1. POLICY FRAMEWORK FOR THE IMPLEMENTATION OF A BUDGET NORM SYSTEM AND A SYSTEM OF
UNCONDITIONAL AND CONDITIONAL INTERGOVENMENTAL TRANSFERS
(Draft version to be approved by the Steering Committee)
Version modified on June 18th 2009
I. Objectives of the Budget Norm System
Based on the new Budget Law promulgated by the National Assembly on December 26th 2006 and
the Implementation Decree issued by the Prime Minister’s Office on February 14th 2008, the Ministry
of Finance has undertaken the design of a Budget Norm System. This Budget Norm System is an
important component of the reform of the Central-Local fiscal system which has four broad
objectives:
(1) Ensuring the rational distribution of fiscal resources across sub-national jurisdictions in an
equitable manner;
(2) Ensuring that fiscal resources allocated to sub-national jurisdictions are used in line with the
Government development objectives with the purpose of improving Government’s service
delivery;
(3) Improving financial management at the local level, including planning, budget formulation,
budget execution and reporting;
(4) Strengthening incentives for improved service delivery performance of local administration.
In order to reach these broad objectives, the Ministry of Finance has recognized that work must be
undertaken in four areas:
(1) The development of Budgetary Norms
(2) The development of a system of unconditional transfers for provincial administration
(3) The development of additional conditional grants for the provinces
(4) The improvement of budget formulation at the sub-national level through a set of
instructions and guide-lines
The Ministry of Finance also has recognised that work on budget norms must go in parallel with the
development of the unconditional transfer system to reach the maximum level of integration.
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2. Within that context, objectives of the Budget Norms system have been identified as follows:
(1) To depart from the existing de facto provincial expenditure assignment mostly based on
historical trends and to move to a system based on transparent and objective principles;
(2) To base unconditional transfers to provinces on principles of equity that will reduce existing
disparities in spending per capita in key sectors;
(3) To base unconditional transfers to provinces on identified needs as a departure from the
existing input driven system based on revenue assignments;
(4) To align provincial expenditures with Government’s priorities as they have been expressed in
the National Growth and Poverty Eradication Strategy (NGPES) and the sixth National
Socioeconomic Development Plan (NSEDP);
(5) To ensure that local recurrent budgets have sufficient funding for daily operations in key
sectors such as education, health and agriculture and that the required expenditures are
properly identified in local budget in accordance with the new budget classification adopted
by the Ministry of Finance;
(6) To ensure that local budget have sufficient funding for the maintenance of infrastructures
and investments;
(7) To ensure a better integration between the recurrent budget and the investment budget by
taking into account the impact of new investments on the recurrent budget and by ensuring
that the level of investment remains sustainable, and that such investments can be properly
maintained in the future.
II. General principles of the budget norm system
In relation with the objectives identified above, the Ministry of Finance has decided that Budget
Norms and the Intergovernmental Transfer System (covering conditional and unconditional grants)
will be based on the following principles:
1. Budget norms will be developed as a component of the futur intergovernmental fund
transfer system of unconditional grants with the objective of moving away from the present
excessively ad hoc and discretionary system of fund allocations. The budget norms system
should result in rationalizing budget decisions, strengthening principles of equity in fund
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3. allocation between provinces, and gradually correcting disparities in fund allocation among
provinces.
2. Budget norms will apply to six sectors that have been defined as followed:
(1) Education
(2) Health
(3) Agriculture
(4) Communication, Transport, Post & Construction (CTPC)
(5) General Administration
(6) Provincial Administration
3. Energy and Mining will be covered by targeted grants.
4. Budget norms will apply only partially to CTPC. The Post Office and large projects in
telecommunication will probably be excluded from budget norms. The Sector Review and
the Expenditure Need Assessment to be conducted at a later stage will identified CTPC’s sub-
sectors to which budget norms will apply.
5. The General Administration Sector is defined as the aggregation of provincial expenditures of
the following ministries: (1) Industry & Commerce, (2) Information & Culture, (3) Justice, (4)
Finance, and (5) Planning.
6. Ministries and Government agencies other than those mentioned here will not be covered by
the budget norm system. Another mechanism will have to found for determining the size of
the intergovernmental transfer necessary to cover sectors outside of the budget norm
system (Security, Social Organizations, Army) through specific grants.
7. The system wil be developped into different phases. The first phase will cover only non-wage
expenditure. Including other economic categories (wages and investment) will depend on
progress made in putting consultative mechanism between all institutions involved; namely
MoF, MPI and PACSA.
8. The system will use three types of norms:
(a) Sector budget norm(s) used for the calculation of each sector budget for each
province and determining the size of the equalization grant to meet the expenditure
need of a given province as part of the Intergovernmental Transfer System of
unconditional grants,
(b) Economic norms that provinces will use for allocating funds by economic categories
based on the current budget classification.
(c) Economic norms that will apply to line-ministries at the central level and that will not
be part of the Intergovernmental Transfer System.
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4. 9. In order to avoid any drastic restructuring of provincial budgets, budget norms will be
introduced gradually according to a multi-year implementation plan. This plan would reduce
disparities in provincial allocation by increasing the allocation for the previously under-
allocated provinces at a faster rate than the others provinces and would avoid the case that
any province would see its allocation reduced.
10. No province will have its budget reduced as a consequence of the introduction of norms.
III. Implementation Strategy of the budget norm system
1. During the first phase of development of the system MoF will put in place two types of
budgets norms: a non-wage aggregated expenditure norm for the local recurrent
butgets, and non-wage expenditure norms by sector to be applied by provinces.
2. During the first year of implementation, MoF will conduct consultations with other
stakeholders such as MPI, PACSA , line-ministries and provinces to determine the best
approach for expending the budget norm system to cover all economic categories and all
key sectors.
3. Discussion on the budget norm system will consider needs for each sector and projects
of line-ministries such as block-grant for schools and health financing formulae. Specific
implementation strategies might have to be developed for each sector.
4. As a result of those consultations, and in a second phase, either the aggregated non-
wage norm will be integrated into an intergovernmental transfer formula for general
purpose unconditional grant or the intergovernmental transfer formula will result from
the addition of all sectoral norms.
IV. Transfer System General Outlook
1. The Transfer System will be made of the following components:
(a) One single unconditional transfer (unconditional general purpose grant) that
will cover the recurrent budget;
(b) Conditional grants for covering additional recurrent expenditure for a limited
number of provinces such as:
(i)Provinces having sector with structural expenditure needs above the
level of funding provided by the unconditional grant;
(ii) Provinces facing temporary revenue shortfall;
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5. (iii) Provinces having unexpected expenditure needs due for example to
natural calamities
(c) Conditional grants for financing large investments
2. The calculation of the unconditional grant will be based on budget norms reflecting
general expenditure needs.
3. Conditional transfers for investments will be based on a list of projects by sector
prepared by the Ministry of Planning.
4. Unconditional transfers for investments will either cover very small investments that can
be decided only at the local level, or an investment envelope based on budget norms
prepared by the Ministry of Planning. These last two points will need further discussions
with the ministry of planning.
V. Unconditional Transfer
1. The Unconditional transfer will be made of two components: (i) the shared revenue
transfer and (ii) the General Purpose Grant.
2. The General Purpose Grant will be given by the following formula:
Equalization Grant = Provincial Fiscal Envelope – Targeted Local Revenues – Shared
Revenue Transfer
VI. The Provincial Fiscal Envelope
1. The Provincial Fiscal Envelope will be calculated on the basis of expenditures needs
measured by sectoral budget norms or by predefined expenditure norm per capita
modified to take into account cost factors (mountainous regions, accessibility, and
special and ordinary needs such as specific project, coverage of Government service,
poverty, presence of ethnic minorities, etc. .
2. Size of the Provincial Envelope will be based on f a minimum spending per capita with
some adjustments for taking into account the poverty level of the province or other
factors relevant to a sector such population density, number of students, urbanization
rate, kilometres of roads to be maintained, etc.
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6. 3. Each year the minimum level of investment will be adjusted to take into account
inflation, changes in policy and other fiscal considerations.
4. During a transition period of a minimum of five years, the local fiscal envelope will be
adjusted to reflect different factors such the absorption capacity of the province and
internal fiscal and administrative constrains. Major adjustments will be spread over a
period of several years.
VII. Fiscal Sustainability of the System
1. The system design and its implementation plan will be prepared in consideration of the
overall fiscal sustainability of the system.
2. The implementation plan will be prepared in a way that will avoid any drastic change in
the budget structure.
3. Based on a macro-fiscal model developed by the Fiscal Policy Department, the total
adjustment of any given year required for fiscal equalization will not result in any
increase of more than 1.5% of the general budget of the state with an average of 0.8%
per year.
4. The Department of Fiscal Policy with consult with the Department of Taxes and Revenue
and the Department of Budget to introduce incentives for increasing collection of local
revenue such as the possibility to keep in reserve a portion of local revenue collected in
excess of the revenue target.
5. In case in a shortfall in local revenue collection compared to targeted revenue, the
Ministry of Finance will have the discretion to cover or not the local revenue shortfall or
to make his assistance conditional on an improvement of the local tax collection system.
VIII. Fiscal Implementation strategy
1. The system will be implemented in three phases:
Phase 1: Health + Education
Phase 2: Agriculture + CTPC + Provincial Administration
Phase 3: General Administration
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7. Phase 1 will start with the preparation of FY 2010/11 budget. It will last four years for
the recurrent budget and three years for the investment budget.
Phase 2 will start with the preparation of FY 2011/12 budget.
Phase 3 will start with the preparation of FY 2012/13 budget.
2. Each implementation phase will last three to four years. These four years will constitute
a transition period to which specific rule will apply in order to avoid large budget
adjustment.
3. Although all phases have maximum implementation duration of four years, the majority
of provinces are expected to make the transition in two years, except for provincial
administration which is facing deep structural problems.
4. In the event that due to equalizations needs some provinces experience important
budget gap, budget adjustments will be made over several years.
5. In the event that some provinces have structural sectoral expenditures well above the
theoretical notional budget determined by budget norm, the provinces will incur no
budget reduction. The shortfall in resources will be covered by a conditional grant.
IX. Transition Period
1. The preparatory survey has identified several administrative, economic and fiscal
constraints that will affect implementation of budget norms and of the
Intergovernmental Transfer System of conditional and unconditional grants. Among
those constraints are the practice of dual budgeting (separation between recurrent and
investment budget), the lack of clarity of the expenditure assignment that will need
important revision, the absence of programme budgeting, ceiling on the number of civil
servants employed in the provinces, absence of multi year budgeting at the provincial
level, limited capacity absorption of the poorest provinces which might not be able to
use additional funding necessary to bring them to the same level of service delivery than
other provinces. The necessity to accommodate those constraints explains the length of
the transition period.
2. The implementation of the budget norm system is expected to represent a budget
adjustment equal to 5% of the general budget for equalization needs. Spread over a
period of six years the required adjustments remain sustainable. However, some
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8. provinces will have adjustment to make that might represent up to 30% or more of the
budget of a specific sector. Budget increase above inflation and the general average will
have to be limited by specific rules, such as no budget in such sector will increase more
than 15% of the national average.
3. Other budget increase will be linked to revision of the expenditure assignment,
introduction of block grants, improvements in service delivery.
4. Effective use of increased recurrent budget might not be possible without additional
investments. In such case, provinces will have to present a multi-year plan approved by
the Ministry of Planning to justify an increase in the recurrent and investments budgets.
5. All arrangements for the transition period will be presented with the implementation
plan for each of the three implementation phases.
X. Cooperation with the Ministry of Planning
A joint committee with the Ministry of Planning, or any other consultative mechanism, will
be put in place with the objective of defining common objectives for the implementation of
budget norms. The committee will be responsible for:
-ensuring that the level of investment is sustainable and compatible with the level
of spending in the recurrent budget;
- ensuring a better prioritization of investments between sectors at the provincial
level
-developing common budget norms for investment
XI. Integration with macro-economic policy and multi-year fiscal planning
Integration of the budget norm system with multi-year budgeting is essential for the
management of the transition period and for long term sustainability. The equalization model
used to determine the minimum level of spending per capita and per sector will be fully
integrated with the MTFF/MTEF model under development.
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