Public choices for private initiatives : prioritizing public expenditures for sustainable and equitable growth in Uganda (Vol. 3 of 3) : Executive Summary

Report No. 9203-UG Public Choices for Private Initiatives Prioritizing Public Expenditures for Sustainable and Equitable Growth in Uganda (In Three Volumes) Executive Summary February 12, 1991 Country Operations Division Eastern Africa Department Africa Region FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  MAJOR ACRONYMS AND ABBREVIATIONS ACP - AIDS Control Program MTEP - medium-tcrm expendin -c plan ADB - African Dcvelopment Bank MWMD - Ministry of Water and Mineral AfDF - African Development Fund Development ATM African Textile Mill Ltd. NEC - National Enterprise Corporation BOU - Bank of Uganda NGO - non-governmental organization CFS - Consolidated Fund Services NMS - Namalere Mechanical Scrvices CG - Consultative Group NRM - National Resistance Movement CIF - cost, insurance and freight NWSC - National Water and Sewcrage CMB - Coffee Marketing Board Corporation DANIDA - Danish Intcrnational Development NYTIL - Nyanza Textile Industries Ltd. Agency ODA - Overseas Development DEDE - Draft Estimates of Development Administration (United Kingdom) Expcnditure OGL - Open General Licensing DHT - District Health Tcam O&M - operations and maintenance DMO - District Medical Officer PAPSCA - Program to Alleviate Poverty and DRC domestic rcsource cost the Social Cost of Adjustment EADB East Africa Development Bank PE - public enterprise EASCO - East African Steel Corporation PER - Public Expenditure Review EDMP - Essential Drugs Management Program PFP - Policy Framework Paper EEC - European Economic Community PSRRC - Public Service Review and EIB - European Investment Bank Reorganization Commission EIRR - economic internal rate of return PTA - Preferential 'irade Area EPRC - Education Policy Review Commission PTA - parent-teacher association ERP - Economic Recovery Program RC - Resistance Council ESAF - Enhanced Structural Adjustment RDP - Rehabilitation and Development Facility Plan FARE - Facility for Agricultural Research and SAF Structural Adjustment Facility Extension SARAPS - Sector Administrative Reform GTZ - German Agency for Technical and Planning Study Cooperation SIP - Special Import Program ICA - International Coffee Agreement SSA - Sub-Saharan Africa IDA - International Development Association TCS - Traditional Civil Service IMF - International Monetary Fund TOA - Treasury Office of Accounts KR - Kenya Rai;ways TRC - Tanzania Railways Corporation LMB - Lint Marketing Board '1TC - teacher trainings college LRMC - long-run marginal cost UA - Uganda Airlines MAIF - Ministry of Animal Industry of UCB - Uganda Commercial Bank Fisheries UDB - Uganda Development Bank MCM - Ministry of Cooperatives and UEB Uganda Electricity Board Marketing UNEPI - Expanded Program on MEPF - Ministry of Environmental Protection Immunization and Forestry UNICEF - United Nations Intemational MOA - Ministry of Agriculture Children's Emergency Fund MOE - Ministry of Education UPE - universalization of primary MOF - Ministry of Finance education MOH - Ministry of Health URC - Uganda Railways Corporation MOIT - Ministry of Industry and Technology USAID - United States) Agency for MOLG - Ministry of Local Govemment International Development MOTC - Ministry of Transport and USM - Uganda Spinnmrig Mili Ltd. Communications UTC Uganda Transport Company MOW - Ministry of Works WDD - Water Development Department MPED - Ministry of Planning and Economic WHO - World Health Organization Development W&S wages and salaries MPSCA - Ministry of Public Service and ZBR - Zaire, Burundi and Rwanda Cabinet Affairs  FOR OFFICIAL t'SE ONLY 1KREFACE This report discusses prrogress made and remaining challenges under the Government's -Lconomic Recovery Prograin, tocusing in particular on priorities for public expenditures to tacilitate sustainable and equitable growth. The report was discussed with the Government in January 1991, and is being distributed to the Consultative Group meeting for donors in March 1991. The report is organized in three parts: Executive Summary and two Volumes. Volume I discusses the reform agenda, and synthesizes issues pertaining to expenditure allocations within sectors, across sectors and across economic categories, including civil service reform. It also presents the macroeconomic framework and recommendations for donor assistance. Volume 11 contains detailed analyses of public expenditure policy issues in key economic and social sectors: agriculture, industry, transport, energy, health, education and water. The report is based on the findings of a mission that visited Uganda between March 5 to March 23, 1990. The mission consisted of: Sanjay Pradhan (mission leader), Oey Meesook, Emnanuet Ablo, Bruce Jones, Kapil Kapoor, ANick Burnett, Jill Armstrong, Richard Durstine, Nisha Agrawal, Victoria Kwakl4wa (all from Eastern Africa Department), Doug Adkins (Consultant), Mohammed Usrman (Consultant), Raoul Ascari (Consultant), R. Shoo (Consultant, financed through UK-ODA), and A. Goala (African Development Bank). In addition, the following stafffrom Eastern Africa Department provided input to the sectoral chapters: Hayley Goris, Lars Vidaeus, Gerhardt Tschannerl, Ian Knapp, Nat Colletta and Subhash Dhingra. Mini Klut:tein-Meyer managed the database. Roboid Covington was responsible for wordprocessing and physical production of the report. Caroline Milad and Patricia Sanchez also assisted in putting together this report. Thvs dos.ument ha, a re.trwtc.d ditrnhution and may he useJ hx re@ ip2ents only in he perfornancc uf th,ir i'tti,ial duni,- it- * ntl w ni,c n .t rv ', hd i, \c'd %zith(ut World Bank authorization.  EXECUTIVE SUMMARY Introduction 1. Over the past three years, the Government of Uganda has made impressive progress in restoring peace and security, achieving greater financial stability, and facilitating general economic recovery. The stage is now set for the Government to place greater emphasis on addressing underlying structural impediments not only to deal with critical short-term problems (particularly, reducing inflation and coping with a difficult balance of payments situation) but, more importantly, to ensure sustainable growth and improved quality of life for its people in the medium-to-long term. The Government has already initiated important steps in this direction. These will need to be reinforced by a comprehensive reform agenda, one that will require difficult and far-reaching actions on the part of the Government, one that will require enhanced support from donors, but one that holds significant promise for the economy and its people. 2. With greater stability and overall recovery, there is indeed a compelling need to focus on underlying structural problems, much of which is a product of a tragic inheritance -- a decade and a half of decline, devastation and destruction. The principal challenges include: an agricultural sector, which despite Uganda's considerable potential, is characterized by low yields on account of traditional technology; the economy's dependence on a volatile coffee market for over 95 percent of its export earnings; an incentives and regulatory framework which, though significantly .mproved, needs further reforms to attract private investment; an industrial sector dominated by inefficient public enterprises; a financial sector with deep-rooted structural problems; a road network that is impassable in many stretches and frequent power outages that disrupt economic activity; a resurgence of preventable diseases, lack of safe drinking water for over 80 percent of the populaion, and the emergence of AIDS as a grave problem with economy-wide ramifications; an education system which, despite commendable efforts and contributions by parents, has ceased to provide basic education of even minimal quality to children. Much of this requires actions that fall in the public domain. Unfortunately, the capacity of the Government (as well as of the organized formal sector), both institutional and financial, has itself been severely impaired. 3. While these problems may appear daunting, there are several features and strengths of the Ugandan situation that point not only to potential solutions but also to the promising prospects for sustained gtowth and development. First, with some of the finest natural resources in Sub-Saharan Africa and two excellent growing seasons in most of the country, Uganda's agricultural sector, where little technological improvements have taken place over the last two decades, offets  treiniitd.ous p)k, ItL' [to 'Ii\tdIII'i,d .iok III v di ii II)II)%l IIt lIllirx I1iliput\, IniCenltives and inti astruc:turi. Seco,nd. the (iW1. ii,unct h&\ dtinonstatlcd tiliilil'imit and resolve to undcrtake ditticult and needled ich,rirs in mrdcr to rc\ erse anid edt.ss ltis tormidable inheritance. Third, even though resourccs available tOt Ih (ic Geinment are nicager. it is teasible to prioritize and target these resources to address mnan ot tne challenges identitied above. At present, scarce resourccs are being dissipated over a large riinb-er of inet'tctive personnel, activities and t'acilities; indeed, the prevailing system ot planning and hudgetinig largely seeks to replic.ite an increasingly irrelevant past. With a t'undamental restructuring ot' ptublic expenditure priorities, it is possible to have a smaller, more et'tficient civil servite with sult''icient resources to impleimient critical activities in key economic and social sectors. Moreover, with greater peace and security, it should be possible to reduce the presently dnominant share ot detense expenditures t[ourth. the private sector in Uganda -- farmers, entrepreneurs, local communities and NGOs -- tOrced by circumstance but bolstered by commitment and perseverance, has demonstrated an impressive capacity for self-help even in providing health care and education (albeit severely lacking in quality given extremely adverse circkimstances). In this context, while the Government rebuilds its own capacity, it needs to recogniLe its limitations and build on private initiatives not only for economic growth but also for the provision of social services. Indeed, the promise for Uganda lies in these resilient and vibrant energies of' its predominantly rural communities combined with its wealth of natural resources. The realization of this promise is, however, also critically contingent on enhanced donor assistance to support the Government's difficult and necessarily ambitious attempts to help its people help themselves, and thereby tc reverse the impact of a decade and a half of assault on a promising economy. 4. This report describes these challenges facing the Government and discusses the reform agenda required to meet these challenges. It focuses in particular on challenges in key economic and social sectors, and on the role and priorities for public expenditures both across and within sectors. In doing so, the report also presents recommendations for the level and composition of donor assistance. More fundamentally, however, this report initiates a process -- a process of reviewing and internalizing priorities both within the Government and between Government and donors; a process that will enable policy measures and public expenditure programs to be designed and focused to realize the vision that the Government has for its people: a vision in which the heart of development rests in the energies of its people and its wealth of natural resources, a vision in which people do not suffer from onslaughts of preventable fatal or debilitating diseases, where people have access to basic health care and safe water, and where children are learning and growing to achieve their fullest potential. The Reform Agenda: Progress NMade and Remaining Challenges 5. For this vision to become X reality, the Gov.ernment will need to ensure a number of preconditions. First, there must be peace, security and political stability. Second, the financial stability which has been achieved during the past year remains fragile and must be reinforced. Third, the Government must remove the remaining constraints on the private sector and instead provide it with an environment in which private initiative can flourish based on Uganda's comparative advantage. Fourth, the Government must concentrate its resources on providing those economic services and infrastructure which facilitate growth. Fifth, the Government must ensure that the quality of and access to education and public health is significantly improved not only to meet the basic needs of the people, including the poor and disadvantaged, but also to enhance human resource development and ensure the long-term sustainability of growth. Finally, to accomplish the above, the Government will need to make a concerted attempt at institutional strengthening and capacity building -- strengthening its own capacity to design and implement this  Executive Summary 3 reform agenda as well as ensuring that indigenous managerial and technical capacity of key institutions (public and private) that has been severelv damaged and weakened is enhanced. Over the past three years, the Government has made impressive progress in addressing the most urgent aspects of this reform agenda. Nevertheless, much remains to be done if this progress is to he sustained and the reform agenda completed. 6. One of the principal achievements of the Government has been the restoration of peace and security, and the reestablishment of political institutions that reflect the plural character of the society. This has facilitated the revival of overall economic activity. In addition, the Governiment has succeeded in reducing inflation substantially, from 233 percent in FY86/87 to 29 percent in FY89/90. However, the record in fiscal and monetary performance has been tenuous. Looking forward, therefore, the Government will need to take steps to increase the revenue effort (principally through exchange rate adjustments to bolster coffee tax revenues, and through strengthened tax administration) and control expenditures to within targeted levels. In addition, structural reforms in the following areas are needed to curb inflationary lending: in the coffee subsector (e.g., through actions being taken to transfer responsibility for crop finance from the Bank of Uganda (BOU) to the commercial banks, and to turn Coffee Marketing Board into a commercial organization with private shareholding) and the financial sector (through improvements in bank supervision by BOU and restructuring of government-owned commercial banks). Indeed, developments in the first quarter of FY90/91 underline the continued challenges faced in economic stabilization. The rise in oil prices (to which the Government responded promptly and decisively), late rains in food-producing areas, reduced availability of import support, and familiar budget problems (shortfalls in revenue and external financing, and overruns in defense expenditures) have fuelled inflation to a cumulative 18 percent during the first quarter -- already above the target for the year. 7. In other areas, the Government has made significant progress in improving the overall incentives and regulatory framework. These have included several large initial devaluations of the exchange rate followed by monthly adjustments over the past year to maintain and improve Uganda's competitiveness. The ratio of the official to the rrallel market rate has increased steadily from 10 percent in May 1987 to 70 percent in November 1990. The Government has also suspended foreign exchange surrender requirements for all non-coffee exports, gradually liberalized the import system, and recently legalized the parallel market for foreign exchange. In addition, virtually all parastatal marketing monopolies, including coffee, have been abolished. 8. In response to the above measures as well as progress in rehabilitating major highways and other infrastructure, the economy hds grown at over 6 percent per annum in real terms over the past three years. 9. However, major challenges remain. The reforms in the incentives and regulatory framework need to be deepened, particularly to facilitate key sources of growth in agriculture and industry. The trade regime needs to be rationalized in conjunction with the Government's plans to achieve a unified market-clearing exchange rate by the end of 1991. The benefits of export retention (and movements in the exchange rate in the case of coffee) need to be passed on to producers of traditional export crops to improve incentives and boost exports. The industrial climate needs further improvements to attract private investment. Although the new Investment Code passed in November 1990 provides incentives to attract local and foreign investment, various regulations governing business operations, taxation and exit also need to be rationalized, as identified by a joint U.K.ODA-IDA Private Sector Assessment. In addition, the financial sedor needs comprehensive reforms to improve both the mobilization of savings and its allocation to productive activities, including term finance. Finally, an improved business climate, particularly  for toreign itiv-estors, will require speedy and satisfactory resolution of claims on the Custodian Board properties, in area where progress has unfortunately been extremely slow. Parastatal reforir. is another area where progress has been slow. With the completion of the Sector Administrative Reform and Planning Study (SARAPS), the Government needs to carry out its divestiture program and initiate the process of restructuring the remaining enterprises. Given that restructuring will make its own demands on scarce financial and managerial resources and given that it may not yield significant benefits in the short run, a phased restructuring program, yielding benetits in the medium to long term, is likely to be necessary. 10. One of the most important priorities for the next phase of the reform agenda requires making significant improvements in Uganda's devastated economic infrastructure and services to sustain and facilitate economic growth. The principal achievement ir this area has been the rehabilitation of most of the major highways. However, a maintenance cr.6is is loomning on these rehabilitated roads. In addition, the vast network of gravel and feeder roads is almost uniformly in a state of acute disrepair, and represents a significant bottleneck to the potential supply response. Power is another major constraint to economic activity. Among other economic services, a principal area of weakness is Uganda's ineffective agricultural research and extension network. Strengthening research and extension is critical for significantly raising yields through available or easily adaptable technology, and is indispensable for agricultural growth and export diversification. In the area of environmental protection, work is underway to improve forest protection and management throngh an ongoing Forestry Project, and the Government is preparing a National Environmental Action Plan to promote a more balanced and sustainable use of its natural resources. 11. With the Government's scarce resources focuseo on achieving security and economic stability, relatively little attention has been focused on improving basic social services, with the few achievements (e.g., immunization, essential drugs, water supply in seven towns, and textbooks for primary schools) accomplished largely through donor programs. At the same time, the quality of and access to primary health care, primary and secondary education and safe water are grossly inadequate as is Government support or provision for these basic social services. These also constitute the most pressing areas of need for the poor in Uganda. The joint Government- multidonor task force 'hat prepared the Program to Alleviate Poverty and the Social Costs of Adjustment (PAPSCA) concluded that poverty in Uganda is better characterized in terms of grossly inadequate access to basic social services such as primary health and education, than in terms of malnutrition on a large scale. Improving basic social services therefore represents another pressing area for Government action in the next phase of the reform program. 12. While some steps at institutional strengthening have been undertaken, the Government's own capacity to design and implement policies and programs remains extremely weak and hence constitutes an essential area for action. Of particular importance is the need to strengthen economic management in key institutions and ministries, particularly the Bank of Uganda (bank supervision, external debt and monetary policy), the Ministry of Finance (tax administration and budgetary reform), the Ministry of Planning and Economic Development (project monitoring and review, and aid coordination), arid design and monitoring of the macroeconomic framework. While actions are planned in each of these areas, lack of skilled and motivated personnel is a major constraint that will become even more formidable as aue Government implements a necessarily broader and deeper reform agenda. One potential measure to alleviate this problem in the short term entails facilitating the return of qualified Ugandans living overseas. Donor support will be essential in making this happen.  Lxecutlve wumnmary U 13. In a larger context, weakniesses in Government capacity stem troin an overstaffed, poorly paid and ineffective civd service; indeed, one of the institutions most in need of retorm and rehabilitation is the civil service. While signiiicant progress has been made in establishing a permanent information system for the civil service and carrying out a major review, it is now critical that the Government act decisively to streamline and rationalize the civil service to make it smaller, better paid and more eftective. 14. In addition to strengthening its own capacity, the central Government will also need to bolster the capacity of local governments; indeed, many of the key areas of emphasis in the retorm ager,da -- feeder roads, primary health care, primary education, rural water -- require that the central Government build on and support community initiatives and local governments. Moreover, the capacity of the private sector needs to be enhanced by strengthening management, business, accounting and marketing skills, and by strengthening local institutions that provide training, consulting and research services to the private sector. 15. In summary, the Government now needs to place greater emphasis on addressing underlying structural impediments in key economic and social sectors and on institutional strengthening and capacity building; consequently, emphasis must shift from general economic recovery to structural reform and adjustment. Implications for Public Expenditure Policy 16. Overview. Public expenditure policy needs to be geared to meeting the most pressing imperatives of this reform agenda. This requires, in particular, that public expenditure programs, taking into account the strengths and initiatives of the private sector, facilitate key sources of growth, principally through effective economic infrastructure and services; improve basic social services; and strengthen the capacity of the civil service. 17. However, as discussed below, a review of public expenditure programs in key economic and social sectors reveals that the Government is by and large unable to provide these basic preconditions for growth and development. In particular, severe underfunding and weak implementation capacity impede the effectiveness of critical programs: agricultural research and extension, road rehabilitation and maintenance, power transmission and distribution, primary health care, primary and secondary education, and water supply in rural areas and small towns. The problems are both financial and institutional. Financially, overall public expenditures in Uganda (12 percent of GDP compared to an average of 30 percent in Sub-Saharan African (SSA) countries) are constrained by an extremely low revenue effort (6 percent of GDP compared to an average of 20 percent for SSA) and by the need to reduce inflation. Even within this constraint, there are dominant requirements of defense expenditures (3 percent of GDP versus an average of 1.5 percent in comparator countries in SSA). Moreover, whatever resources are left are dispersed over a large number (45) of other ministries/self-accounting agencies as well as a correspondingly overstaffed, poorly paid and ill-equipped civil service which is therefore ineffective in implementing expenditure programs. Indeed, average civil service wages amount to only a small fraction of a living wage. Even within key economic and social sectors, however, meager resources are being dissipated over a large number of public facilities and services inherited from the past, with the result that most, including the ones most critical for the supply response and social welfare, are not effective. Quite simply, the Government is trying to do too much with too little. It should try to do less better. 18. The prevailing planning and budgeting system reinforces these problems by allocating historical shares of expenditures to sectors and activities. Consequently, public expenditure programs seek largely to replicate, rejuvenate or rehabilitate the well-developed infrastructure and  services appropriate for the once-tlourishing economy. Present realhaes necessitate an explicit recognition of financial and institutional constraints that limit the scope and pace of rehabilitation, and make it inteasible or undesiranle to replicate the network of infrastructure and services of the past, which is the understandable temptation of policymakers. 19. Looking forward, therefore, major reforms are needed in public expenditure policy. To begin with, there is a need to reorient planning and budgeting to ensure that activities critical for the reform agenda get greater priority in funding aind institutional strengthening. At the same time, the Government will need to make a concerted attempt to raise its revenue effort and investigate whether defense expenditures can be controlled and security provided more cost-effectively. Expenditure allocations will need to be increased for critical activities in economic and social sectors and for wages and salaries to improve incentives; the Government will simultaneously need to phase out of financing unproductive facilities, activities and personnel within and across sectors. This will require comprehensive actions that will ultimately result in a smaller size and scope of the Government which will nevertheless be better equipped and motivated to carry out its essential mandate. 20. At the same time, in view of the likely continuing financial and institutional constraints of the Government as well as the comparative advantage and strengths of the private sector, public expenditure programs in key sectors will need to take into account and build on private initiatives. For instance, while agriculture is the primary engine of growth for the economy, the predominant role rests with the private sector; the public sector therefore needs to phase out its involvement in production, marketing and processing and confine its expenditure programs largely to the provision of critical public goods. Similarly, the imperative for Government policy in industry rests primarily with creating an enabling environment for private sector investment and growth, while public expenditure policy needs to focus on the rationalization of parastatal operations. Even in the context of parastatal reform, it would be important to recognize the comparative advantage of the private sector (local and foreign), and attempt divestiture through privatization to the extent feasible. In transport and energy, the onus rests on the State to directly intervene; however, despite the public goods nature of the interventions required, the Government will, in view of its own capacity constraints, need to build on the strengths of the private sector (e.g., subcontracting of tasks to private contractors for highway maintenance or implementation through local communities for fepder roads maintenance). In health, deteriorating public health and the resurgence of preventable diseases point to the need for Government to improve the provision of primary health care both as a public good (prevention) and as a means for poverty alleviation; here too, given the severe weaknesses of the public health delivery system and the relative strengths of the NGO sector, the Government will need to contract or subsidize NGO to provide services in certain areas. Similarly, in order to improve access to safe water in rural areas, the Government will, in view of serious capacity constraints in the Ministry of Water and Mineral Development, need to build on the fairly successful ongoing programs (funded by UNICEF and DANIDA) that rely on the participation of local communities and NGOs, while confining its interventions to technical and financial support. And in primary education, while the Government needs to improve quality and access both on the grounds of high social returns as well as equity, it needs to do so by providing assistance and support to the efforts of parents and communities, who have kept the system functioning over the years almost entirely by themselves. Overall, the State in Uganda needs to play a crucial but limited role to support private initiatives. 21. Within this framework, issues pertaining to sectoral and intersectoral allocations as weii as allocations across economic categories can be summarized.  executive Sumnmnary Expenditure Allocation Issues for Key Sectors and Activities 22. To realize the promise of agriculture as the primary engine of growth, the Government needs to provide an enabling policy environment for private sector growth, and confine its direct interventions and expenditure programs to providing ..search and extension, control of endemic and contagious animal and plant diseases, and preservation of natural resources. Strengthened research and extension are particularly important at this time because agricultural growth and export diversification are contingent on increased yields through improN Xd technology. A recently conducied study funded by USAID indicates that yields across a range of cash and foodcrops in Uganda can be doubled using availabie or easily adaptable technology, which relies on labor- intensive, appropriate technology rather than high cost, capital intensive mechanization. While there are these requirements for public expenditures in agriculture, scarce resources are being dispersed on a number of ineffective activities and facilities. These include: 20 state farms, 17 production farms and schemes, and over 60 subsidized agricultural machinery workshops. In addition, the sector employs a large number (24,000) of group, or casual, employees. Moreover, the existence of four separate ministries with responsibilities for the agricultural sector, each with separate research and extension representatives all the way from headquarters to the field level wastes resources on duplicating headquarters establishments (20 percent of total expenditure) and leads to coordination problems and confusion. 23. At the same time, allocations for technical field services are highly inadequate, with research and extension receiving less than 40 percent of allocations. The travel budget for field services, for instance, would have allowed technical staff to spend only one night in the field throughout the year. Even within these inadequate allocations, resources are spread over a number schemes in extension, and an extensive but severely underfunded network of research stations. While underfunding is a serious constraint, the dominant problem in research and extension is severe institutional weakness. Quite simply, neither research nor extension hf.s functioned in any meaningful sense over the last two decades. Consequently, while increased allocations are needed to improve incentives and supplies and to rehabilitate facilities, they must go hand i-hand with a program of institutional rationalization and strengthening. 24. While some of these expenditure requirements can be met through phasing out unproductive activities, there is also greater scope for cost recovery in the sector through a viable user charge policy in the provision of clinical veterinary services, and veterinary drug and artificial insemination services and through the sale of inputs and implements imported for the crop subsectors under project aid at prices that reflect the open market exchange rate. The Government has already taken important steps in several of these areas. In particular, it has embarked upon an action plan to privatize veterinary services, effect greater cost in the livestock sector and phase out state farms. 25. In industry, the challenge for the Government is to create an environment conducive to private sector participation and investment (through the reform agenda outlined above), while pursuing divestiture and closure or restructuring of enterprises that remain, and strictly limiting expenditure on ongoing and new projects, most of which have doubtful or unproven economic viability. 26. The SARAPS study referred to earlier has recommended that the Government divest itself of commercial activities. The only area where continued involvement by Government in industrial PEs might be justified is in high capital cost, resource-based projects with proven economic viability, but where the entire equity cannot be generated by the private sector at this stage of the country's development. Based on this, SARAPS has recommended substantial divestiture of  industrial Pl.s through privatization and liquidation. In privatization, while the Government's pret'erred option is for divestiture to indigenous entrepreneurs, the scope for doing this is limited because there are relatively tew large indigenous groups, and financial instruments for mobilizing large numbers of' smaller investors are inadequately developed. Some foreign investors have expressed interest, but the Government's success in divesting to them will he a tunction of progress in improving the business climate sit,nificantly, including settiing claims on Custodian Board properties. 27. A review ot public expenditures in the industrial sector reveals that the Governmnent is investing or planning to invest in PlE pro jects which . e of doubtt'ul or unproven viability. These include: Fast Atrican Steel Corporation, ILake Katwe 5alt, Tororo Cement, Uganda Spinning Mill and the National E'nterprise Corporation. It is roughly estimated that based on budgetary allocations, direct public expenditure on the above activities could amount to close to US$20 million in FY89/90 and FY90/91. The total investment cost in these parastatals, however, is over US$100 million, though sonme of it is sunk cost by now. The Government is undertaking economic analyses of several of these projects. Of all the PE projects that were examined, only four had positive rates of return: two textile mills (NYTIL and ATM), Hima Cement and Phosphatic Fertilizer Plant. Even in these cases, there are problems and risks pertaining to the size of investment and access to foreign markets as well as problems pertaining to managerial and financial weaknesses of the implementing PEs. In light of these risks, preconditions for investment should be the identificatior. of private partners willing to take a prominent equity position, or ensuring that the enterprises are managerially and technically strengthened. 28. Public expenditure policy faces major challenges in transport. While major highways have been rehabilitated, considerable resources are now required for their maintenance. In addition, the vast network of feeder roads is almost uniformnly in a state of acute disrepair; many segments are impassable either throughout the year or after periods of rain. Given institutional limitations as well as likely economic benefits, only the most densely used feeder roads would justify full rehabilitation at this time; for the majority, accessibility primarily through construction of culverts to ease the principal drainage problems needs to be restored. This approach, however, implies a departure from the previous Government strategy of seeking full rehabilitation of the entire roads network. The expenditure requirements of a time-phased strategy of rehabilitation and maintenance of increasing segments of th.e road network (consistent with implementation capacity) indicate that allocations will need to be increased by several orders of magnitude. Specifically, in two years, the financial requirements for the routine maintenance component are projected to be seven times the already increased FY90/91 allocations in reai terms. In addition, these point to a restructuring of priorities between maintenance and rehabilitation, with the share of maintenance rising from about 10 percent currently to over 30 percent in five years. Finally, the high foreign exchange content (4(b.70 percent) of even maintenance expenditures points to the need for donors to finance a greater ,roportion of the maintenance budget. 29. The need to irnplement an expanded maintenance and construction program for highways will clearly tax the limited implementation capacity of the Ministry of Works. The Ministry will need to rely on subcontracting tasks to private contractors to the maximum extent; nevertheless, a major effort at institutional strengthening of monitoring and supervision will be required. Rehabilitation and maintenance of feeder roads will need to be carried out using small private contractors employing labor intensive techniques, with the responsibility for implementation resting with those levels of local governments/communities that will be the major beneficiaries. The Ministry of Local Government will, however, also need to be strengthened to provide technical assistance, and the central Government will need to share costs with local communities.  30. Ihe considerable antd urgent requirements IOr the transpolt SectOF oUIlltimed above stiggest the nieed to re-examinie the availabilitv o tIfnance anid even the rationale tor a number et1 ongoing or planned transiqort activities and investments ot doubtful econorn ic validity unider present ecooornic circunmstances and resource constraints: the Mubende-l't. Po)rtal highway, thie westein rail line to Kasese, rehabilitation ot railway passenger and commuter services, reentry of' Uganda Airlines into long haul international service, the purchase ot wiilebodly aircratt, and tthe operation ot the Soroti Flying Schiool. At a minimum, tflll, validating economic anal vses ol these activities should be carried out prior to new or turther investment. 31. In power, the principal requiiiremenit is to alleviate existinig ard potential bottlenecks to economiiic activity due to variable and inadeqtiate transmission and distribution ot electricity. At present, there are trequent power outages on account ot poor equipment, lack ot maintenance and inadequate transmission; daily peak demand, including export obligations to Kenya, is greater than installed capacity at Owen Falls; and regular demand is likely to outstrip full capacity in a few years. Overall, only about 6 percent of the population has access to electricity. In this context, given that virtually no investments were made for maintenance or expansion during the last twenty years, large and inevitably lumpy investments are required. A proposed Third Power Project is designcd to address this need. It proposes an extensicrn of the present 150 MW Owen Falls plant by 104 MW The project also addresses shortcomings in the transmission and distribution networks caused by lack of maintenance and expansion. The project, with an economic rate of return of 17 percent, is estimated to cost about US$312 million; however, a US$100 million funding gap remains which will need to be met by additional donor commitments. 32. At the same t;me, it is imperative to significantly raise electricity tariffs to ensure appropriate pricing and adequate cost recovery. It is estimated that despite recent doubling of tariffs, they are less than 40 percent of the long-run marginal cost. At the same time, the bulk tariff for supplies to Kenya under a 50-year supply agreement signed in 1955 is extremely low. 33. The public health situation in Uganda is alarming. Available evidence on patte.las of mortality and morbidity indicate a resurgence of preventable diseases like diarrhea and malaria, compounded by high population growth, malnutrition and the emergence of HIV infection as a very serious new threat. Public health care services have, however, deteriorated considerably over the years; so had NGO health services, although the NGOs have largely rebuilt and expanded. Most government units remain in a state of severe disrepair, with unmotivated and ill-equipped staff. Unfortunately, while the Government's stated policy is to concentrate on primary health services (based on health centers, with hospitals playing an essential referral function), the bulk of Government's own resources go to hospitals and very little to health centers. Health centers largely function on account of donor-funded vertical programs, two of which (immunizations and essential drugs) have been notably successful. 34. A pragmatic policy for the Government would be to ensure initially that cost-effective primary and preventive services are supplied to t e maximumi number of Ugandans, with a secondary objective of rehabilitating and constructing the hospitals necessary for referrals. This would mean recognizing that it is not up to the Government to provide all such services but rather to ensure that they are provided. Thus direct provision by the public sector should concentrate on those preventive programs such as immunization and AIDS education which represent public goods and on primary services in geographical areas where there are no adequate or affordable NGO and private services. It would also imply increasing the public sector's resources through cost recovery at the most expensive points of the system: drugs, hospital inpatients and private patients at public facilities. It could also mean contracting or making grants to NGOs to provide services in certain  10 Executive Sumnmary regions where this would be more cost-ettective than public provision. Involving NGOs in community- and home-based care for the burgening numbers ot new AI)S patients -- conservatively estimated to be 50,000 annually -- must particu'arly be examined 35. Recurrent spending orn primary and secondary health care in Uganda is only U5$1.7 per capita, or only 50 petcent of the US$3-4 absolute minimum level necessary for etfective care; a more reasonable level would be twice the minimum amount -- Kenya spends US$6, Ziimbabwe US$14 and Botswana US$29. Indeed, the overall level of public expenditure on health is too low, and needs to be increased signiticantly in the following key areas: wages and salaries to improve incentives; expenditure on consumables (such as protective gear and syringes, the absence of which constitutes a public health hazard of its own in the presence of HIV); maintenance of physical facilities, equipment and vehicles. Within this, emphasis should be on primary care as it is most cost effective. Although expenditure on essential drugs is presently adequate, it is likely that requirements will rise significantly due to increasing patient load due to AIDS and to treatment of STDs. The results of drug quantification exercises to be completed in early 1991 should provide planners with revised drug requirements. Increased government resources need to be invested in strengthening the AIDS program and expanding the Family Planning program. In addition, increased government expenditures are required for the rehabilitation and construction of health centers, focusing first on those areas (especially the North and Rakai district) without NGO and private primary services. As resources permit, rehabilitation of secondary and tertiary units can take place. At present, however, rehabilitation of Mulago Hospital shoula largely be limited to that currently underway and required to keep the hospital functioning. Mulago is currently providing primary, secondary and tertiary services; alternatives for the provision of primary care through Kampala health centers need to be urgently explored. 36. There are a number of major public expenditure issues in the education sector. While enrollments grew rapidly during the 1970s and early 1980s -- a reflection of parents' commitnment to education -- the quality of education deteriorated drastically. The result is that in most of the primary schools and many of the secondary schools, while there are students enrolled, only a small fraction of instructional materials is supplied, most teachers are untrained and poorly paid, and facilities are dilapidated. Moreover, while gross enrollment in primary schools is 70 percent, only 18 percent of the children complete primary school. 37. The Government's stated objectives in the education sector are universal primary education by the year 2010, improved education quality, and decentralized management of education. Despite this stated emphasis on primary education and improved quality, actual expenditures on education are not only low, but are allocated contrary to Government's objectives: virtually no funding is provided for primary education, while the bulk of expenditures are spent on secondary and higher education. At the same time, the bulk of Qovernment expenditure at the higher level is spent on non-educational items such as feeding, boarding and allowances. In addition, resources are spent on a large number of teacher training colleges. 38. During the 1980s, Uganda ranked in the bottom third of Sub-Saharan African countries in its share of total expenditures going for education, and ranked last in the share of sector resources devoted to primary education. Within the Government's primary education budget, the bulk of expenditures go to finance wages and salaries of teachers. Even so, wages and salaries of teachers are very low, requiring topping up by parents by a factor of 3 to 4, even excluding nonmonetary compe,,sations. With parents also contributing for most of the cost of new schools or of expanding existing schools, virtually nothing is left for instructional materials or enhancing the quality of education. Worse still, children from poor families are priced out of whatever education that is available.  39. On a per pupil basis, Government expenditure on secondary education has been 15 times as much as on primary education while teitiary education has been almost 225 times as much. Even so, the quality of secondary and tertiary education is very poor primarily because food and boarding expenditures account for about 75 percent of the budget for secondary education; at higher educational institutions, student allowances (including transport, books, pocket money) use up between 55 to 65 percent of the recurrent budget while food and boarding account for another 30 percent. This leaves virtually nothing for educational expenses. Much of this is a legacy of the colonial education system; for instance, since the founding of Makerere University in 1922, the Government has borne tiie responsibility for paying for all student expenses. The Government has now embarked upon a process of reducing or eliminating some of the student allowances, but there remains considerable political resistance to be overcome before meaningful changes can be implemented. The Government is currently preparing a White Paper on Education that proposes a range of reforms in educational policies and programs to address many of the problems mentioned above; in addition, work is underway to prepare a detailed education sector investment program. 40. In this context, the overall expenditures for education need to be increased, and allocations within the education system need to be made consistent with Government's stated policy objectives. The Government therefore needs to significantly improve wages and salaries, complementary inputs, training and supervision, and where essential, rehabilitation of facilities for primary and secondary education, focusing in particular on areas where quality improvements are most urgently required and/or where children from poorer families are excluded. At the same time. the Government will need to phase out budgetary allocations for boarding, feeding and living eYxe1ises. Rough estimates from the Ministry of Education indicate that to provide even a minimum reasonable quality of basic instruction, total expenditure (by parents and government) will need to be increased five times for primary education and three times for secondary education. If Government seeks to increase its share of primary education from the present 10 percent to even 30 percent, it will need to increase its allocation by 20 times: this reflects how marginal its existing contribution is. 41. In water supply, the Government confronts pressing needs but weak institutional capacity. At present, only 20 percent of Ugandans have access to clean and safe water. The National Water and Sewerage Corporation (NWSC) has been strengthened in recent years, and is making significant progress in providing Kampala and six other major towns with safe water covering now about 50 percent of the population in these towns; however, even by the end of the century, about 25 percent of the population in these towns will not have access to safe water. The situation in the other 52 towns is more critical, where even the existing schemes have virtually ceased to function due to budgetary and organizational problems. In addition, access to safe water in rural areas is very poor. The expansion of coverage faces severe institutional constraints in the Water Development Department of the Ministry of Water and Mineral Development. In this context, expenditure policy will need to build on the fairly effective donor/NGO rural water programs (e.g., UNICEF, DANIDA), which work with the Resistance Councils and community initiatives. Even in these programs, cost sharing from the Government will be required as will technical support from the Ministry. 42. The review of public expenditure programs in key sectors therefore reveals that a number of critical activities are severely underfunded. At the same time, at least some of the resources for critical activities in particular sectors can be generated by phasing out unproductive activities within the sectors.  1 2 Executive Summary Intersectoral E:xpendittire A,I!ot^sfions 43. Issues and guidelines pertaining to intersectoral allocations are necessarily and inherently ditticult. By their nature, intersectoral allocations should retlect societal weights or values placed on ditterent sectors intlbrrned ;,y quiantitied requirements within key secters. A pragmatic approach, however, would he to start with a process of expenditure prioritization that would allocate sutticient resources for high priotity prograi: s within a set of sectors crucial tor the reform agenda, taking into account poteritial savings within each sector (para 59 below). Based on the reform agenda. it is clear that particular emphasis needs to he placed on infrastructure, agriculture, health, education, water and industry. While the available data do not permit precise quanit;ication, the analysis ot sectoral expenditure programs indicates that with the exception of industry where there may he scope for releasing resources or at least limiting further investment, expenditure allocations in other key sectors are inadequate, with a!locations for infrastructure, health, and education being unacceptably low. This would imply that shares for these sectors need to be increased. 44. One significant source of funds for this reallocation could be through the functional rationalization of the large number of ministries and self-accounting agencies. This could result in mergers of ministries in other sectors with duplicating or overlapping functions, or phasing out of certain functions that 9re either low priority or can better be performed by the private sector. The Public Service Review and Reorganization Commission has better identified several areas where this can done, which will result in at least a halving of the number of ministries. 45. Another key, potential source is reduced expenditure on defense, particularly as there is now greater peace and security. Defense expenditures have had a dominant share in the past; in FY89/90, they accounted for close to 50 percent of recurrent expenditures. In addition, defense expenditures have consistently been much higher than programmed, thereby putting a squeeze on budgeted expenditures in economic and social sectors. 46. These findings on intersectoral allocations are borne out by comparing allocations in Uganda with those in otler Sub-Saharan African countries undergoing adjustment. Over the past two years, while Uganda spent about 29 percent of its total budgetary expenditures on economic services (infrastructure, agriculture and other economic services), the comparator countries comprising Ghana, Malawi and Kenya spent 40 percent; about half of this is on account of lower expenditure on infrastructure in Uganda. In the social sectors (education, health and other social services), Uganda spent 23 percent as opposed to 33 percent in the comparator countries -- the bulk of this represents lower expenditure on education. Overall, Uganda spends about 20 percent less of its expenditure on economic and social services. The difference is accounted for by a much higher percentage of expenditure going for defense in Uganda -- 30 percent, or more than four times the 7 percent allocated in comparator countries. While it is true that overall public expenditures are much lower in Uganda (12 percent of GDP) than in comparator countries (30 percent of GDP), defense expenditures in Uganda even as a percent of GDP are twice (3.0 percent) that of comparator countries (1.5 percent). 47. Security is a key national imperative and an essmntial precondition for growth and development. To the extent that defense expenditures contribute toward this, their value is unquestionable and indispensable. Yet defense expenditures in Uganda have been rising even while there has been restoration of peace and security over most of the country; indeed, defense expenditures over the past two years have grown by over 40 percent per annum in real terms. In view of this and the significant underfunding of critical ec.onomic and social sectors, the Government needs to assess whether security can be provided more cost effectively.  txeCut'lve 1ummary I J 48. Part of the problem seems to stem from poor financial management in a military set up that is only now getting bureaucratized and that has little familiarity with budgeting, accounting and cost control. The Government will need to strengthen financial management skills and ensure that the same system of budgeting, scrutiny, appraisal and accounting applies to defense expenditures as they must in other sectors. In addition, the Government will need to focus on the costs and benefits of the economic components of defense expenditures such as production tarms run by the army, and the National Enterprise Corporation (a parastatal under the Ministry of Defense) which has acquired or set up 12 public enterprises over the last year. The experience with economic activities of this type elsewhere has consistently been poor, resulting in major net drains on the economy and the government budget. More effective means of facilitating the mobility of soldiers into private economic activity, such as through training or credit schemes for retrenched civil servants, should be considered, while still maintaining reservists for security. While a large army helps Uganda protect itself given a history of conflicts and continuing tensions across its borders, it is also viewed as an indispensable mechanism for preventing the arming and militarization of rival ethnic and tribal groups in a country with a tragic legacy of domestic conflict and civil war. In this and other areas (such as the need to have a plethora of 46 ministries and self-accounting units as a means of distributing power), the leadership needs to evaluate whether this is the inevitable option and course for political conciliation; indeed, the consequent severe underfunding of essential economic and social services also risks fueling discontent and unrest, threatening the impressive gains that have been made thus far. Civil Service 49. A major problem impeding the effectiveness of public expenditure programs across-the- board is the weak implementation capacity of an overstaffed and poorly paid civil service. Consistent with the goal of focusing scarce resources, the Government needs to have a smaller civil service that is considerably better paid. 50. In this context, the Government needs to: * Eliminate ghost employees. Considerable progress has already been made in this area; linking the Establishment Register with staff lists and payroll data is estimated to have led to savings of about U Sh 100 million per month, enough to pay around 20,000 employees. Significant savings are likely to come from flushing out "ghost" group employees as well. * Reduce the large number of ministries and self-accounting agencies by merging some of them and eliminating others. At present there are 46 of these, compared with only 35 as recently as in 1985. This leads to considerable overhead and headquarters expenditure, and causes problems of coordination of functions, as in the four ministries in the agricultural sector. e Reduce the size of the civil service drastically, especially at the lower levels. The civil service has doubled in size during the 1980s, with about 60 percent of recent recruits consisting of group employees, who are supposed to be temporary, daily-paid workers. Despite past attempts to reduce the number of group employees their wage bill has continued to rise.  1 4 Executive Summary * Implement a redundancy scheme to facilitate the transition of retrenched civil servants into productive activities. PAPSCA contains provisions for the preparation of such a scheme; donor support for funding and implementing components of the scheme will nevertheless be required. * Eliminate extensive abuse in the system, as reported tor instance by the Public Accounts Committee, by streng hening financial and other controls. The Government has demonstrated its seriousness to deal with the problem by acknowledging the prevalence of abuse, setting up and strengthening public institutions (e.g., the Inspector General of Government and the Public Accounts Committee) to deal with corruption, and taking punitive actions against abuse in the system. * Eliminate a large number of routine allowances, monetize nonmonetary benefits, and consolidate these into basic salary. * Raise levels of basic salary to the extent permitted by these savings and by the macroeconomic framework. Present average remuneration is estimated variously as being only 3 to 5 percent of a living wage or of competitive private sector wages (though this masks zonsiderably higher total compensation for a set of officials in the top grades who receive housing, allowances and other fringe benefits). 51. The Public Service Review and Reorganization Commission has recommended a number of significant actions along these lines, including reduction in the number of ministries to 20 or 21; laying off overaged staff or workers with unsatisfactory performance (the latter was estimated to be 37 percent in the 1990 census). 52. Savings from merger of ministries and reduction in staff could permit a significant increase in basic salaries; monetizing and consolidating allowances could also allow for a more equitable increase in basic salaries. In conjunction with these actions, however, the wage bill will need to be increased. Over time, with sustained improvement in the revenue effort and progress in reducing the size of the civil service, the Government will need to bring salaries up to levels which are competitive with the private sector, and the wage bill may need to be increased significantly (based on very rough estimates, by a factof of four or five) over a specified number of years. Expenditure Allocations Across Economic Categories 53. Indeed, the share of identifiable wages and salaries in Uganda is quite low as a percentage of total expenditure (16.1 percent), and as a percentage of GDP (only 1.9 percent) in comparison with 26 percent and 8.1 percent respectively for St STharan African countries generally. Of course, many African countries are struggling with er ive wage bills; for this reason Ghana has taken a policy decision to limit its civil service wage bill to 5.0-5.5 percent of GDP, though Uganda is still far from this level. Non-wage recurrent expenditures (excluding defense) are estimated to be only 1.9 percent of GDP in Uganda, or 40 percent of an estimated 4.6 percent of GDP in SSA countries, which, however, is itself considered inadequate. In light of the above, looking to the future, the emphasis should be on increasing both wage and non-wage recurrent expenditure to more adequate levels. However, this must take place in conjunction with efficiency gains resulting from functional rationalization of ministries and civil .vice reform; nonwage recuirent expenditures should not be increased across-the-board, but rathe? on the basis of assessment of the needs and priorities of each sector. Expenditure on capital foi.nation should be limited by the Government's financial capacity to subsequently operate and maintain the capital  txecutive ;umIfyary I D stock. Nevertheless, rehabilitation and even new investment is required in some key areas where devastation has left infrastructure and facilities (e.g., stretches of roads, power stations, health and education facilities) in shambles, beyond the scope of minor repairs or maintenance. A particular emphasis will need to be placed on a multisectoral rehabilitation program in the North, which is only now emerging from the ravages of war and insecurity. The NMacroeconomic Framework: Implications for Expenditure Allocations 54. The macroeconomic framework for the next three years is geared to achieving a 5 percent real GDP growth per annum and reduczion in inflation to below 10 percent by FY92/93. This indicates that though expenditures are projected to grow over the next three years on account of increase in the revenue effort and external assistance, the rate of growth in expenditures is quite modest. In the projections carried out for the Policy Framework Paper (FY90/91-FY92/93), public expenditures, consistent with inflation and growth targets, were programmed to grow from 11.6 percent of GDP in FY89/90 and a budgeted 13.9 percent of GDP in FY90/91, to 15.4 percent of GDP by FY92/93. This would have implied a cumulative 30 percent real growth in recurrent expenditures over the three-year period. Project aid and hence, development expenditure, was projected to stay roughly constant in real terms. These projections have been revised to take into account recent developments -- in particular, the impact of the oil price shock, a sharper depreciation of the exchange rate, as well as the shortfall in coffee exports thus far in FY90/91. The resulting resource envelope for public expenditures permits only a 5 percent real growth in recurrent expenditures over the three year period, with development expenditures roughly constant in real terms. 55. Owing to weaknesses in the database and the present state of knowledge (para 61), it is not possible to project sectoral and intersectoral allocations that would be required to finance alternative sets of public programs within this resource envelope. However, based on rough orders of magnitude, it is clear that expenditure requirements for critical programs are considerably higher than this permissible increase in the overal! expenditure envelope. For instance, it was roughly estimated that the budget for road maintenance needs to be increased seven-fold over the next three years. Absolute minimum levels of expenditure for primary and secondary health care are estimated to be twice present Government allocations. In primary education, total expenditures need to be increased five times to allow for reasonable quality, even assuming that parents are able to increase their already large contributions proportionately. In addition, it is roughly estimated that taking into account a scenario incorporating mergers of some ministries and a significant reduction in numbers, a four- to five-fold increase in the wage bill will be required to bring salaries up to levels that approach competitive private sector compensation. Clearly, it will take some time to accomplish the needed increases, and given a constrained resource envelope, a time-phased plan with prioritized and focused use of scarce resources towards these and other critical activities will be essential. As a corollary to this, however, it is essential that resources be released within each sector by phasing out of unproductive activities and facilities and undertaking cost recovery to the extent feasible. 56. A critical parameter is the Government's action on defense expenditures. For instance, if the Government is able to freeze defense expenditures at its budgeted FY90/91 level, nondefense recurrent expenditures (under the modified scenario) can be about 60 percent higher in real terms by FY92/93 than if defense expenditures are maintained at their higher FY89/90 level. If, at the same time, transfers (principally, net flows to parastatals and subsidy for boarding, feeding and allowances in higher education) can be reduced by 10 pe;cent each year, expenditures on wages and salaries (W&S) and nonwage operations and maintenance (O&M) can increase by about 120 percent in real terms over the three year period, FY90/91-FY92/93. Moreover, if the revenue  16 Executive Summary effort could he increased to 10 percent of GDP by FY92/93 (instead of the programmed 8.7 percent), W&S and O&M could be increased by about 180 percent in real terms over the same period; this compares with the 5 percent permissible growth if none of these measures is taken. 57. Consequently, a combination of actions -- significantly increased expenditure allocations for the high priority programs and projects identified above; phasing out unproductive activities and facilities; drastic reduction in the number of ministries and employees along with a significant increase in wages and salaries; a significantly reduced level of defense expenditures; and a higher revenue effort -- will go a long way towards me_ting the requirements of essential public programs. It will, however, be essential that donors increase their support for recurrent programs (para 69). Budgetary Reform and Expenditure Prioritization Process 58. As important as expenditure allocation issues are, perhaps even more important is the process of expenditure prioritization and allocation in Uganda. The present budgetary process largely replicates historical shares, and therefore does not embody any mechanism for assigning greater emphasis to particular activities or phasing out others. The Government has embarked on a budgetary reform program which provides the basis for developing and instituting an expenditure prioritization process. 59. The main elements of the proposed process can be summarized as follows. The Budget Policy Committee, consisting of key officials from the Ministry of Planning and Economic Development (MPED), the Ministry of Finance (MOF) and the Ministry of Public Service and Cabinet Affairs (MPSCA), would prepare a Public Expenditure Issues Paper in August of each year in preparation for the next budget. The paper should: * articulate national development objectives and key targets (e.g., improvement of certain segments of the road network, primary health care and primary education for a certain proportion of the population, expanding coverage of safe water to a certain proportion of the population, strengthening of extension services covering export crops in selected districts); * identify a set of specific, high-priority programs that will be crucial for meeting these targets; * make projections of the macroeconomic framework and resource envelope for public expenditures; * within the projected resource envelope, go through rank-ordered priorities sequentially and propose expenditure implications for key sectors and ministries, including allocations for the wage bill taking into account action on civil service reform; and * allocate residual resources proportionately among remaining ministries pending functional rationalization, policy decisions and improved database on other activities. 60. The paper and its proposals would then be discussed with the line ministries with the objective of enlisting the contribution and ultimately support of all principal actors. A concerted attempt will need to be made by the core ministries to build a consensus on expenditure priorities  txecutive summary I / from a national perspective. The Budget Call Circular issued towards the end of the calendar year would have an overall ceiling that better reflects the macroeconomic constraints, and ceilings for various ministries that would have some relationship with their mandate rather than reflecting their historical shares. The process of prioritization and discussions would give greater authority to the Budget Call Circular. In order to manage and implement this process, however, the Budget Policy Committee will need to be strengthened, possibly including the setting up of Budget Policy Unit in the Ministry of Finance. 61. Over time, the Government will need to move towards the preparation of a comprehensive Medium-Term Expenditure Plan with objectives, strategies, macroeconomic projections and expenditure priorities and allocations, translated every year into the Annual Budget. The Government's Rehabilitation and Development Plan, listing the portfolio of externally-financed projects, is currently beset with a number of problems of consistency with the macroeconomic framework, the budget and expenditure priorities in the reform agenda; it needs to be subsumed into this medium-term expenditure plan. In addition, in view of weaknesses in the prevailing database that prevent specific quantification of expenditure requirements, a process to take stock of inventories of facilities and equipment, and estimate expenditure norms and unit costs for key activities and programs needs to be initiated. 62. Budgeting Supportfor Local Inihiatives. Many of the critical programs identified by this review -- feeder roads, primary health, primary education, rural roads -- involve supporting decentralized local initiatives. Over the years, however, the appropriate roles and responsibilities of local communities, District Authorities, Ministry of Local Government and line ministries in these areas have blurred, and need to be more clearly delineated. Moreover, mechanisms for channeling budgetary support need to be identified and strengthened -- e.g., block grants to district authorities, or special deposits for particular sectors through the Ministry of Local Government. While certain mechanisms have been proposed in each area in this report, these need to be reviewed in conjunction with the larger process of political decentralization and consequent devolution of power over certain economic affairs that have been instituted by the NRM Government. A careful analysis of the role of local governments as well as the appropriate institutional mechanisms for channeling budgetary allocations and facilitating implementation of decentralized local initiatives in economic and social sectors is therefore urgently needed. 63. Budget Implementation. Significant improvemnents have been made to ensure that approved budget estimates and priorities are implemented without delay and impediments. Starting October 1, 1990, the practice of suspending the recurrent budget was abandoned, under which line ministries had to requisition funds item by item from the Ministry of Finance. In abandoning this system, the Government has come to accept that it is not necessary to operate an item by item requisition method in order to keep spending within available resources. A so-called Exchequer system has instead been instituted under which budgeted recurrent expenditures are to be released automatically on a quarterly basis. This system now needs to be extended to include local counterpart funds for externally-financed projects. Indeed, the budgeting of local counterpart funds and the process of their releases have been fraught with severe problems, impeding the implementation of the few public programs that are effective. The Project Monitoring Unit set up in MPED will also need to play an important role in facilitating the implementation of priority projects. Although there have been some improvements in expenditure controls over the past two years, the Government will need to focus much greater attention on containing expenditure to within targeted levels, and on ensuring that high priority programs in key economic and social sectors are protected from across-the-board budget cuts or from a squeeze imposed by overspending by particular ministries (principally defense). Finally, the Government's system of accounting for public expenditures is in acute disarray. Accurate information on expenditure is  not available on a timely basis; indeed, the system has not produced a balance sheet or processed an annual closing - ycle in sixteen years. In this context, the Government needs to reinforce its recent actions to strengthen accounting, and focus attention on the implementation ot' the Financial Information Systems project in the Ministry of Finance. Dialogue with Government 64. The Government has been open and receptive to the numerous public expenditure issues and recommendations that have emerged in the context of this review. As noted earlier, the Government has already initiated actions to phase out several unproductive activities and has embarked on a process of expenditure prioritization in preparation of Lhe FY91/92 budget. In addition, brainstorming sessions and a workshop on public expenditure issues during the main mission helped build greater consensus on expenditure priorities within the Ministry of Finance and Ministry of Planning and Economic Development. Moreover, this report has been widely distributed within the Government, and it was discussed with the Government in January 1991. The Consultative Group meeting in March 1991 will further advance the dialogue between Government and donors on these issues. Recommendations for Donor Assistance' 65. Clearly, a vast and difficult reform agenda lies ahead. Yet the sustainability of these reforms is dependent on adequate external financing. Indeed, the country faces an extremely difficult balance of payments situation. An already difficult foreign exchange constraint was made formidable by the collapse of the International Coffee Agreement, and more recently, by the oil price increase. The Government has taken important steps to respond to these shocks, including regular exchange rate adjustments as well as remarkably prompt action to adjust petroleum prices by the full amount of the international oil price increase. In a larger context, as discussed earlier, the Government has undertaken important steps to encourage exports (100 percent foreign exchange retention, the elimination of virtually all export marketing monopolies, and legalization of the parallel market); in addition, the Government plans to achieve a unified, market-clearing exchange rate by the end of 1991. It will nevertheless take time for exports to increase sufficiently to offset the terms of trade shock or the precipitous decline in export earnings over the years. At the same time, the economy needs a minimum level of imports to meet its growth and inflation targe-ts. Consequently, policy reforms alone will not suffice. Considerably enhanced donor assistance will also be required to ensure the sustainability of these reforms, to enable the Government to meet its growth and stabilization targets, and to reverse a decade and a half of economic retrogression. 66. Taking into account projections of (i) exports, debt service and private transfers; (ii) requirements for nonproject imports (US$480 million in FY90/91, rising to US$550 million by FY92/93) to finance agricultural and industrial inputs, raw materials and spare parts and petroleum imports needed particularly for private sector growth; and (iii) debt rescheduling (which unfortunately is limited given the large share of Uganda's dett owed to multilaterals and non-Paris Club bilaterals, and the 1981 cutoff date for Paris Club), total required disbursements of import support amount to about US$225 million per annim over the next two years, FY91/92 and FY92/93. This implies new commitments of import suppOrt of around US$245 million per annum over the same period. However, it is important to note that this is the minimum level of support Estimates of external financing requirements were made in November 1990. These are being updated by an ongoing Bank-Fund mission. Revised estimates will be distributed at the Consultative Group Meeting.  rxercltive S(,tt,t'w lV 1 9 require..l indeed. thei piot!i .a III I.d 1.1 I (II I fCl I buIlid uLp a Inoi int ' to Ol I0 9 m nonths of' pro jct,ed irnportll h I Y92 )' 67. In addition t) providing foreign exchange for private secti)r inmpipits and growth, import suppoit will provide counterpart t'unds for tlle budget and will help finanice needed public expenditures, incIluding increased wages in the context ft' civil service reform and nonwage expendLitIures par ticularly for critical programs in the ,ontext of a prioritized public expenditure policy. In this lighit, it is recommended, consistent with proposals mande by the 1.FC at the October 1990 SPA meeting, that donors not target these counterpart tunds for specific purposes, but through an enhanced dialogue with the Government (e.g., local donors meeting or Consultative Group meetings) reach general understandings on overall expenditure priorities, pirticularly for key economic and social sectors. 68. Regarding project aid, assuming first that project assistance is used primarily to finance development or capitalformation expenditure, disbursements are recommended to be constant in real terms (i.e., at its FY89/90 level of US$250 million). This is based on the explicit recognition of (i) the limited need for implementing new capital formation projects, when existing investments are badly in need of recurrent expenditures; and (ii) Uganda's limited absorptive capacity and ability to effectively implement a large number of development projects. Taking into account disbursements from existing commitments, new commitments of project aid in the amount of around US$500 million per annum over the next two years are required. Within this, the emphasis should be on rehabilitation investment (e.g., certain stretches of gravel and feeder roads, health and education facilities, economic and social infrastructure in the North); however, new investment is imperative in certain areas (e.g., expansion of power capacity, health centers in areas not served by NGOs). 69. Both the requirements and absorptive capacity for recurrent programs are considerably greater. While institutional constraints are quite significant even for recurrent programs (e.g., agricultural research and extension), inadequate funding is an inextricable part of this constraint; indeed, for several such programs, inadequate funding is to a significant extent a constraint on absorptive capacity rather than vice versa. In this context, it is recommended that donors increase their support for recurrent programs (e.g., road maintenance, primary and secondary health and education). Depending upon the estimation of overall requirements and macroeconomic/aid constraints, there may be a need to reorient the planned project aid to finance more recurrent requirements; to some though limited extent, this is already being done through projects financing essential drugs (DANIDA) or textbooks (IDA). Clearly, this must take place in the context of enhanced expenditure prioritization where concerted attempts are made by the Government to curtail expenditures on nonessential programs, make significant progress on civil service reform to ensure effective utilization of expenditures, and increase the revenue effort substantially. 70. While external financing of recurrent programs does raise potentially troubling and legitimate questions of sustainability, a fiscal program with a modest increase (a one-shot 10-15 percent increase in FY91/92 maintained constant in real terms over the medium-term) in project aid devoted to such programs is sustainable and noninflationary. First, the budgetary current account deficit improves even in the three-year period, FY90/91-FY92/93, as revenues are expected to grow faster than recurrent expenditure,. With strengthened tax administration and economic growth, revenues will finance more of current expenditures. Second, the fiscal program is consistent with a sustainable balance of payments, which shows even a modest nominal decline in the current account deficit as exports are projected to grow faster than imports. Finally, the fiscal program, with higher recurrent expenditures financed through project aid, leaves sufficient room for noninflationary financing for private sector growth. It will take considerable time,  20 Executive Summary however, for revenues and exports to increase sufficiently to generate positive current account balances. External assistance to tacilitate this transition is therefore a crucial bridge between a devastated economy and one capable of self-sustaining growth. 71. Taking into account this increase in project aid to finance some recurrent programs and a build-up of reserves equivalent to three months of imports by FY92/93 to allow sufficient cushion for the achievement of a unified, market-clearing exchange and trade regime, total new commitments ofproject aid are recommended at around US$540 million per annum over the next two years, FY91/92 and FY92/93, and total new commitments of import support are recommended at around US$325 million per annum over the same period. This implies total new commitments of external assistance of US$865 million per annum over the next two years, which compares with US$640 million pledged during the 1989 Consultative Group meeting. 72. Overall, based on pivsent indications, therefore, the Ugandan program is underfinanced by a large amount. Significant underfunding may lead to the unravelling of the adjustment program itself. In this context, it is important to note that aid per capita to Uganda over the last two years has been about 30 percent lower than aid to other Sub-Saharan African countries despite IDA's aid per capita being one of the highest among the IDA countries. Bilateral assistance for Uganda, though rising, has averaged only US$9 per capita for Uganda, or only 40 percent of the average US$21 per capita bilateral aid for SSA countries (excluding Nigeria). 73. In conclusion, the Government has made impressive progress in facilitating economic recovery and achieving greater financial stability. In order to sustain growth and ensure that growth is equitable, the Government will need to broaden and deepen policy reforms and ensure the provision of critical economic and social infrastructure and services. This requires that Government prioritize scarce resources to accomplish its most essential functions and mandate, building on the strengths and initiatives of the private sector. The Ugandan economy, with a rich resource base and a determined and resilient people, holds significant promise for sustained growth and improved quality of life. The realization of this promise, however, is critically contingent on sustained and reinforced Government action supported by enhanced donor assistance.