The major pillars of the on-going budgetary reform are: the budgetary reclassification that will allow program management and performance-based budgeting, the new reporting that enhances transparency and control vis-a-vis Congress, and the medium-term expenditure framework.
—Inter-Ministerial Commission for
Improving Public Finance-MoF, March 2006a
This chapter argues that revamping of the national investment system will not be fully achieved unless authorities successfully tackle the multiple and severe institutional shortcomings surrounding the budget process. It overviews the main features of the budget system. Given its weaknesses, when compared to international standards, reiterates that effective implementation of the PCSC will not work without parallel and urgent budgetary institutional reforms. Furthermore, it answers legitimate questions as to whether current budgetary practice supports fiscal discipline, or threaten its sustainability in the medium term. Do current practices facilitate adequate inter- and intra-sectoral allocation of resources, or cause resources to be distributed with little prioritization? Are resources implemented with efficiency, or exposed to waste and corruption either at the central or deconcentrated public entities?
A. Overview of Budgetary Management -
This chapter compares budgetary management in Algeria against international standards, highlights the country’s ongoing reform efforts and presents new findings. Chapter 1 introduced the PCSC and its risks. Chapter 2 assessed the country’s capacity to maintain discipline in overall fiscal balances, despite the oil windfall since the early 2000s. Chapter 3 described how a public investment system may allocate PCSC resources to priority and cost-effective projects. In turn, this chapter addresses the budgetary practices needed for steady implementation of the PCSC. In doing so, it completes the review of the three levels of public expenditure management (PEM) shown in Table 4.1.
Table 4.1 Basic Elements of Public Expenditure Management: The “Three- Level Analysis”
Aggregated fiscal discipline
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Budget totals should be the result of explicit, enforced decisions, not merely accommodation for inertial trends and spending demands. Aggregate ceilings on totals should be set before individual budget decisions are made, and these levels should be sustainable over the medium term.
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Allocation to strategic priorities
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Budget allocations should be based on government sectoral priorities and on effectiveness of public programs. The budget system should shift resources from lesser to higher priorities and from less to more effective programs.
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Operational efficiency
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Line agencies should produce goods and services at costs that achieve ongoing efficiency gains and are competitive with market prices.
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Source: Schick (1998).
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Poor performance of investment expenditure in Algeria is closely linked to PEM shortcomings. Recent reviews of international experience show that poor PEM performance creates serious obstacles to government investment objectives in many countries (Judge and Klugman 2003). Algeria is no exception. Failures in its budget process and institutional bottlenecks have consistently led to poor execution in investment programs. Shortcomings result in poor programming, overbudgeting, and long delays in project implementation. Important failures include a disconnect between budget planning and sectoral priorities; a lack of effective interventions resulting from budget fragmentation through separation between capital and recurrent budgets; potentially sizable contingent liabilities, significant variations between capital budgets approved and executed; and extended delays and surcharges in the implementation of projects, which reflects weak execution capacity among line agencies. These shortcomings are explored in greater detail in this chapter.
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To effectively implement the PCSC, solid parallel progress is required in ongoing reform of budgetary management. Modern budgetary management includes a standard budget classification, sound aggregate fiscal ceilings, properly defined inter- and intra-sectoral priorities, and quantitative (both intermediate and final) indicators that make use of modern technology to monitor service delivery performance. Algeria is already working on all these fronts. A new budget reclassification, according to IMF public finance standards, is expected to be validated by the end of 2006. Sector priorities and key program indicators are being defined in agreement with 4 line ministries (health, education, public works and finance). The same pilot ministries have been selected for introducing a medium-term budgeting framework (MTEF). Passage of a modern IT-supported budget system is expected in 2009. A modern IT-based budget will also allow transparent information access for implementation of all PCSC projects, as well as proper monitoring and results-oriented budgeting in the future. Finally, as the ongoing budgetary reforms gain ground, a rolling three-year MTEF would also align expenditure inputs with expected sector outcomes. Hence, no delays are required in the upgrading of Algeria’s budget and financial management procedures for sound implementation of the PCSC.
B. The Budgetary Process and its Recent Performance
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PCSC implementation takes place in a framework in which deconcentrated bodies (wilayas, that is, regions) have become more important for some sectoral budget execution. Overall, the PCSC should raise the share of centralized budget investment execution (Figure 4.1). While the central government directly executed about 60 percent of total investments in 2004, that share is expected to rise to about 66 percent of total investments under PCSC budget authorizations. This overall trend reflects a sizable increase that the central government is expected to make in the execution of economic infrastructure—from 68 to 84 percent of total PCSC investments. However, it masks the ongoing fiscal deconcentration in the health, education, and water sectors. Wilayas executed 100 percent of total health investment in 2004, and their share will remain above 80 percent in 2007. Their share in education was more than 90 percent in 2004 and will remain above 80 percent in 200743. Finally, wilayas will increase their share in dam projects from 30 to 50 percent during this period. Given this trend, the health, education, and water sectors should pay particularly close attention to budget monitoring, execution, and evaluation at the wilaya level. Toward that end, a section of this chapter is devoted to the budget management of wilayas and of municipalities.
Figure 4.1. Central and De-concentrated Budget Investment Authorizations of PCSC Expenditures, 2004-2007
Source: Ministry of Finance, Bank staff calculations.
 
Source: MEFI
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Algeria has taken important steps toward a sound overall PEM. Fiscal management is defined by a relatively clear legal and administrative framework, which is contained in the Budget Framework Law No. 84–17 (IMF 2005a). Exceptional hydrocarbon revenues enlarge Algeria’s space for financing public investment programs without affecting medium-term fiscal sustainability (IMF 2005b, 2005c). Algeria has also been prudent in its budget formulation. Despite high oil prices, it has adhered to a conservative price estimate of US$19 per barrel, though average prices were above US$38 per barrel in 2004 and 2005. Surplus hydrocarbon revenues are feeding the Hydrocarbon Stabilization Fund—the Fond des Régulation des Recettes (FRR). However, sound management of hydrocarbon revenues was supported by rules in which the stabilization fund could only be used to repay public debt,44 until this was amended by the Budget Complementary Law of 2006, which now allows for direct financing of the budget deficit (see section D on Chapter 2). The government has also developed an excel-based central registry database for all special Treasury accounts. Thus, the budgetary process is also modernizing (see Annex C and below).
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Despite these efforts, Algeria’s budgetary management as assessed by international standards reveals significant shortcomings. Initial efforts in many areas are fragile. Since the late 1990s, the IMF and the World Bank have jointly developed a survey tool called an Assessment and Action Plan (AAP) to evaluate budgetary management practices worldwide (World Bank 2003e), but Algeria did not have one so far. Hence, for the first time, this survey applies a series of 16 indicators covering the various stages of budget management, including seven on formulation, four on execution, two on reporting, two on auditing, and one on public procurement. The survey was originally designed to help heavily indebted poor countries (HIPCs) identify key budget management areas in which poverty-reduction expenditures could be better executed and tracked. Indeed, this assessment served as a condition for eligibility for upcoming debt relief that would increase the availability of funding for poverty reduction. Likewise, Algeria is also experiencing an increase in revenues associated with its new oil pipeline and a significant increase in resources to finance PCSC investment. Applying this survey to Algeria sets a baseline and highlights areas for improved budget management.
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The AAP survey shows that Algeria meets only 5 of the 16 global benchmarks. The IMF and World Bank consider that a country’s budgetary management system requires substantial upgrading if fewer than 7 of the benchmarks are met. As shown in Table 4.2, Algeria’s performance is particularly dismal across the different budget stages of formulation, execution, reporting, and procurement.
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Formulation. Algeria uses an outdated classification system. In addition, coverage of general government activities is insufficient; and there is no medium-term expenditure framework. An important caveat in regard to one of the three satisfactory items—the overall ratio between the executed and approved budget—is that the execution performance by sector widely varies, which reduces budget reliability as a guide to resource allocation by sector.
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Execution. Slowness in execution does not reflect cash rationing but the cumbersome procedures that prevent rapid closing of the end-year period to close the budget (known as the Journée Complémentaire) and the opening of the new fiscal year, which delays the initial allocation of resources by more than three months. While Treasury timely knows how much budgetary resources are transferred to the Comptes Spéciaux du Trésor (known as STA in English), these funds are not fully disbursed immediately; rather, they are partly kept in deposit because they are not necessarily executed by these institutions. Hence, Treasury is artificially short of funds and must raise money to finance the nonhydrocarbon budget deficit. In the meantime, there are undisbursed funds lying in the special accounts.
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Reporting. The lack of prompt and virtual (in real time) consolidation of the budget once executed, as well as shortfalls in auditing, contribute strongly to low scores. Despite ongoing efforts to modernize, the budget is managed on multiple and separated databases. This leads to a disconnect among the various institutional database systems and problems in consolidating reliable data in the central database at the budget office. Neither internal nor external fiscal accounts are effectively audited; and there is high-level political interference in auditing followup. This prevents substantive cases from being presented, or sanctions from being applied.
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Procurement. The scope of the investments to be made and the considerable increase in the number of contracts to be awarded and managed in the context of the PCSC call for strengthening of entities and improvement of the procurement and contract management system, with a view to enhancing its efficiency and transparency and ensuring the execution of investments under sound conditions from the standpoint of cost-benefit, particularly in the case of major projects.
Table 4.2. Ratings of Algeria’s performance against international benchmarks for budgetary management and the reasons for its ratings
International Benchmarks (AAP)
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PER Rating/b
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Rationale for Algeria’s PER Rating
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Formulation
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1 (A).
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Fiscal reporting matches the IMF definition of general government sector with coverage (by value) of at least 95 percent, whether or not funded through the budget.
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C
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A C rating is granted if fiscal reporting includes central government operations exclusively. Thus, it excludes coverage of the rest of general government budgets—especially subnational, regional or local, government budgets, and public enterprises. Ex ante transfers to subnational governments are available, but ex post reporting is not available and does not include off-budget activities.
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2 (A).
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Off-budget fiscal activities: Government activities are funded through extrabudgetary resources, but these funds represent less than 3 percent of total spending.
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A
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On the sources side, there is no comprehensive and reliable list and information estimating extrabudgetary resources, but at first sight they do not seem significant. Identified extrabudgetary resources are mainly the 20 percent earmarked VAT revenues to local governments (i.e. recettes affectées) equivalent to about 1 percent of GDP in 2005, and own-generated resources collected by special treasury accounts,social programs and the road fund. Authorities claim that amounts involved in these items are rather small. On the destination side, no inventory of tax expenditures, contingent liabilities, or off-budget activities is included in the budget documents presented to Parliament.
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3 (B).
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The level and composition of the budget outturn is quite close to the original budget appropriations (a B is granted for deviations between 5 and 15 percent) for at least two years.*
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A
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During 2001–04, aggregate deviations represented an average 3 percent of underbudgeting in recurrent budgeting and below 5 percent in capital budgeting (which justifies the A rating). Although there was no dominant pattern of under- or overexecution in those years, investment budgets among some sectors widely varied.
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4 (A).
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Budget reports include timely data on external financing flows—loans or grants—ex-ante and ex-post.*
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A
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Ex-ante forecasts and ex-posts reports of loans and grants disbursements are available. A minor issue is that ex-post grant reports are neither timely nor complete. Budget registration of grants obtained during the fiscal year has delays and no clear procedural guidelines, but their share of the budget has been negligible since 2002.
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5 (B).
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Budget expenditure is classified on an administrative, economic, and detailed functional and programmatic basis.
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C
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Algeria’s economic classification does not fully conform to international standards (ROSC 2005), which corresponds to a C rating. Separate budgets for recurrent and capital budgets coexist, and their classification system does not match. There are no functional or programmatic classifications.
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6 (A).
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Identification of poverty-reducing expenditure is clear, through a virtual or an actual poverty fund.
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B
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A B rating is granted if poverty-reducing spending is somehow tagged through a list of transfers to social programs. However, these are just broad transfers with no special tracking mechanism for monitoring or verifying their execution on pro-poor outlay at the level of the line agencies, the wilayas, or local governments in charge of those programs. This adds to budget fragmentation and the lack of a functional and programmatic classification as major obstacles to identifying pro-poor spending.
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7 (A).
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Multi-year sectoral expenditure projections are integrated into the budget formulation cycle as indicative ceilings.
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B
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There is no formal medium-term expenditure framework (MTEF) endorsed by the Cabinet. However, steps toward a MTEF have been adopted and the Ministry of Finance produces three-year aggregate forecasts, and approves sector multi-year investment authorizations, which justifies the B rating. These are purely informational. They are not integrated into the budget formulation cycle yet. The absence of functional and program classification prevents the adoption of inter- and intra-sectoral disaggregated benchmarks.
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Execution
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8 (A).
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No stock of payment arrears (or very few), with little accumulation of arrears over the previous year.*
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A
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Algeria has no arrears from past years. The oil windfall has provided ample fiscal space to finance its investment programs. It has also advanced external debt repayment. Instead, two minor issues are the current practice of supplementary budgeting by mid-year (with sizable resources involved) and of increased resources allocated to special Treasury accounts, which are not executed during the fiscal year and thus de facto break the principle of an annual budgetary cycle.
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9 (A).
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Internal control system is effective.
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B
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Internal financial audits exist, which justifies the B rating, but their coverage is partial and are weak in their breadth, depth, and frequency. The country uses an ex-ante visa mechanism that essentially consists of checking documents. However, it does not monitor overall performance of outlays to verify that underlying contracting and financing mechanisms are operating properly. Reports of fraud cases are rare.
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10 (B).
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Public expenditure tracking surveys (PETS) of funds are piloted to supplement weak internal control as a second best.
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C
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No PETS have been piloted or implemented. In addition, the fiscal reporting system is not well equipped to monitor expenditure, which explains the C rating. No supplementary mechanism, such as PETS, exists to complement internal audit shortcoming. No special studies are done on the resources reaching the final users or service providers in PCSC projects or social programs.
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11 (A).
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Satisfactory reconciliation of banking and fiscal accounts is undertaken monthly.
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A
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Reconciliations of banking accounts are facilitated by the fact that all Treasury operations are recorded in a single master account at the Bank of Algeria that provides balances on a daily basis, which justifies the A rating. However, there are regular discrepancies between reporting of expenditure execution by Treasury (cash basis decaissement) and Budget (ordonnancement-basis).
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Reporting
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12 (B).
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Internal budget execution reports are received within two to four weeks of the relevant period.
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C
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Whether annual, quarterly, or monthly. reports on budget execution are irregular and very incomplete, which explains the C rating. Delays in institutional audit reports from spending units may continue for much more than 3 months. Reports from decentralized execution units are nonexistent.
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13 (A).
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Good quality classification of poverty-reducing spending is reflected in regular in-year budget reports.
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C
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Because there are severely fragmented, mismatched, and outdated budgetary classifications, reporting on poverty reducing expenditure is nonexistent and a C rating is guaranteed.
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14 (A).
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Routine transactions are entered into the main accounting system within two months of the end of the fiscal year.
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B
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Centralized monthly statements are entered within six weeks of the end of the year (IMF 2005a), which explains the B rating. Deconcentrated monthly statements by wilaya treasurers can take much longer. The complementary period for closing the annual budget, known as Journée Complémentaire, has taken no less than three months on average during the past three years.
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15 (B).
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An audited record of the financial outturn should be presented to the legislature within 6 to 12 months of the end of the fiscal year.
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C
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The Constitution empowers the National Audit Court to oversee the finances of the central and local governments, as well as state services ex post. However, the exercise of this right has not been exercised since 1997. External audits are done ad hoc. The annual report for 2003 took longer than a year to be prepared and is still not published. The annual report for 2004 has not yet been issued. In addition, audited records of decentralized execution units are nonexistent. All this justifies a C rating.45
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Procurement
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16 (A).
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The public procurement system promotes efficiency and effectiveness in the use of public resources through clear rules that promote competition, transparency, and value for money.
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C
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The procurement system has unclear and inadequate rules and weak enforcement studies (cahiers des charges) are insufficient; external expertise is rare; and present procedures do not favor competition (MoF, 2006) which prompts a C rating. There have been numerous cases of suspected corruption in public procurement contracts, but little follow-up.
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The number of benchmarks met (i.e., the number of A ratings)
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5
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Source: ROSC and CFAA, and WB staff survey.
Notes: a/ Single asterisk(*) and boldface means that the benchmark was met.
b/ The ratings are as follows: A = Good. B = Fair. C = Poor.
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In the same vein, Algeria’s global rankings in budgetary management are below those of an average HIPC country. Table 4.3 shows that Algeria fares better than average on only three indicators. It is similar on six other indicators. It fares worse on the remaining seven indicators. This would place Algeria in Group C among HIPC countries with the less-advanced budget management systems. Twenty-one of 25 Group C countries are located in sub-Saharan Africa. However, if Algeria continues to make solid efforts in its ongoing budgetary reforms, its gap with the more advanced HIPC countries would diminish in the next three years. Its present budgetary reforms are far from exhaustive or needing only to accelerate. They also need to focus on other fundamental issues, as discussed below. A comparison with HIPCs process of budgetary reforms also illustrates the areas of ongoing budgetary performance that are proving relatively easier to reforms (Table 4.3).
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