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LAGOS STATE GOVERNMENT

Ministry of Economic Planning and Budget

FINAL REPORT ON ANNUAL BUDGET PROCESS IMPROVEMENT IN LAGOS

STATE

May 2010

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Acknowledgement This report was made possible through Technical Assistance from: United Kingdom Department for International Development (DFID) State Partnership for Accountability Responsiveness and Capability (SPARC) Programme.

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Content List

Abbreviations and Acronyms ........................................................................................................4

Executive Summary ......................................................................................................................5

1.0 Background and Introduction ........................................................................................... 6

1.1 Background.................................................................................................................. 6

1.2 Introduction .................................................................................................................. 6

1.3 Objective of the Assignment ........................................................................................ 7

1.4 Approach & Methodology ............................................................................................. 7

1.5 Scope of Work ............................................................................................................. 8

2.0 Activities and Work Completed ........................................................................................ 9

2.1 Overview ...................................................................................................................... 9

2.2 Annual Budget Call Circular ......................................................................................... 9

2.3 Capital Expenditure Work Plans................................................................................... 9

2.4 Budget Cycle Guide Book ...........................................................................................10

2.4.1 Purpose of the Guide Book ...........................................................................................10

2.4.2 Scope of the Guide Book .........................................................................................10

2.5 The Budget Process Cycle in Perspective ..................................................................10

3.0 Conclusion .....................................................................................................................13

4.0 Recommendations .........................................................................................................14

5.0 Next Steps ......................................................................................................................15

Annex 1: Sub-Terms of Reference ............................................................................................16

Appendix One: Draft Budget Cycle Guide Book ........................................................................18

Appendix Two: Draft Template of Annual Budget Call Circular ..................................................28

Appendix Three: Draft Template of Capital Expenditure Work plan for MDAs ...........................37

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Abbreviations and Acronyms CMA - Centre Moving Average DFID - Department for International Department DMO - Debt Management Office LMDGP - Lagos Metropolitan Development and Governance Project LSG - Lagos State Government MTEF - Medium Term Expenditure Framework PEFA - Public Expenditure and Financial Accountability PEM - Public Expenditure Management PF - Public Finance PFM - Public Financial Management SLGP - State and Local Government Programme SMA - Simple Moving Average STO - State Treasury Office WB - World Bank WMA - Weighted Moving Average AGO - Accountant General’s Office BCC - Budget Call Circular BCGB - Budget Cycle Guide Book BSG - Budget Sub-Group CEWP - Capital Expenditure Work Plan DFID - Department for International Development DB - Director of Budget EXCO – State Executive Council IGR – Internally Generated Revenue LASEEDS - Lagos State Economic Empowerment Development Strategy LMDGP - Lagos Metropolitan Development and Governance Programme MDA - Ministry, Department and Agency MEPB - Ministry of Economic Planning & Budget MoF - Ministry of Finance MTEF – Medium Term Expenditure Framework MTFS - Medium Term Financial Strategy MTSS – Medium Term Sector Strategy PS – Permanent Secretary SPARC - State Partnership for Accountability Responsiveness Capability STO - State Treasury Office ToR - Terms of Reference

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Executive Summary The report documents the approach and methods adopted in support Ministry of Economic Planning and Budget (MEPB) to strengthen the annual budget process and system leading to the production of the key pieces of documentation. The overall objective of the assignment is to provide technical support to the MEPB to improve annual budget system in the State Government. The envisaged support is geared towards strengthening the annual budget planning, preparation, management and monitoring processes with a view to achieving better outcome. The specific objective of the assignment is to assist in producing a comprehensive Annual Budget Call Circular, Annual Budget Cycle guide book, Capital Expenditure Work Plans template.

Findings The course of this assignment it was noted that the World Bank MTBF project team has produced a budget manual which was being reviewed. The manual is essentially a description of the existing budget rules and procedures and the manual is a reference document.

Recommendations This assignment primarily aimed at improving the annual operating budget process and system so that basic characteristics of sound budgeting system can be enhanced including transparency, accountability, comprehensiveness, predictability and credibility. On the basis of the work undertaken and findings the following recommendations are put forward in order to achieve improved budgeting system in Lagos State Government:

There is the need for training for budget and planning staff of the MEPB and MOF as

well as line ministries to enable them keep abreast of best practices.

There is the need for the DB and the Budget Sub-Group (BSG) to develop templates of

the budget documentation, which will include Budget Policy Statement, Economic and

Fiscal Up-date, Annual Marco-economic Analysis Statement as well as quarterly budget

performance reports (with emphasis on sector budget outcomes).

1.0 Background and Introduction

1.1 Background

The Lagos State Government conducted a Public Expenditure and Financial Accountability (PEFA) self-assessment in May 2009. The PEFA process used the three fiscal years from 2006-2008 as basis for the assessment.

In summary the PEFA outcome shows that the Lagos State Government posted very strong performances in many aspects of payroll controls, revenue collection, accounts preparation, and external auditing. Through Oracle Financials, the LSG has achieved integration of the payroll and nominal rolls. Internal controls to changes on the personnel database are strong and payroll audits regular. Taxpayers pay directly into Treasury Bank accounts. The quality of final accounts is good and their preparation is timely. Similarly, audit reports are very timely and cover all of Governments operations, including non-budgetary funds and operations. However, the PFM system showed particular weaknesses in fiscal discipline, especially in the credibility of the budget. Budget planning and implementation processes are also weak. In particular, planning and budgeting do not use multiyear forecasts or sector strategies; although some work has been undertaken to strengthen these areas. Budget execution does not rely on reasonable forward cash forecasts and cash planning. Finally, the procurement process is particularly weak and insufficiently transparent. Since 2008 a number of PFM reforms have been supported, both through the DfID SLGP programme – in particular support to the Office of the State Auditor General, the PFDMO and budget and planning; and through the WB LMDGP which has provided support to medium term budget planning and MTEF.

Following the PEFA self-assessment report the LSG embarked on a plan to improve PFM performance, including improvement in budgeting, accounting, revenue administration, debt management, procurement, external audit, internal audits and inter-governmental fiscal relations. The same PEFA self-assessment identified some areas of concern in the existing Budget Classification & Chart of Accounts (BC&COA) system.

1.2 Introduction

Lagos State Government is a major beneficiary of development partners’ public sector reform n, allocation and service delivery. Although the State is slowly but surely, moving in the right direction, much more needs to be done towards sustaining the on-going donor-driven public sector reforms, of which the present DFID/SPARC-assisted Public Finance Management (PFM reform is a critical component. For instance, according to the State’s 2009 Public Expenditure Financial Accountability (PEFA) assessment report, the State’s Public Financinitiatives in the last ten years. One of such support interventions was the 2008/2009 DFID-SLGP Programme which helped to strengthen the capacity of the Office of the Auditor General, the State Treasury Office and the Payroll System. More recently also is the State-wide infrastructural development programme, the World Bank-assisted Lagos Metropolitan Development and Governance Programme (LMDGP). The programme has, among other things, provided support for the development of a medium-term

expenditure framework for the State which aim is to further strengthen the annual budget process. However, despite these giant strides, the State still has a long way to go towards achieving the set goals and targets contained in its poverty reduction and development strategy papers, the LASEEDS and 10-point Agenda. The main vehicle for transforming the State’s policy prescriptions into measurable inputs, outputs, outcome and impact, is the annual budget process. But this process must be credible, comprehensive, predictable, inclusive and above all, transparent, if it is to serve as a reliable guide to resource mobilizatioe Management System (PFM) System is presently threatened by several challenges, especially in the areas of budget planning,, preparation, management and control, procurement, debt management, accounting , internal audit, to name a few. Essentially, this assignment is one of several improvement measures recently initiated by the DFID/SPARC to further strengthen the State’s Public Finance Management (PFM) System, especially the annual budget process which is the focus of this assignment. 1.3 Objective of the Assignment

The overall objective of the assignment is to provide support to the State’s Government through the Ministry of Economic Planning and Budget (MEPB) to improve annual budget processes. The envisaged support is geared towards strengthening the annual budget planning, preparation and management processes with a view to achieving better outcome. The specific objective of the assignment is to improve the current Annual Budget Call Circular, Budget Cycle timing schedule, Capital Expenditure Work Plans and to produce a Budget Cycle Guide Book for the MEPB.

1.4 Approach & Methodology The approach and methodology for the assignment are as follows:

Obtain and review the relevant documents and reports on this subject;

Meet and interview key officials at the relevant central/sector ministries

Present the draft outputs for comments of the key officials and other stakeholders, including SPARC programme management;

Incorporate the comments of the key officials and other stakeholders; The Consultants collected and reviewed relevant documents and reports, such as, the 2009 Budget Call Circular, 2008 and 2009 budgets, World Bank Budget Manual for the State, Standard Budget Call Circular and Capital Expenditure Work Plan model, etc. Several meetings were held with key officials of the MEPB during the course of the assignment. The purpose of the first meeting was to enable the Consultants collect relevant inputs from the Ministry of Economic Planning and Budget (MEPB) and the STO that would facilitate their assignment. The second meeting was to enable the Consultants present the Zero Draft copies of their deliverables (Improved Budget Call Circular, a uniform Template of Capital Expenditure Work Plan for MDAs and a standard Budget Cycle Guide Book) to the DB and other members of the Budget Sub-Group for their review and comments.

1.5 Scope of Work The scope of the assignment is limited to Budget Process Improvement, covering the core budget sub-processes of the annual budget process, namely annual budget planning, annual budget preparation; budget management and control; monitoring and evaluation; audit, reporting and publication. The Consultant(s) were expected to review and document the activities and steps in the annual budget process to determine areas that would need to be strengthened. The consultant(s) in the course of this assignment would generate aggregate/sector budget performance data for 2007/08/09 to up-date the SPARC PFM database.

2.0 Activities and Work Completed

2.1 Overview The activities undertaken by the Consultants started with a preliminary meeting between the DFID/SPARC team and the MEPB team held on the 22nd of February, 2010 at the Budget Directorate of the MEPB, Lagos. The aim of the meeting was to discuss the assignment ToR to ensure that all parties to the assignment were starting on the same page. This is with a view to having a shared understanding of its contents, especially the required inputs and the State officials/MDAs that should take responsibility for providing such inputs within the assignment time period to enable the Consultants add value to them and deliver as expected. Another meeting was held on the 3rd of March, 2010 to present the Consultants’ preliminary findings and zero drafts of the expected deliverables to the DB and his team. The said deliverables are the zero drafts of an improved annual budget call circular, a uniform template for MDAs capital expenditure work plans and a standard budget cycle guide book.

2.2 Annual Budget Call Circular The Consultants collected and reviewed the State’s 2008/2009 Budget Call Circulars and compared them with that of the Federal Government and the World Bank’s guidelines for preparing a standard budget call circular. For example, the current Lagos State Budget Call Circular did not contain any summary of a quantitative medium-term fiscal framework for estimating the total forecast resource envelope and the economic assumptions behind forecast revenues and expenditure projections for the next three years, starting with the fiscal projections for the coming budget year. Consequently there was no link between policy objectives and priorities of the government (as stated in LASEEDS and 10-point Agenda) and the annual budget The implication of this disconnection between policy formulation and budgeting will be an approved budget that was prepared by simply marking up the previous year’s budget based on some percentage, making it to be less than a suitable guide to resource allocation. The Call Circulars did not contain the State’s aggregate spending limit and sector indicative ceilings for the budget year to be distributed among the MDAs under each sector to guide them preparing their budget estimates. Consequently, MDAs’ budget proposals were made without reference to the Government’s policy objectives, direction, priorities and most importantly, the State’s ability to pay. The Consultants are optimistic that these problems would be resolved when the on-going attempt at implementing a pilot scheme of a MTSS and an MTFF at Sectoral budget group and State level, respectively is completed and implemented. However, haven noted the above input content limitations of the State’s current annual BCCs, the Consultants went ahead to develop a Standard draft annual Budget Call Circular which was presented to the DB and other members of the budget sub-group for their review, comments and possible adoption when preparing the 2011 BCC .

2.3 Capital Expenditure Work Plans All efforts made by the Consultants to get the current MDAs’ Capital Expenditure Work Plans proved abortive. The Plans were supposed to have guided the State Treasury Office (STO) in forecasting the MDAs’ quarterly or seasonal capital expenditure cash needs. In the same vein, the STO could not accede to the Consultants requests for the State’s current Cash Flow Plan of the State as the financial management system was said to be having some problems. Also, for

the same reason, there was no information on actual revenue and expenditure for 2008 and 2009. These data and the current MDAs’ Capital Expenditure Work Plans (CEWPs) which the Consultants could not access are the main inputs for preparing a standard cash forecasting model for the State for purposes of estimating the quarterly cash requirements of the MDAs which is a critical function of the STO. The Budget Directorate of the MEPB is only required to guide the MDAs to ensure that they have a standard template for preparing their CEWPs. Despite these limitations, the Consultants presented a sample of such template to the DB and other members of the budget sub-group for their review, comments and possible adoption.

2.4 Budget Cycle Guide Book After a study of the State’s current budget cycle and document review, including review of the 2009 draft Budget Manual produced with the assistance of the WB MTEF project team for the State, the Consultants produced a draft copy of a standard and comprehensive Budget Cycle Guide Book for the State. The draft copy of the guide book was discussed and presented to the DB and other members of the BSG for their further review, comments, consultation with the leadership of the MEPB and possible adoption. The guide book is portable and is recommended as an appendix to the Budget Manual which the staff of MEPB can rely on for quick references in their daily assignments. The Budget Process Cycle is a series of activities and procedures through which the economic and fiscal policy objectives of the government are actualized in a calendar year. A typical Budget Cycle comprise of Annual Budget Planning; Annual Budget Preparation; Budget Management and Control; Budget Monitoring and Evaluation; Audit, Reporting and Publication. The guide book is structured into five sections called Sub-processes that constitute the core budget sub-processes of the budget process cycle as explained earlier above.

2.4.1 Purpose of the Guide Book The Guide Book was specially designed for Lagos State and it is intended to serve as an operational manual for the staff of the State’s MEPB, the Budget Committee and Budget Sub-group when discharging their daily official duties and tasks.

2.4.2 Scope of the Guide Book While contemporary budget cycle includes policy formulation, institutional arrangements and strategy development (e.g. LASEEDS and the State’s 10-point Agenda), the Guide Book covers only the core budget sub-processes of Annual Budget Planning; Annual Budget Preparation; Budget Management and Control; Budget Monitoring and Evaluation; Audit, Reporting and Publication

2.5 The Budget Process Cycle in Perspective The guidebook is divided into five sections called sub-processes that constitute the core annual budget sub-processes of the Annual Budget Cycle (ABC) as explained below: Sub-Process 1: Annual Budget Planning This sub-process begins with a review of the performance of the State’s economy as well as the budget performance in the past six months (mid-year review of the current year’s budget performance). Essentially, it entails, updating of annual budget outturn data in the past six months, noting revenue, expenditure and any financing gap and how such gap was financed. The MEPB, in collaboration with other relevant agencies, such as, the MoF and STO, etc, is

responsible for this sub-process. This planning stage may be more detailed as to include the up-dating of the 3-year Fiscal Framework. In such situation, the annual budget planning sub-process will involve the collection and analysis as well as up-dating fiscal targets. This sub-process would lead to determination of Annual Fiscal Targets, Aggregate Spending Limit and Sector Spending Ceilings, which would be contained in the Budget Call Circular. The Fiscal Framework gives direction to the Budget Policy Statement which forms, content and timing differs from one State to another. A typical Statement will contain the State’s broad annual goals and objectives, fiscal targets, sector priorities and their justification, annual aggregate spending limits(including contingency and planning reserves) and MDAs’ spending limits; contingencies reserve; equity and gender mainstreaming of social issues. The budget policy statement in turn gives direction to budget preparation. Sub-Process 2: Annual Budget Preparation The issuance of the Budget Call Circular (BCC) by the MEPB to all MDAs in July kick-starts the budget preparation sub-process. This is followed by preparation of budget proposals, bi-lateral discussion, consolidation and review of the Budget by EXCO and the Treasury Board, presentation to SHA, review and approval by SHA, assent by the Governor, budget analysis and dissemination. The BCC is a key component of this sub-process which includes the following activities:

Economic and Fiscal outlook of the State for the fiscal year

Aggregate spending limit (stating planning and contingency reserves)

A summary of State Budget Policy Statement

Government-wide priorities

Explanations and guidelines on admitting capital projects and programs into the budget

Sector spending ceiling

Form and Format the Budget estimates would take

Input spending boundaries (e.g. capital versus recurrent and personnel versus overhead costs)

Guidelines for preparing recurrent expenditure (particularly personnel costs)

Budget Classification and Chart of Accounts

Instructions for completing the budget forms

Detailed timetable for submission of proposal/defence Sub-Process 3: Budget Management and Control Budget Management and Control start with the call by the STO for MDAs’ Work Plan for the implementation of capital projects and programmes, soon after the budget is passed. Authorization and Release of Funds for capital spending involve a series of activities that starts in January, soon after the budget is passed into law, It begins with the issuance of a capital work plan circular (not the BCC) to all MDAs, requesting for their capital expenditure work plans. The Plans are the basis of quarterly cash budget. The returns by the MDAs are to determine the capital projects & programs cash needs of the MDAs which in turn will enable the State Treasury Office (STO) allocate funds to them in line with the criteria set by the Treasury Board, taking due cognizance of State priorities and resource constraints. This sub-process relies on the budget classification and chart of accounts for effective resource allocation and recording of transactions. Generally, the budget is executed by spending units classified as administrative entities under sectoral budget groups. Other activities under this

sub-process include, but are not limited to, payroll, vote book management, procurement (tendering and award of contract) and debt management. The Budget Management and Control also includes, accounting, recording and internal audit (pre-payment audit) of all financial transactions of the Government. Sub-Process 4: Monitoring and Evaluation Each MDA is expected to monitor and report on its monthly actual expenditure against the budget. At the State level, the MEPB is also expected to monitor, collect and report on the consolidated actual expenditure against the budget and communicate Monthly Budget Performance Report to the EXCO with definite recommendations. The reports should show the variance in revenue from IGR and other sources as well as the variance in expenditure (personal cost, overhead and capital costs), against the budget, including reasons for variances and solutions. M & E is at two levels. The first, is the monitoring of committed inputs against expected outputs (Technical M&E) while the second is the monitoring of committed inputs against expected outputs, outcomes and impact (Strategic M&E). All MDAs (especially the M&E Department of MEPB), members of the SHA and external stakeholders are responsible for M&E/reporting. Sub-Process 5: Audit, Reporting and Publication The Directors of Finance and Administration (DFA) of MDAs are required to submit monthly transcripts to the STO. But under Public Sector Budget Module in Lagos State Government, the MDAs are expected to upload the budget transactions only regularly basis. Monthly Transcript is the summary of total receipts and payments of a self-accounting or sub-self accounting MDA as posted in the cash book, extracted and forwarded to the AGO. Such data are the basic inputs for the preparation of the State’s Final Accounts. They are also among the source documents required by the Office of the State Auditor General when discharging its statutory functions, which involve the examination of all accounting books and financial records of the government. Another imperative of this sub-process is the reporting of all financial transactions of the Government as prescribed by Law (Finance Control and Management Act, CAP,144, LFN, 1990). It stipulates that, financial statements, such as, the Accountant General’s Statement of Financial Responsibility, Statement of the Auditor General’s Opinion, Cash Flow Statement, Statement of Assets and Liabilities, Statement of Consolidated Revenue Fund, Statement of Capital Development Fund, including Notes to the financial statements should be published and made accessible to all stakeholders and the public annually. Lastly, the annual reporting/ publication of the Government’s financial transactions as prescribed by law, is the responsibility of the Accountant General.

3.0 Conclusion

The assignment has focused on the basic budget process improvement leading to the production of three key outputs, which would be presented to the stakeholders for review and approval before they would be introduced into the operating budget system. However, in order to achieve improved budget outcomes a number of reports would need to be generated from the various annual budget sub-processes and the reports and statements have been outlined in the annual budget cycle guide book. The process of generating the required information and reports would endanger improvement in the annual budget system.

4.0 Recommendations

This assignment primarily aimed at improving the annual operating budget process and system so that basic characteristics of sound budgeting system can be enhanced including transparency, accountability, comprehensiveness, predictability and credibility. On the basis of the work undertaken and findings the following recommendations are put forward in order to achieve improved budgeting system in Lagos State Government:

There is the need for training for budget and planning staff of the MEPB and MOF as

well as line ministries to enable them keep abreast of best practices.

There is the need for the DB and the Budget Sub-Group (BSG) to develop templates of

the budget documentation, which will include Budget Policy Statement, Economic and

Fiscal Up-date, Annual Marco-economic Analysis Statement as well as quarterly budget

performance reports (with emphasis on sector budget outcomes).

5.0 Next Steps

The following steps have been discussed with the key officers of the MEPB as necessary to ensure that the objectives of improved budget outcomes are achieved:

a) Review and approval of the consultancy assignment outputs, the outputs had been presented to workshop of senior officials of the key ministries and comments were taken and reflected the final outputs;

b) Introduction of the key outputs particularly the Comprehensive Annual Call Circular 2010;

c) Development and adoption of key operating budget report templates.

Annex 1: Sub-Terms of Reference

SPARC TOR: LAG-PFM-01

1. Name of Consultant: Andrew Oliko

2. Overarching TOR Ref: LAG-PFM-O1 (Attached)

3. Overarching TOR

Version:

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4. Contribution to specific Dimension outputs

The specific Dimension outputs within the overarching TOR which this input will contribute towards:

3. New Call Circular developed, based on standard formats and set out a clear and achievable budget calendars and incorporating clear frameworks and responsibilities for budget coordination. Revised work-plan to be used and submitted in accordance with agreed timetable in 2/3 pilot sectors to reflect profiled and seasonal resource needs. AG able to prepare cash forecasts based on profiled work plans. 5. Clear rules for budget reallocation are defined and complied with.

The following are the specific assignment outputs expected from this input and should to be presented to the relevant central ministry/agencies for review and comments before the conclusion of this input:

Draft Budget Cycle Guide Book

Draft Annual Call Circular

Draft Quarterly Work Plan

5. Activities

The anticipated activities needed to deliver the outputs, consistent with overarching TOR:

3. Support for budget processes, budget calendar and call circulars Support the development of new budget preparation instructions for MDAs and review of budget processes and timescales for budget activities, and the adoption of a timely Budget Calendar and issuance of Budget Call Circular (for recurrent and capital estimates) by July. Capital Expenditure work-plans Support to produce and issue a guideline, formats and timetable for the submission by MDAs of capital expenditure work-plans to reflect seasonal resource needs.

5. Budget reallocation processes support Support to revise and update guidelines for budget reallocation by MDAs.

Required tasks

Review and Document the current budget cycle and all existing manuals and produce a guide book consisting of activities, outputs and timeline for annual budget process made up of: ANNUAL BUDGET PLANNING, ANNUAL BUDGET PREPARATION, ANNUAL BUDGET EXECUTION/CONTROL AND ANNUAL BUDGET MONITORING/EVALUATION;

Review, Document and Prepare a draft Annual Call Circular

Review and document the current quarterly work plan and produce an improved template

6. Inputs and Deadlines

The anticipated inputs/resources needed to implement the activities, together with deadlines for delivering the stated outputs.

National Consultant to be engaged for 10 days, (February 22 – 5 March, 2010). The Technical Lead would guidance, support and backstopping during the input to ensure quality control.

Appendix One: Draft Budget Cycle Guide Book

LAGOS STATE GOVERNMENT PROPOSED ANNUAL BUDGET CYCLE CALENDAR

SUB-PROCESS 1: ANNUAL BUDGET PLANNING

s/n

Activity Activity Explanatory Note Key Output Responsibility for Action

Timeline

1.1 Review Economic and Fiscal Situation & Updates

A report of the broad economic performance analysis, including a review of the all key sectors of the State economy. This report would include the analysis of the fiscal policy and the growth of aggregate demand in the past year. And it would endeavor to provide overview of the coming fiscal year particularly the prospect of resource availability

A statement of economic & fiscal updates

Ministry of Economic Planning and Budget.

15th June

1.2 Preparation of a Fiscal Framework.

A formulation of multi-year fiscal targets including projections of revenues and expenditures. This statement depends on the analysis provided in the statement of economic & fiscal updates. It serves as the basis for the Budget Policy Statement and the Annual Budget Call Circular.

Aggregate Fiscal Framework Statement

MEP&B 3rd June

1.3 Review of Annual Budget Policy

The draft annual Budget Policy would provide insight to government policy thrust in the next fiscal year and set out

An Annual Budget Policy Statement

MEP&B 4th week June

procedures for allocation of resources to sectors and spending ceiling in consonance with the Policy direction. This process would be carried out by the MEP&B and submitted to the Governor for review and approval. This key activity would outline the rules for next budget year with regards to percentage of planning and contingency reserves.

1.4 Preparation Draft Annual Budget Call Circular.

The MEP&B draws up a comprehensive annual budget call circular including budget preparation calendar, summary of medium term fiscal targets, instructions on up-dating MTSS, sector ceiling and detailed templates of budget proposals from the MDAs.

Draft Annual Budget Call Circular with Calendar and Sector Ceilings.

MEP&B (Budget Department)

4th week June

1.5 Preparation/Up-dating of Medium Term Sector Strategy (MTSS).

Preparation/up-dating of the Medium Term Sector Strategy (MTSS). The MTSS is prepared by the sector ministries based on the approved sector policy document and translated in costed operational plan (or action plan) on the program budget structure.

MTSS with realistic cost estimates for recurrent and capital and based on program budget structure

MEP&B (Macro-planning) and MDAs.

4th June

1.6

Stakeholders’ Consultation

Conduct pre-budget stakeholders’ consultations (including key MDAs, Legislators, OPS, Labor/CSOs and CBOs) to deliberate on the proposed budget thrust as document in the Budget Policy Statement.

The Stakeholders’ Consultation would provide feedbacks and contributions to serve as inputs into budget preparation process.

Report of the Stakeholders’ Budget Meeting

MEPB, Ministry of Information and Strategy (MIS).

4th June

1.7 Consideration/Approval of Draft Call Circular

The State Budget Committee would review the draft Annual Budget Circular submitted by the Budget Department and recommend it for approval of the Hon Commissioner (MEPB) and signed by the Permanent Secretary (MEPB) before circulation to MDAs.

Approved Annual Budget Call Circular for the year concerned.

MEPB 1st week July.

SUB-PROCESS 2: ANNAUL BUDGET PREPARATION S/No Activity Activity Explanatory Note Output Responsibilit

y for Action Timeline

2.1 Approval and Circulation of Annual Budget Call Circular to all MDAs.

The MEP&B would issue the approved Annual Budget Call Circular to the MDAs and constitute a team of Budget Officers to support the MDAs to comply with the requirements of the Call Circular.

Budget Call Circular

Budget Department of the MEP&B

1st week July

2.2 Consultation between EXCO and SHA

The Hon Commissioner, MEPB would initiate and coordinate a meeting between the members of the Executive Council and the Appropriations Committee of the State House of Assembly (SHA) to explain the State’s fiscal policy direction and the thrust of the proposed budget. This will improve the understanding of the Honorable members of the fiscal thrust. Political engagement in Budget process helps to improve acceptability and buy-in of members of State House Assembly.

Report of the Consultations

Hon Commissioner, MEPB

August

2.3 Preparation of annual budget proposals by MDAs.

All MDAs would be guided by the Budget Call Circular (BCC) when preparing their revenue and expenditure estimates for the coming budget year. The budget department would constitute a team of officers to provide support and backstopping to MDAs in need of assistance.

Draft MDAs’ Budget Proposals

All MDAs August

2.4 Submission of draft budget proposals by MDAs to the MEPB.

MDAs complete the preparation and production of their budget proposals and submit them within schedule.

Draft MDAs’ Budget Proposals

All MDAs 1st week August.

2.5 Review of Budget Proposals by MEPB

Preliminary review and exploratory of the financial estimates to ensure that the proposals substantially comply with the requirements of the Budget Call Circular including sector ceilings. Budget Department would ensure that all the forms annexed to the Circular are properly completed. It would also ensure that the projects and programmes included in the proposals comply with the State’s policy objectives and priorities.

Draft Budget Proposals

MEPB 15th August

2.6 Bilateral budget discussions (negotiation and defense of MDAs’ budget proposals)

Budget proposals are corrected and adjusted in line with the findings during scrutiny and analysis of budget proposals by MEPB. A Planning Reserve would then form the basis of any incremental adjustment of any MDA’s estimates. This underscores the need to set aside a planning reserve of

Corrected Draft Budget Proposals.

MEPB and Other MDAs

15th August to 15th September

,about 3% of total projected annual revenues when formulating sector ceiling for the MDAs. The same argument applies to setting aside a Contingency Reserve of about 5% to fund any supplementary budget in the event of unforeseen occurrences.

2.7 Collation, Analysis and Consolidation of draft budget proposals.

This should be carried out by the Budget Department in the MEPB, supported by members of the Budget Committee.

Consolidated Draft Budget Estimates

MEPB 3rd week of September

2.8 Presentation of Draft Consolidated budget to Treasury Board (TB)

The draft budget at this stage will be reviewed and adjusted by the TB for consistency with the State’s revenue projections as per the MTFF.

Draft Consolidated Budget

Hon. Commissioner, MEPB

4th week of September

2.9 Presentation of Draft Consolidated Budget to EXCO

Review, deliberation and approval by members of the State Executive Council.

Draft State Budget Estimates

Executive Council

1st week of October

2.10 Presentation of Draft Budget to the State House of Assembly (SHA)

Presentation of copies of the draft State Budget Estimates by the Governor to the Hon. Speaker of the SHA.

Annual Appropriation Bill

Governor, accompanied by the Hon. Commissioner, MEPB

15 October

2.11 Debate of the Appropriation Bill by the SHA.

Review of the draft State Budget Estimates by the Appropriations Committee of the House.

Appropriation Bill passed for the new fiscal year.

SHA November/ December

SUB-PROCESS 3: BUDGET EXECUTION AND CONTROL

S/No.

Activity Activity Explanatory Note Output Responsibility for Action

Timeline

3.1 MDAs carry out budget profiling of both revenues and expenditures

Each MDA would carry out profiling of the approved budget estimates of both revenues and expenditures for 12 months.

Budget Profile Report for 12 calendar months

MDAs coordinated by the MEP&B

January

3.2 Request for Quarterly Capital Project Work Plan

The STO would request each sector ministry to prepare and submit quarterly work plan of its capital projects.

Quarterly Work Plan Call Circular

STO/Budget Department

2nd week of January

3.3 Submission of Quarterly Capital Project Work Plan

Each MDA would review its capital expenditure component of the approved budget (after budget profiling) and prepare a quarterly capital project work plan on the prescribed format.

Quarterly Work Plan for Capital Project

MDAs 4th week of January

3.4 Monthly Release of Funds for Personnel and non-salary recurrent costs.

Personnel and Overhead Costs (Monthly Recurrent Costs).

Monthly Statement of Recurrent Expenditures

STO Monthly

2.12 Governor Assents to Appropriation Act

The Governor reviews the approved Appropriation Bill

Appropriation Bill signed into Law.

Governor December

2.13 Presentation of the Budget to the general public

Governor presents the State’s Budget at a press briefing, followed by publication and dissemination of the budget through the media and the State’s web site.

Governor’s Budget Speech. Published Budget Document.

Governor’s Office (supported by the MEP&B)

First Week of January

3.5 Monthly Revenue & Expenditure Returns

The MDAs would upload and prepare monthly transcripts of revenues and expenditures by line items and forward to the STO and MEP&B

Monthly Transcripts of Revenue and Expenditures

MDAs Monthly (by 2nd week)

SUB-PROCESS 4: BUDGET MONITORING EVALUATION

S/No. Activity Activity Explanatory Note Output Responsibility for Action

Timeline

4.1 Monthly Budget Performance Review

Each MDA is would prepare detailed budget performance review of revenues and expenditures and compare and contrast budgeted and actual figures and provide explanation for variances.

Monthly Budget Performance Reports to MEP&B

All MDAs, Monthly (second week of the following month)

4.2 Monitoring of individual Capital Project & Programme

Monitoring and evaluation of capital programmes and projects to ensure that the execution is in accordance with design specifications, including review of inputs and outputs. The reports are sent to the Monitoring & Evaluation Unit.

Monthly Project Implementation Reports by MDAs.

MDAs/MEP&B Monthly

4.3 Consolidated Budget Performance

MEP&B would retrieve performance reports from the MDAs and compile the progress reports and evaluate the resource inputs and compare them with outputs.

Consolidated Monthly Budget Performance Report

MEP&B Third week of following Month

4.4 Consolidated Project Monitoring

Periodic Review of the Capital Project execution undertaken by the MDA.

Quarterly Project Monitoring Report

MEP&B (M/E Unit)

Quarterly

SUB-PROCESS 5: AUDIT AND REPORTING

S/No.

Activity Activity Explanatory Notes Output Responsibility for Action

Timeline

5.1 Preparation of

monthly internal

audit reports

Summary of internal audit activities at the MDA produced by Resident Internal Auditor

MDAs’ Monthly Internal Audit Report

Resident Internal Auditors

Monthly (1st week of the following Month)

5.2 External Audit (Statutory Audit, ad hoc, special, interim and final Audit)

Preparation of interim and Annual Audit Reports as required by the Statutes.

Auditor General’s Reports and Statement

Office of the State Auditor General (OSAG)

Quarterly/Annually.

5.3 Reporting, Publication and Dissemination of various reports.

Production and dissemination of various reports from Approved Budget Estimates to Consolidated Budget Performance Report, Annual Audited Accounts.

The Approved Budget Estimates; Consolidated Budget Performance Report, Annual

MEP&B, MOF, Auditor-General’ Office, STO, Internal Auditor’s Office.

Monthly, Quarterly or Annually

Audited Accounts.1 .

1 See list of all other documents for publication and dissemination.

Appendix Two: Draft Template of Annual Budget Call Circular

ANNUAL BUDGET CALL CIRCULAR 2011

1.0 Introduction This Call Circular sets out instructions for submission of information and statistical data that will be used to prepare the 2011 annual State Budget and 2011-2013 Medium Term Budget Framework. Each spending unit is requested to prepare and submit its recurrent and capital budget proposals in accordance with the guidelines provided in this circular. The Lagos State is continuing with MTSS, which would be based on Medium Term Budget Framework (MTBF) along with new classifications of program budget structure beginning with 2011 fiscal year2. As a result of these fundamental changes in the public finance management system each MDA is requested to study this call circular carefully so as to comply with all provisions and requirements herein. Should you be in doubt about any provisions of this Circular, you should be free to contact the Central Budget Department for clarifications and it is envisaged that technical support would be available to assist any entity in complying with the provisions of this Circular.

2.0 Medium Term Budget Framework Since the introduction of Medium Term Fiscal Framework in the LSG in 2009, focusing on one fiscal year revenues and expenditures alone has been found to be inadequate. Expenditure planning should be extended beyond one year, not least to gain a full appreciation of the future spending implications of present policy decisions. Nowhere is this more important than on the recurrent costs of capital spending. In our budget system, such plans need to be integrated with recurrent expenditures and into a multi-year expenditure plan that provides the basis for establishing a realistic global budget. This approach is what is called Medium Term Budget Framework. This essentially means translating MTFF into multi-year detailed budget for 2011 – 2013.

MTBF will assist in laying the foundation for a more unified multi-year budgeting and economic planning. The MTBF will be up-dated annually and will involve:

Projecting revenues and expenditures for three year period;

2 Separate Guide Books would be issued for MTBF and BC&COA.

Keep spending within limits created by the ability to raise revenue and maintain debt levels which are not prohibitively expensive to service;

Linking public expenditure to strategies outlined in the MTSS3;

Integrating recurrent and capital spending;

Advising the MDA on their expenditure envelopes (i.e. the amount that is available to them for personnel, overhead and capital projects & programs that will enable them meet their mandates) over the period.

The MTBF will enable the MDA know how much resources available for them from the State Government budget over a three year period.

3.0 Economic and Budget Performance for 2010 INSERTION half a page, (summary of economic and fiscal up-date) The preliminary budget performance data for the first half of 2010 is presented in table 1 below. Table 1: 2010 (JANUARY-JUNE) FISCAL PERFORMANCE

ITEM Budget Actual Variance %

1.0 REVENUE

1.1 IGR

1.2 Federation Account

1.3 Capital Receipt

TOTAL

2.0 EXPENDITURE

2.1 Personnel

2.2 Overhead

2.3 CRFC

Recurrent

2.4 Capital

TOTAL

3.0 GROSS TOTAL

3 FEEDS would need to be up-dated

4.0 2011 - 2013 Fiscal Framework The fiscal framework envisages improved efficiency in revenue administration and strict expenditure control. Consequently, no spending unit would be allowed to deviate from its resource envelope during the three year period.

4.1 Key Assumptions Key assumptions underlying the preparation of revenue and expenditure under the MTBF (2011 – 2013) are set out in the table below. Since the federation account receipts do not dominate the LASG budget and for which it cannot directly influence its performance, accordingly a large proportion of the LASG recurrent revenues is subject to endogenous variables. This framework has adopted the most plausible and conservative assumptions based on information available from the federal fiscal and monetary authorities. Table: to be reviewed in light of the economic events

Key Assumptions 2010 2012 2013

Average Oil Price per barrel $55 $65 $75

Average Production (dppb) 2.75 2.85 2.90

Foreign Exchange Stable Stable Stable

Given the key assumptions set out above and on the basis of time series data analysis, revenues have been projected to grow at 10% per annum during the planning period of 2011 and 2013. Aggregate revenue from all sources is projected at N458.117 billion for 2011 as computed in the exhibit 1 below. The projected aggregate expenditure for 2011 is put at N4451.117 billion with a budget planning and contingency reserves of N6.8 billion.

Table 2: FISCAL FRAMEWORK 2011 - 2013 PROJECTIONS

2011 2012 2013

REVENUE

IGR

Federation Account

Capital Receipts

TOTAL

EXPENDITURE

Personnel

Overhead

Total Recurrent

Capital

TOTAL

Planning/Contingency Reserves

4.2 Aggregate Resources Envelope for 2011 4.2.1 Objectives of 2011 LASG Budget Apart from the overall objectives of the MTBF articulated above, the objectives of State 2011 budget are:

Set the 2011 expenditure at sustainable level;

Ensure that 2/3rd of the total capital investment fund is directed to the government priority areas

Build greater transparency, accountability and comprehensiveness into the budget process;

Use budget to further the goals of job creation, poverty reduction and wealth creation as articulated in the MTSS/MTBF document;

The 2011 budget preparation procedure is aimed at making the government's priorities clear and at selecting, from the many budget requests by spending units, those which are really important to the government. In principle that requires two elements. First, a budget policy statement as determined at EXCO level, which determines (1) the affordable total, (2) new policies to be accommodated, and (3) any changes in existing project provision. Second, each spending unit and the central budget department as well as the treasury department meet to discuss each entity’s estimates. To accommodate new policies, the central budget department requires each spending unit to prioritize its requests.

In introducing MTBF, the LASG has also introduced the concept of planning reserve, which is a sum (three percent of total expenditure) not allocated in the budget policy statement and call circular, which the ministry of economic planning & budget later intends to allocate to new project/programs, if necessary above the sector ceilings during budget negotiations. In addition, a contingency reserve is a reserve for in-year expenditures “over and above appropriations” for handling genuine contingencies; it is modest in size (if too large, a bidding process from ministries may quickly set in) and thus it does not exceed 5 percent of total expenditures. It is under the control of the Ministry, and access would be granted by the EXCO only under stringent conditions by way of supplement budget proposals. The sum of N13.4 billion is set aside for contingency reserve for 2011 from the aggregate resource envelope and another sum of N7.4 billion is set aside from the capital development fund as planning reserve to be used by the government to augment compelling shortfalls in sector/function allocations where there is a proven need backed with statistical data and information. The contingency reserve would be used strictly for the following reasons:

Expenditure that could not be anticipated during the time of budget preparation;

Correction of genuine errors or/and omissions;

Cost of overrun or variations that could not be reasonably anticipated during the time of the budget preparation;

Contingencies approved by the EXCO; 4.2.2. Sector/Function Spending Ceiling To ensure that the budget maintains strategic equilibrium during the 2011 fiscal year, government has stated and produced the resource envelope for each spending unit collectively as sector/function (see table 3). The main entity within the sector/function would meet with all its sub-organisations (INCLUDING THE PARASTATALS) to prioritize their needs and prepare and present proposals within the resource envelope in accordance with the guidelines contained herein. However, the subventions to the parastatals would be treated outside the sector/function spending ceiling, each parastatal is expected to consult with the main entity in its sector or area of operation. Table 3: 2007 Resource Allocations by Sector/Function

SECTOR/FUNCTION 2011 2012 2013

CABINET OFFICE EDUCATION HEALTH AGRICULTURE SOCIAL DEV TRANSPORTTION WORKS RURAL DEVELOPMENT

ECONOMIC PLANNING LOCAL GOVERNMENT HOUSE OF ASSEMBLY JUSTICE FINANCE HOME AFFAIRS COMMERCE & INDUSTRY INFORMATION & STRATEGY ESTABLISHMENTS & TRAINING WOMEN AFFAIRS YOUTH & SPORTS SCIENCE & TECHNOLOGY GENERAL PUBLIC SERVICE OTHER PARAST sub-total capital cost PERSONNEL OVERHEAD sub-total recurrent cost PLANNING & CONT.

TOTAL NOTES Personnel increased by 5% Overhead increased by 10%

5.0 Strategic Prioritization The LASG does not plan to present a supplementary budget during the 2011 fiscal year except in the event of unforeseen occurrences such as natural disasters and other compelling reasons. Accordingly every spending entity is advised to ensure that all activities that are urgent and important to them in 2011 are included in their 2011 proposals by way of strategic sector prioritization within the allocated resources. One of the key advantages of the MTBF is that annual budget would enhance predictability of funding for MDA activities during the fiscal year. The government would aim to achieve not less than 85% funding of capital projects and programs in the approved budget estimates for 2011.

The MDA must live within the allocated resource for 2011 and table 4 provides detailed spending ceiling. It means that they have to provide for their personnel, overhead and capital costs within these envelopes. It is therefore important that MDA achieve the right balance among its competing needs. The table has set a ceiling on the amount to be spent on each component of budget. Any MDA that succeeds in rationally reducing its recurrent costs would have its capital cost enlarged by the same amount of savings.

6.0 Guidelines on Preparation and Submission of 2011 Budget The 2011 draft Budget Proposals should be prepared using the code system. Please refer to the Lagos State Guide Book on Budget Classification & Chart of Accounts.

6.1 Recurrent Revenue The receipts from Federation Account would still be less than 25% of the recurrent revenue of the LASG. The State Government expects internal revenue to continue to contribute substantially to the total recurrent revenue in the 2011 fiscal year. Accordingly, the LAGS expects all internal revenue generating entities to introduce the recently proposed strategies for internal revenue administration to meet the internal revenue performance targets. In order to meet internal revenue targets for 2011, the following strategies are to be adopted:

a. revenue budget for 2011 would be disaggregated according to the sources as outlined in the Lagos State Guide Book for Budget Classification and Chart of Accounts;

b. there should be an realistic revenue budget in respect of assessment and collection c. a detailed enforcement action plan should be formulated and implemented;

6.2 Expenditure Budgeting for personnel and overhead costs must be done on the prescribed format. A guide book on new Budget Classifications and Chart of Accounts (BC&COA) should be consulted during budget preparation. Debt incurred by the MDA up 31 December, 2009 should be listed separately, using the prescribed debt schedule. Please note that this does not mean that the Ministry Economic Planning & Budget or Ministry of Finance would take the debt from the MDA. The reasons for requesting the information is to quantify the level of indebtedness as at the date and to ensure that the treasury department would devise global strategy on how to address the internal debt situation.

7.0 Budget Defence Plan and Schedule The 2011 Budget defence would be carried out in systematic manner based on the newly introduced administrative classifications (Main Org Codes and Sub-Org Codes). The defence will be organized along the line of the Main Org with all its sub-organizations attending the bi-lateral negotiations on the same day(s), (see the budget defence schedule Annex I). The budget defence schedule would facilitate effective negotiation and iterative sessions to ensure that the proposals are comprehensive and reflect the priorities of the sector/function and it is inclusive. Table 4: Proposed Budget Timetable

Activity Time Responsibility Collect and analyze half year economic and budget performance data and produce a half yearly and 2010 perspective report. -Preparation of Economic & Fiscal Update

July CBD

Preparation of Fiscal Framework – Revenues and Expenditures Forecasts. (exhibit 2)

July Treasury and CBD

EXCO agreeing on Budget Policy Statement - A statement of fiscal thrust including sector ceiling and priorities.

July EXCO Economic Committee

Issuance of Call Circular reflecting agreed policy priorities & resource allocations.

1st August CBD

Stake holder’s consultations with CSOs, NGOs, CBOs, OPS etc

August & September

CBD

Submission of Proposals by MDAs August 31st MDAs Bilateral discussions and defense of proposals September

15th CBD

Consolidation and Production of draft budget estimates 31 September

Treasury/CBD

Submission of draft budget estimates to EXCO 1 October Treasury/CBD EXCO approval of draft proposal 15th October EXCO Secretariat Presentation of draft budget to National Assembly 1st

November EXCO

Assembly Approval 30th December

SHA

Governor’s Assent 31st December

Governor

Publication and Dissemination of Budget 5th January CBD Request for quarterly work plan from MDAs 5th January Treasury/CBD

The 2011 budget marks the beginning of MTBF in Lagos State. Accordingly all entities are required to provide detailed budget proposals for 2011 and provisional figures for 2012/13

The deadline for submission of all budget proposals is 4 p.m. August 31, 2010. All enquiries concerning this Call Circular should be director to the Budget Director, Central Budget Department, Ministry of Economic Planning & Budget, Block _ , Room _, State Secretariat, Ikeja/Lagos. Permanent Secretary Ministry Economic Planning & Budget Ikeja/Lagos State

Appendix Three: Draft Template of Capital Expenditure Work plan for MDAs

www.lasg.gov.org