SNNPR Unit Cost Needs Based Transfer FormulaBriefing for Senior Regional Officials

Planning WorkshopBOFEDApril 2003 (English Version)

Regional Financial Resource

Total = 1,352.28 mln Federal transfer = 1,141.66 mln

Treasury = 1,014.84Foreign Aid = 126.82 mln

Loan = 93.82 mln Assistance = 33.00 mln

Region’s own revenue = 210.62 mln

Treasury resource = 1,225.46 mln

Levels of Budget Allocation

Contingency = 5% = 67.61 mln Available resource = 1,284.67 mln Region = 15% = 192.70 mln Zone = 15% = 192.70 mln Towns = 5% = 64.23 mln

Awassa = 15% = 9.63 mlnOther towns = 85% = 54.6 mln

Woredas = 65% = 835.03 mln

Budget Allocation at

Each Level Region Zone Towns Woredas

The Previous Formula

It was for Capital BudgetRecurrent Budget was not formula based Prioritization More of bargaining or negotiation

The lump sum would be allocated by the formula, the recurrent budget is fixed then the residual will be Capital

The Previous Formula Notions

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Limitations of the formulaIt was not explicitly related to the main sectoral needs It doesn’t explicitly show the relation between financial performance with government policies, goals and objectivesIt doesn’t measure recurrent needsIt gives less emphasis for other than populationIt doesn’t favor efficient and equitable utilization of resourceSubjective weighting

The New Formula

Need based, outcome conditional General Purpose Grant (BG) Allocation FormulaNeed is defined by Existing commitments Service expansion requirementse.g. financing existing pupils but

getting out of school pupils into school

The main objectives

EfficiencyEquity Equitable distribution may be taken to mean

that the level of resources assigned to each woreda matches their relative needs and capabilities

Adequacy and comprehensivenessTransparency and comprehensibility Non-manipulabilityStability and predictability

Regional Level

Budget Call for sector bureausSectors submit their recurrent and capital budget needBudget variation adjustment Regional budget will be

negotiated ‘at cost’ within the ceiling with BOFED

Notification of the final budget

Zonal Level

Two alternatives are proposed for zones BG calculation

1. Block Grant and Administrative Constant Index

2. Block Grant, No. of woredas, Distance and Administrative Constant Index

Block Grant and Administrative Constant Index

Block Grant IndexBGI of zonei = BG of woredas in

zonei BG of all woredas

Administrative Constant IndexACI of zonei = constant constant

= 1 13 = 0.08Composite Index

0.7 x BGI of zonei + 0.3 x ACI of zonei

Block Grant, No. of woredas, Distance and Administrative Constant Index

This alternative additionally includes number of woredas and distance indicesNumber of woredas index NWI of zonei = number of woredas in zonei

total number of woredasDistance Index DI of zonei = distance from awassa of zonei

distance from Awassa of all zonesComposite Index

(0.65 x BGI) + (0.15 x NWI) + (0.1 x DI) + (0.1 x ACI)

Basis of Calculation for Woreda Level Block Grant

For the sake of calculation the budget is broken down to Recurrent and CapitalThe new need based block grant formula mainly focused on the five strategic sectors Education Health Agriculture Water Road

And the Administrative and General Service Expenditures

Recurrent Budget Calculation

Recurrent budget means for salary and operationalCycle II data or actual 1995 EFY planned financial data is used as a benchmark for the calculation of unit costs in the new approachAdjustments are made on the existing need in order to gradually get closer to the standard need

Education

BG = UC x Students in 1996

UC = (Total Expenditure)/Students

= (Salary + Operational)/Students

= (TSal + NTSal + Operational)/Students

=TSal/Students + NTSal/Students + Operational/Students

AvTSal = TSal/Teachers TSal = AvTSal x Teachers

AvNTSal = NTSal/Non-Teachers NTSal = AvNTSal x Non-Teachers

STR = Students/Teachers Students = Teachers x STR

SNTR = Students/Non-Teachers Students = Non-Teachers x SNTR

UC = (AvTSal x Teachers)/(Teachers x STR) +

(AvNTSal x Non-Teachers)/(Non-Teachers x SNTR) + Operational/Student

UC = AvTSal/STR + AvNTSal/SNTR + Operational/Students

AvNTSal/SNTR (AvTSal/STR) x (NTSal/TSal)Operational/Student 5% Regional (AvTSal/STR)

UC = AvTSal/STR (1 + NTSal/TSal) + 5% Regional (AvTSal/STR)

BG = UC x Students 1996 x k

k (Population Correction Factor)

k = (Estimated + Population Adjusted)

(2 x Estimated)

Students 1996 is calculated by increasing the GER by 2.28 percentage points

BG = UC x (Estimated + Pop. Adjusted) 2

= UC x Estimated/Estimated x (Estimated + Pop. Adjusted)/2

Estimated = Students 1996

= UC x Students 1996 x (Estimated + Population Adjusted) (2 x Estimated)

BG = UC x Students 1996 x k

Health

The salary unit cost per beneficiaries is developed like the education sector. That is the ratio of Average health workers' salary to the beneficiary health workers ratio.

AvHWSal/BHWR

Operation Unit Cost per Beneficiaries is calculated as a ratio of Standard Cost developed for health package by studies to the theoretical coverage i.e. a health center serves 25,000, a clinic serves 10,000 and a health post serves 5,000 people and annually a patient visits these health institutions 3 times.

Health Center – 115200 birr Clinic – 23600 birr HP – 8200 birr

Therefore, standard operational cost per beneficiaries = standard cost for existing institutions / theoretical coverage

Actual Beneficiaries = theoretical coverage x actual utilization

rate

UC = AvHWSal/BHWR + Standard operational cost per beneficiaries

BG = UC x Beneficiaries x k

AgricultureThe agriculture budget is calculated separately for extension, veterinary clinic and other cost componentsThe extension salary unit cost per farming household is computed as a ratio of average DA salary to farming household-DA ratio. That will give us the average DA salary expenditure per farming household. And when we multiply it with the farming households, it will give us the total salary budget for the extension service. The operational component unit cost is calculated as a ratio of actual operational expense per farming households. (Just like Education and Health)Correction Factor (k) is also applied at this level

Operational cost for veterinary clinic is calculated based on standard cost. That is a standard cost per Tropical Livestock Unit. And standard number of TLU to be covered by veterinary clinics is calculated i.e. 3750 TLU per clinic. Total operational cost is calculated by multiplying number of clinics, 3750 and standard cost per TLU. 1 TLU = 250 kg 1250 TLU

69,000 – Low land 76,000 – High land

The bureaucratic and veterinary medicine personnel salary is calculated by taking 3% of the so far calculated budget for extension salary and operational budget for extension and veterinary clinics.

There are diversified agricultural activities to be financed by government treasury budget. At least for the time being, we can't calculate every thing in every thing by a unit cost approach. Therefore, we take 27% of the so far calculated budget for extension salary and operational budget for extension and veterinary clinics to take care of the diversified operational requirement in the agriculture sector.

WaterThe water sector salary and operational budget except for maintenance is calculated by taking last year water sector budget and calculating the per capita within those woredas that assigned water sector budget last year i.e. 1995 EFY. The per capita is calculated separately for salary and operational and applies for all woredas by multiplying by their respective population in order to arrive at the 1996 salary and operational budget.The maintenance budget is calculated by simply taking the number of functional and non-functional various water sources and the respective standard maintenance cost to arrive at the total required resource for maintenance.

Administrative and General Service

The Administrative and General Service Budget is calculated by establishing a ratio of the administrative and general service budget to the education, health and agriculture budget. And applying the ratio to the three sectors 1996 EFY estimated budget would give us a reasonable assumption of the administration and general service sector budget.

Capital Budget CalculationCapital budget has to be allocated based on the relative infrastructure deficit index for the five strategic sectors. These are Education, Health, Agriculture, Water and Road. Revenue index is also included as an incentive for those that collect revenue well.

The education sector infrastructure deficit index is calculated by taking the number of schools and classrooms in 1000 school age population then inverted and indexed on the one hand and student-classroom ratio is also indexed on the other hand. Therefore, the final index is taken as the average of the above two indexes. Elementary school construction unit cost is also included in the final index.

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The health sector index is calculated by taking the number of health centers, clinics and health posts in 1000 population then inverted and indexed as a final index. Health Center construction unit cost is also included in the final index.

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The water sector infrastructure index is calculated by indexing the clean drinking water coverage.

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The agriculture sector infrastructure index is calculated by taking the number of veterinary clinics in 1000 livestock population then inverted and indexed on the one hand and the index of farming households is taken on the other hand. Therefore, the final index is taken as the average of the above two indexes.

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Road index is calculated by dividing the road length by area and again by population to arrive at per capita road density. And indexing it will give us the road index.

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Revenue index is simply the percentage of revenue collected in each woreda from the total sum of revenue collected from all woredas.

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Towns Level

Town’s, other than Awassa, BG is calculated by two alternative approach1. Need based unit cost approach like woredas2. The index of Trade, Industry and Urban

Development with some adjustment to the

budget principle. That is inverting the socio-economic index.

Need based unit cost approach

Recurrent Education (same as woredas) Health (same as woredas) Administrative and General Service

Fully staffed – salary 30% of Salary – Operational

Capital (same as woredas) Education Health Water Road Revenue

The index of Trade, Industry and Urban Development

Revenue – 50%Administrative Capital – 10%Socio-economic – 15% (Inverted)Population – 25%

The Aggregate Index is recalculated and applied

Standard costs are ‘normative’ costs – they are what should be if resources are used efficiently, equitably and, hopefully, effectivelyStandard costs do not mean that all costs are the same Population density difference mean different costs

for service delivery

The main policy issues arise when actual costs diverge significantly from standard costsTransition Change the variable that make up the formula

each year Make a single transition variable in the formula

ADJUSTMENTSAverage Salaries

(Below the regional average to the regional average) Average Teachers’ Salary Average Health Workers’ Salary Average DAs’ Salary

Ratios (one tenth increment or decrement on/from the regional

average) STR (Student – Teacher Ratio) BHWR (Beneficiary – Health Workers Ratio) FHDAR (Farming HH – DA Ratio)

SimilaritiesThe data requirement of the new formula is the same as the previous one except the new one includes financial data If there is data reliability problem, both approaches will be affectedBoth approaches have similar theoretical background but d/t technical approaches Larger population means larger need Lower development means higher

compensation Encourage revenue raising capacity