Chapter four: Economic governance and management 446. A major challenge to public sector management, in the context of improved service delivery and long-term development, arises from the consistently low budget implementation rate. Thus, despite the need for increased government spending in various areas, Lesotho’s budget surplus increased from 5.8 per cent of GDP in 2004 to 12.6 per cent in 2008. In addition to capacity limitations, the low budget implementation rate is another indication of inadequate planning. Indeed, the government attributes the low budget implementation rate (especially in capital expenditure) to the budget-preparation process and procurement. Ministries and other agencies are not allowed to begin implementing projects before getting the approval of the budget by Parliament (usually in March) and disbursement, which occurs months later. By the time procurement starts, three to four months have elapsed. This leads to significant delays in implementing projects. Unused budget allocations are returned to the MoFDP and uncompleted projects have to await new budget allocations. This procedure results in cumulative delays in implementing capital projects. 447. However, the CRM established that delays, especially in implementing road projects, could be attributed to poor monitoring and supervision of contractors and weak enforcement of terms of contracts (see box 4.3). Despite delays in implementing road projects, contractors may not pay fines as stipulated in project agreements. Box 4.3: Low project implementation rate a major concern Lesotho’s public budget is characterised by relatively low implementation rates, as is reflected in increasing fiscal surpluses between 2003 and 2008. The overall budget surplus amounted to 12.6 per cent in 2008. The implementation rate was particularly low, while capital expenditure was particularly high. The fiscal surplus does not originate from high actual revenue, but mainly because of delays in implementing projects, including those for roads, hospitals and other essential infrastructure and services. Unspent capital, as a percentage of allocated capital budgets, increased from 33.9 per cent in 2006 to 40.4 per cent in 2008. The MoFDP projects that it will remain above 30 per cent between 2009 and 2012. On average, about 50 per cent of capital expenditure in Lesotho is financed from grants (over 35 per cent) and loans (about 15 per cent). Low budget implementation rates imply high direct and indirect costs. Government pays interest on loans that are not fully used to finance projects and project delays encourage potential donors to reduce aid. At the same time, delays in implementing infrastructure and basic service projects result in inadequate service delivery and discourage investment and job creation in the private sector. As actual growth rates fall far below potential growth, government loses potential increases in tax revenue. Because of high inflation rates, delays in project implementation also imply escalating project costs. Therefore, the low capital expenditure implementation rate has a high negative multiplier effect. Although government uses budget surpluses to finance external and domestic debt and to build balances to finance subsequent budget allocations, the cost of delayed project implementation remains high. Government attributes the low budget, and especially the low project implementation rate, to the budget process and project cycle. Project preparation, design and procurement only start after the budget is approved by Parliament and funding is actually received by the implementing unit. 124