Public Finance and Budgeting Public Finance and Budgeting Miami ICGFM, May 11, 2006 Richard Bartholomew OTA Senior Budget Advisor

Public Finance and Public Finance and BudgetingBudgeting

Miami ICGFM , May 11, 2006Miami ICGFM , May 11, 2006

Richard BartholomewRichard Bartholomew

OTA Senior Budget AdvisorOTA Senior Budget Advisor

AN AN OVERVIEW OF OVERVIEW OF PUBLIC FINANCEPUBLIC FINANCE & THE & THE

BUDGETBUDGET

Today’ PresentationToday’ Presentation

1.1. A brief look at the Public Finance A brief look at the Public Finance System System

2.2. The Budget ProcessThe Budget Process

3.3. An Emphasis on Budget ExecutionAn Emphasis on Budget Execution

4.4. The PEFA Indicators The PEFA Indicators

5.5. The Platform ApproachThe Platform Approach

6.6. Questions and DiscussionQuestions and Discussion

What Happens When The Public Finance System Malfunctions?

Corruption – improper payments Inflation – the worst taxBudget deficits and debt pile up

What Happens When The Public Finance System Malfunctions?

Money gets spent but results are not seen – damage to democracy and government credibility

Banking System – bank manipulation or bad regulation can create serious problems

It is necessary to It is necessary to understand this understand this system to work system to work effectively in it effectively in it

The Public Finance System

MoFinance: Macroeconomics, Budget, Treasury, Tax and Debt

Executive/Council of Ministers

Taxpayers, Bondholders

Lenders

Ministries/Chapters/Localities/Agencies

ParliamentExternal Partners: WB, IMF, donors, peer groups

Supreme Audit Agency

Payments System

A Vehicle to Achieve A Vehicle to Achieve ObjectivesObjectives

PFM can help move us from where we are PFM can help move us from where we are to places we want to go:to places we want to go: To better benefits and education for citizensTo better benefits and education for citizens To economic competitiveness, growth and jobsTo economic competitiveness, growth and jobs To more security in the streets or at the borderTo more security in the streets or at the border

PFM is a sophisticated, powerful vehicle that PFM is a sophisticated, powerful vehicle that must be professionally maintained and must be professionally maintained and controlledcontrolled

PFM Task 1PFM Task 1

Maintain aggregate fiscal Maintain aggregate fiscal discipline bydiscipline by-Setting-Setting Spending FrameworksSpending Frameworks

--EstablishEstablishinging Fiscal RulesFiscal Rules & & ControlsControls


Allocate resources effectively, Allocate resources effectively, according to priorities, byaccording to priorities, by formulating the budget in a formulating the budget in a

fair, stable and sustainable fair, stable and sustainable process that involves process that involves stakeholdersstakeholders


Gather, Maintain and Use Gather, Maintain and Use resources efficiently byresources efficiently by

- executing the budget in a way - executing the budget in a way that does not waste money or that does not waste money or time. Revenue collection is in time. Revenue collection is in this task.this task.

Capital inventories are part of it.Capital inventories are part of it.

RolesRoles

Taxpayers, Taxpayers, Fee Payers, Fee Payers, Lenders and Lenders and Asset Purchasers Asset Purchasers

All provide the inputs, the fuel of All provide the inputs, the fuel of Public FinancePublic Finance

RolesRoles

ParliamentsParliaments have the constitutional have the constitutional authority to provide public resourcesauthority to provide public resources

Councils of Ministers and Councils of Ministers and subordinated agenciessubordinated agencies hold hold Executive powers and manage Executive powers and manage public fundspublic funds

Managers of Public Managers of Public FundsFunds

Ministries, led by Ministries, led by the Finance the Finance MinistryMinistry

Special bodies, such Special bodies, such as procurement as procurement boardsboards

Local governmentsLocal governments Government Government

Sponsored Sponsored Enterprises Enterprises

Managing Public FundsManaging Public Funds

Schools and Schools and universitiesuniversities

Subordinate Subordinate organizations such organizations such as public transport as public transport

Private Private vendors/contractorvendors/contractors for state and s for state and donor projects donor projects (NGO’s)(NGO’s)

Payments SystemsPayments Systems

Help collect Help collect revenuesrevenues

Make payments Make payments during budget during budget executionexecution

Interact with Interact with other systems, other systems, especially especially bankingbanking

External PartnersExternal Partners

International Financial Institutions International Financial Institutions (IFI’s)(IFI’s) World Bank: development loans/grantsWorld Bank: development loans/grants IMF: monetary stabilization and planningIMF: monetary stabilization and planning Development Banks: project financingDevelopment Banks: project financing

OECD: shares advanced practices OECD: shares advanced practices Networks (ICGFM, SBO’s)Networks (ICGFM, SBO’s) Bi-lateral donors such as Japan, EU, Bi-lateral donors such as Japan, EU,

The Netherlands, Britain and AmericaThe Netherlands, Britain and America

The Verification RoleThe Verification Role

Supreme Audit AgenciesSupreme Audit Agencies and and Internal AuditorsInternal Auditors report on report on the ultimate use of resources the ultimate use of resources – can you define this in a – can you define this in a more precise way?more precise way?

Budgeters needs auditors!Budgeters needs auditors! Audits determine Audits determine credibilitycredibility

Program Budgets Need Program Budgets Need AuditorsAuditors

Program budget systemsProgram budget systems Require performance audits using non-Require performance audits using non-

financial data financial data Must validate indicators that measure resultsMust validate indicators that measure results Use continuing flows of audit information to Use continuing flows of audit information to

analyze results and make allocation decisionsanalyze results and make allocation decisions Rely on the expectation of audits to Rely on the expectation of audits to

encourage spending organizations to submit encourage spending organizations to submit truthful budget execution datatruthful budget execution data

The Fiscal Facts of Life

1. Countries can only spend what they can collect through revenues and borrowing

2. They must manage these funds successfully

Finance of Ministry FunctionsFinance of Ministry Functions

RevenueRevenuePublic Finance Public Finance PolicyPolicyBudgetingBudgetingMacroeconomicMacroeconomic

EstimatesEstimates Internal Audit/ControlInternal Audit/Control

Finance Ministry FunctionsFinance Ministry Functions

TreasuryTreasury: : management of management of accounts and accounts and paymentspayments

DebtDebt OperationsOperations Financial Financial

Institutions Institutions RegulationRegulation

Finance Ministry Budget Finance Ministry Budget TasksTasks

1.1. Budget Budget FormulationFormulation - - ensuring allocation ensuring allocation of funds according to of funds according to ppriorities riorities enactenacted in ed in Parliament Parliament based onbased on Executive Executive preparationpreparation

2.2. BudgetBudget ExecutionExecution - - conforming the use conforming the use of resources to the enacted plan and of resources to the enacted plan and making changesmaking changes

3.3. Systemic controls and accountabilitySystemic controls and accountability4.4. AnalysisAnalysis – monitoring and internal – monitoring and internal

challengechallenge5.5. Information and Reporting – Information and Reporting – for for

transparency and managementtransparency and management

BudgetingBudgeting

Focuses on PROCESS, as does Internal Focuses on PROCESS, as does Internal AuditAudit

This is different from Debt Instruments This is different from Debt Instruments and Treasury payments, which involve and Treasury payments, which involve transactionstransactions

The BudgetThe Budget

The device that The device that allocates the allocates the shortageshortage of public of public moneymoney

There is never There is never enough money to enough money to do all the things do all the things people want done.people want done.

The BudgetThe Budget

We use budgets We use budgets to decide what to decide what is most is most important and important and who gets what who gets what proportion, or proportion, or share, of public share, of public resourcesresources

Therefore:Therefore:

A budget A budget should =should =

a a priority listpriority list of of government government actions and actions and policiespolicies

The Formulation ChartThe Formulation Chart

This illustrates a complete, mature This illustrates a complete, mature processprocess

OTA suggests that you use it as a OTA suggests that you use it as a template to see how your system template to see how your system measures upmeasures up

A detailed explanation can be found in the A detailed explanation can be found in the UST 100 course found on our website UST 100 course found on our website

A Good Formulation Process:A Good Formulation Process:

Starts with real macroeconomic and Starts with real macroeconomic and budget execution databudget execution data

Operates within politically accepted limitsOperates within politically accepted limits Relies extensively on analyses of financial Relies extensively on analyses of financial

and non-financial dataand non-financial data Has an established calendar and clear Has an established calendar and clear

instructions/manuals/handbooksinstructions/manuals/handbooks Incorporates internal challenges, appeals Incorporates internal challenges, appeals

and final decisionsand final decisions

FormulationFormulation

You can badly execute a well You can badly execute a well formulated budgetformulated budget

You cannot execute a badly You cannot execute a badly formulated budget wellformulated budget well

Budgeting for ResultsBudgeting for Results

OTA recommends program, or results OTA recommends program, or results based budgetsbased budgets

This is how we tell people what we are This is how we tell people what we are doing with their moneydoing with their money

Program Budgets Take TimeProgram Budgets Take Time

Get political “buy in” – do not waste Get political “buy in” – do not waste the effortthe effort

Put the data/accounting fundamentals Put the data/accounting fundamentals in place earlyin place early

Start with outputs while you work on Start with outputs while you work on outcomesoutcomes

Migrate from organization/economic Migrate from organization/economic classification to measurable classification to measurable objectives that drive real programsobjectives that drive real programs

Budget Execution

Allocation

planApportionment

Reports and Statements

Commitments

Payments, receipts and accounting

Audit System

Analysis and review

Forecasting, Cash Management and Borrowing

Year end accounting

Formulation

The Rail Track AnalogyThe Rail Track Analogy

Budgeting Budgeting ALWAYS follows ALWAYS follows

two tracks:two tracks:

Budget Budget FormulationFormulation

andand

Budget ExecutionBudget Execution

The Rail Track AnalogyThe Rail Track Analogy

Ties of budget Ties of budget law and policy, law and policy, help execution help execution to follow budget to follow budget formulation. formulation.

Execution data Execution data ties guide ties guide formulation.formulation.

Destination: SAI ReportDestination: SAI Report

The last stop on The last stop on every budget’s every budget’s journey down these journey down these twin tracks is a twin tracks is a final statement, the final statement, the reconciliation of reconciliation of what was what was authorized to what authorized to what has been spent and has been spent and accomplished.accomplished.

Budget Execution Budget Execution StakeholdersStakeholders

Finance ministry units:Finance ministry units:Central Treasury Central Treasury ManagementManagementBudget Budget Internal controls and Internal controls and auditingauditing

Finance Ministry Execution Finance Ministry Execution StakeholdersStakeholders

Cash and Debt ManagersCash and Debt Managers

Revenue UnitsRevenue Units

Capital Investment Capital Investment ProgrammersProgrammers

Grant Management UnitGrant Management Unit

Spending Ministry Spending Ministry Execution StakeholdersExecution Stakeholders

Departments or sections which perform Departments or sections which perform the following functionsthe following functions::

Treasury transactionsTreasury transactionsBudgetingBudgetingRevenue collectionRevenue collectionCapital Programs and ProjectsCapital Programs and Projects

Spending Ministry Spending Ministry StakeholdersStakeholders

Human resources/payrollHuman resources/payroll

Procurement officersProcurement officers

Internal audit and other Internal audit and other controlscontrols

Grant ManagementGrant Management

Other Budget ExecutionOther Budget Execution StakeholdersStakeholders

Citizens, companies and Citizens, companies and organizationsorganizations

Audit InstitutionsAudit Institutions The Council or Cabinet of The Council or Cabinet of

MinistersMinisters ParliamentParliament Planning and analysis unitsPlanning and analysis units

Other Budget ExecutionOther Budget Execution StakeholdersStakeholders

The Central Bank The Central Bank The banking community The banking community Credit rating organizationsCredit rating organizations International Financial International Financial

Institutions (IFI’s- World Bank Institutions (IFI’s- World Bank and International Monetary and International Monetary Fund) and DonorsFund) and Donors

Budget Execution DutiesBudget Execution Duties

a. carefully managing daily a. carefully managing daily financial operations;financial operations;

b. accounting under clear rules b. accounting under clear rules and controls; and controls;

Budget Execution DutiesBudget Execution Duties

c. c. maintaining a record of maintaining a record of historical and comparative data; historical and comparative data; and and

d. auditing, analyzing and d. auditing, analyzing and evaluating the financial evaluating the financial performance and results of performance and results of government policies, spending government policies, spending and programsand programs

Major Major TreasuryTreasury Unit Unit DutiesDuties

Cash management.Cash management. Management of bank accounts.Management of bank accounts. Accounting and reporting.Accounting and reporting. Planning and forecasting of cash Planning and forecasting of cash

flows.flows.

TreasuryTreasury Unit Duties Unit Duties

• Management of debt and Management of debt and guarantees.guarantees.

• Administration of grants and Administration of grants and counterpart funds from counterpart funds from international aid.international aid.

• Financial assets management.Financial assets management.

Cash ManagementCash Management

NOT cash rationing! Does not pay NOT cash rationing! Does not pay bills on an ad hoc, day to day decision bills on an ad hoc, day to day decision basis.basis.

Relies on continuous communication, Relies on continuous communication, good data and established rulesgood data and established rules

Uses multiple toolsUses multiple tools Experience-based schedulingExperience-based scheduling Short term borrowingShort term borrowing Commitment SystemCommitment System

Cash Management Cash Management ActivitiesActivities

a. controlling aggregate spending; a. controlling aggregate spending;

b. effectively implementing the budget by b. effectively implementing the budget by insuring that adequate cash is available to insuring that adequate cash is available to pay liabilities and prevent arrears; pay liabilities and prevent arrears;

c. concentrating available funds to earn c. concentrating available funds to earn interest; and, therefore interest; and, therefore

d. minimizing costs of public borrowing.d. minimizing costs of public borrowing.

More Treasury More Treasury ResponsibilitiesResponsibilities

Maintaining the Maintaining the Chart of AccountsChart of Accounts;; Setting budget accounting Setting budget accounting

standards;standards; Developing budget accounting laws, Developing budget accounting laws,

regulations, policies, and regulations, policies, and procedures;procedures;

More Treasury More Treasury ResponsibilitiesResponsibilities

Reporting on results of the Reporting on results of the government’s budget execution; andgovernment’s budget execution; and

Preparing statutorily or Preparing statutorily or contractually required financial and contractually required financial and non-financial reports (e.g. for donor non-financial reports (e.g. for donor funds)funds)

Others you could suggest?Others you could suggest?

Chart of AccountsChart of Accounts

The General LedgerThe General Ledger – Those accounts – Those accounts representing the highest level of representing the highest level of summarization for assets, liabilities, summarization for assets, liabilities, equity, revenues, and expenditures of the equity, revenues, and expenditures of the state. These are the accounts that will be state. These are the accounts that will be the basis for the annual financial the basis for the annual financial statements.statements.

Functional ClassificationFunctional Classification – The broad area – The broad area of government activity, often defined by of government activity, often defined by the international “GFS” system endorsed the international “GFS” system endorsed by the International Monetary Fund. GFS by the International Monetary Fund. GFS compatible functional classifications are compatible functional classifications are used for international reports. used for international reports.

Chart of Accounts 2Chart of Accounts 2

Economic ClassificationEconomic Classification – Shows – Shows “what” is being acquired/paid for “what” is being acquired/paid for with budget resources. Examples with budget resources. Examples include Employee pay, Employer include Employee pay, Employer Benefit/Social Insurance costs, Benefit/Social Insurance costs, Goods and Services such as travel, Goods and Services such as travel, and interest payments. and interest payments.

Chart of Accounts 3Chart of Accounts 3

RevenuesRevenues – Taxes, fees, and other – Taxes, fees, and other receipts that finance the receipts that finance the government’s operations.government’s operations.

OrganizationsOrganizations – shows what – shows what governmental entity is responsible governmental entity is responsible for expenditures or revenue items. for expenditures or revenue items. Examples might be the education Examples might be the education ministry or a special investigations ministry or a special investigations office.office.

The PFM System Should The PFM System Should Use ANY Desired Use ANY Desired ClassificationsClassifications

LocationLocation New spending vs. existingNew spending vs. existing Beneficiary groups (retirees, students)Beneficiary groups (retirees, students) Combinations of other classifications, Combinations of other classifications,

such as sectoral classificationsuch as sectoral classification Source of funds (internal, donor)Source of funds (internal, donor) Level of GovernmentLevel of Government Your suggestions?Your suggestions?

More ClassificationsMore Classifications

One-time or ongoing (projects or One-time or ongoing (projects or programs)programs)

Capital or recurrentCapital or recurrent Risk (high, medium, low danger of Risk (high, medium, low danger of

failure)failure) Government Priority ItemsGovernment Priority Items Decision options (grouping by Decision options (grouping by

variables)variables)

The Power to ClassifyThe Power to Classify Determines how we think about Public Determines how we think about Public

FinanceFinance Defines TransparencyDefines Transparency Enables ReformEnables Reform

Intergovernmental equity needs jurisdictional Intergovernmental equity needs jurisdictional datadata

Manipulates debate Manipulates debate Do I argue for money by organization or function?Do I argue for money by organization or function?

Limits concepts Limits concepts Example: without program classification, we Example: without program classification, we

cannot see results. All other classifications show cannot see results. All other classifications show inputs.inputs.

Classification and the Classification and the Useful IFMISUseful IFMIS

Can the system accommodate Can the system accommodate current classifications for budget current classifications for budget formulation and execution?formulation and execution?

Can the system add classifications Can the system add classifications when desired by the users?when desired by the users?

Can the system manipulate all Can the system manipulate all classifications for analysis?classifications for analysis? Example: ability to compare and modify Example: ability to compare and modify

classifications at various time pointsclassifications at various time points

2/13/2003 7:10:24 AM Economic Class 1 - by Organization 1 Historical Classification All funds Col. 1 Col. 2 Col. 3 Col. 4 Col. 5 Col. 6 State budget Nominal values 1999 Actual 2000 Actual 2001 2002 2003 2003revised

Report total /%change 1,231,900.2 3% 1,264,116.0 -20% 1,012,861.6 24% 1,259,527.5 12% 1,415,359.8 6% 1,494,600.0

1 - Current expenditures 395,737.2 32.1% 390,959.4 30.9% 300,155.2 29.6% 401,457.8 31.9% 497,698.2 35.2% 571,614.1 38.2% 1 - Parliament and Related Organizations 9,671.6 0.8% 8,544.0 0.7% 7,718.4 0.8% 9,556.2 0.8% 8,680.7 0.6% 10,502.8 0.7% 2 - Central Elections Commission 1,702.6 0.1% 2,240.2 0.2% 550.0 0.1% 420.8 0.0% 2,371.4 0.2% 420.8 0.0% 3 - Chamber of Control of 2,690.5 0.2% 2,555.5 0.2% 1,757.2 0.2% 3,260.0 0.3% 3,124.4 0.2% 2,970.0 0.2% 4 - Constitutional Court of 532.6 0.0% 983.0 0.1% 955.6 0.1% 1,267.6 0.1% 1,047.6 0.1% 1,248.6 0.1% 5 - Supreme Court of 1,318.9 0.1% 1,704.0 0.1% 1,785.0 0.2% 2,255.0 0.2% 2,130.0 0.2% 2,075.0 0.1% 6 - General courts 4,205.1 0.3% 6,756.0 0.5% 6,760.0 0.7% 8,460.0 0.7% 8,460.0 0.6% 8,060.0 0.5% 7 - The council of Justice 422.0 0.0% 551.7 0.0% 493.4 0.0% 590.0 0.0% 360.5 0.0% 540.0 0.0% 2 - Interest 165,923.0 13.5% 181,200.0 14.3% 141,504.5 14.0% 173,750.0 13.8% 165,300.0 11.7% 187,474.8 12.5% 24 - Ministry of Justice of 1,874.8 0.1% 25 - The Ministry of Culture of 4.5 0.0% 35 - Ministry of Finance 165,923.0 13.5% 181,200.0 14.3% 141,500.0 14.0% 173,600.0 13.8% 165,100.0 11.7% 185,600.0 12.4% 55 - State Road Department 150.0 0.0% 200.0 0.0% 3 - Subsidies and transfers 338,861.6 27.5% 399,526.8 31.6% 360,818.0 35.6% 384,075.0 30.5% 467,532.3 33.0% 503,642.7 33.7% 8 - State Chancellery 48.2 0.0% 266.4 0.0% 53.4 0.0% 53.4 0.0% 59.0 0.0% 59.0 0.0% 19 - Ministry of Education 520.4 0.0% 527.4 0.0% 146.2 0.0% 190.2 0.0% 475.4 0.0% 469.6 0.0% 21 - The Ministry of Economics, Industry and Trade of 206.1 0.0% 237.3 0.0% 237.3 0.0% 237.3 0.0% 312.3 0.0% 312.3 0.0% 4 - Capital expenditures 24,953.4 2.0% 32,366.0 2.6% 9,351.5 0.9% 20,626.1 1.6% 14,954.3 1.1% 10,368.4 0.7% 1 - Parliament 520.0 0.0% 300.0 0.0% 273.9 0.0% 247.2 0.0% 18.7 0.0% 387.2 0.0% 3 - Chamber of Control 50.0 0.0% 40.0 0.0% 117.4 0.0% 230.0 0.0% 4 - Constitutional Court 132.0 0.0% 20.0 0.0% 40.0 0.0% 20.0 0.0% 5 - Net lending 239,850.0 19.5% 214,600.0 17.0% 159,372.8 15.7% 227,838.0 18.1% 269,875.0 19.1% 221,500.0 14.8% 35 - Ministry of Finance 239,850.0 19.5% 214,600.0 17.0% 159,372.8 15.7% 213,575.0 17.0% 253,000.0 17.9% 221,500.0 14.8%

2/13/2002 7:18:21 AM Organization Budget – by Program Historical Classification All funds Col. 1 Col. 2 Col. 3 Col. 4 Col. 5 Col. 6 . State budget Nominal values 1998 Actual 1999 Actual 2000 Actual 2001 Actual 2002 Approved 2002 Revised

Report total/% change 11,802.4 -7% 10,966.7 -12% 9,624.7 20% 11,551.0 17% 13,532.2 17% 15,890.4 17%

25 - The Ministry of Culture %of Tot.

1- Institutional Support Program 3,713.5 31% 3,701.0 34% 3,316.1 34% 4,248.5 37% 5,818.8 43% 6,917.9 44% a – Theater sub program 553.7 5% 548.9 5% 560.3 6% 560.3 5% 654.0 5% 1,224.0 8% – Element/Activity: original works 553.7 5% 548.9 5% 560.3 6% 560.3 5% 654.0 5% 1,224.0 8% b – Museums sub program. 1,495.7 13% 1,500.3 14% 1,332.7 14% 1,472.5 13% 1,747.6 13% 3,008.9 19% - Renovation Project 1,495.7 13% 1,500.3 14% 1,332.7 14% 1,472.5 13% 1,747.6 13% 3,008.9 19% c- Music sub program 1,664.0 14% 1,651.8 15% 1,423.1 15% 2,215.7 19% 3,417.2 25% 2,685.0 17% – Element/Activity: original works 1,664.0 14% 1,651.8 15% 1,423.1 15% 2,215.7 19% 3,417.2 25% 2,685.0 17%

2 – Cultural Development Program 8,089.0 69% 7,265.7 66% 6,282.8 65% 7,302.5 63% 7,713.4 57% 8,972.5 56% a– New artists sub program 8,089.0 69% 7,265.7 66% 6,282.8 65% 7,302.5 63% 7,713.4 57% 8,972.5 56% – Element/Activity: scholarships 7,515.1 64% 6,779.4 62% 6,115.4 64% 7,052.2 61% 7,507.5 55% 7,877.8 50% – Project new art 573.9 5% 486.3 4% 167.4 2% 250.3 2% 205.9 2% 1,094.7 7%

Execution Manuals (Policies and Procedures) 1

Accounting Reporting Chart of Accounts Capital Assets Procurement

Execution Manuals (Policies and Procedures) 2

Donor funds Payroll Internal controls and audit Glossary of terms

Internal Control ObjectivesIt is every stakeholder’s duty to follow procedures to assure :

Effectiveness and efficiency of operation (e.g. payment processing time)

Reduction of Risk (e.g. securing assets)

Internal Control Objectives Prevention of Corruption (e.g. dual

signatures) Reliability of financial reporting (e.g.

professional verification techniques) Compliance with applicable laws and

regulations (e.g. release of funds requirements observed)

Execution SequencingExecution Sequencing

1.1. Allocation PlansAllocation Plans2.2. Commitments for contracted goods Commitments for contracted goods

or servicesor services3.3. Authorization to spendAuthorization to spend4.4. Disbursements and ProcurementDisbursements and Procurement5.5. Reconciliation and AccountingReconciliation and Accounting6.6. Reporting and AnalyzingReporting and Analyzing

AccountingAccounting

CashCash AccrualAccrual What do you prefer?What do you prefer? GFS 2001: Compatibility but not an GFS 2001: Compatibility but not an

accounting systemaccounting system IPSAS ComplianceIPSAS Compliance

Sample Cash Controls

Segregation of duties in the handling of cash is one of the most effective ways to gain control over this asset. No one individual is to have complete control over cash.

Incoming cash must be made a matter of record as soon as

possible. Two persons should open the mail when they expect cash or checks in the mail.

One copy of the listing is forwarded to the cashier. The other copy forms the basis for accounting controls through ledger posting. A third person periodically compares the listing with the deposit.

Payroll Controls Census of Employees (remove phantoms) Position controls to prevent unauthorized

hiring Signed Time sheets

Payroll Controls

Responsible, accountable supervisors

Full Time Equivalent or Head Count?

Cash payments or bank deposits?

PEFAPEFA

The The PPublic ublic EExpenditure and xpenditure and FFinancial inancial AAccountability ccountability project of the major donorsproject of the major donors

Applying PEFA Applying PEFA IndicatorsIndicators

The Performance The Performance Measurement Measurement

Framework -PMFFramework -PMF

The OECD-DAC Task Force on Donor Practices provided guidance on diagnostic reviews and performance measurement and suggested:

A Public Expenditure Working Group was set up in July 2003, chaired by the World Bank, with Fund and PEFA Secretariat representation, reporting to the PEFA Steering Committee

1. Reducing duplication in assessments and high transaction costs on partner countries

2. Establishing a performance measurement framework to monitor progress over time in PFM systems

1. Reducing duplication in assessments and high transaction costs on partner countries

2. Establishing a performance measurement framework to monitor progress over time in PFM systems

1.Greater country ownership, and alignment of donor work around country priorities

2.Reduced transaction costs from streamlining diagnostics

3.Enhanced collaboration between donors, governments, and stakeholders

4.Better meeting of both development and fiduciary concerns

Improved impact on the reform of country systems

The PFM High-Level Performance Indicator Set 1

A. PFM-OUT-TURNS: Credibility of the budget

PI-1 Aggregate expenditure out-turn compared to original approved budget

PI-2 Composition of expenditure out-turn compared to original approved budget

PI-3 Aggregate revenue out-turn compared to original approved budget

PI-4 Stock and monitoring of expenditure payment arrears

B. KEY CROSS-CUTTING ISSUES: Comprehensiveness and Transparency

PI-5 Classification of the budget

PI-6 Comprehensiveness of information included in budget documentation

PI-7 Extent of unreported government operations

PI-8 Transparency of inter-governmental fiscal relations

PI-9 Oversight of aggregate fiscal risk from other public sector entities.

PI-10 Public access to key fiscal information


C. BUDGET CYCLE

C(i) Policy-Based Budgeting

PI-11 Orderliness and participation in the annual budget process

PI-12 Multi-year perspective in fiscal planning, expenditure policy and budgeting

C(ii) Predictability and Control in Budget Execution

PI-13 Transparency of taxpayer obligations and liabilities

PI-14 Effectiveness of measures for taxpayer registration and tax assessment

PI-15 Effectiveness in collection of tax payments

PI-16 Predictability in the availability of funds for commitment of expenditures

PI-17 Recording and management of cash balances, debt and guarantees

PI-18 Effectiveness of payroll controls

PI-19 Competition, value for money and controls in procurement

PI-20 Effectiveness of internal controls for non-salary expenditure and assets management

PI-21 Effectiveness of internal audit


C(iii) Accounting, Recording and Reporting

PI-22 Timeliness and regularity of accounts reconciliation

PI-23 Availability of information on resources received by service delivery units

PI-24 Quality and timeliness of in-year budget reports

PI-25 Quality and timeliness of annual financial statements

C(iv) External Scrutiny and Audit

PI-26 Scope, nature and follow-up of external audit

PI-27 Legislative scrutiny of the annual budget law

PI-28 Legislative scrutiny of external audit reports


D. DONOR PRACTICES

D-1 Predictability of Direct Budget Support

D-2 Financial information provided by donors for budgeting and reporting on project and program aid

D-3 Proportion of aid that is managed by use of national procedures

Today’s PEFA Discussion

• Consider possible applications• Explore pitfalls• Relate to reform programs• Note the “Platform Approach”

Indicators Are For Indicators Are For CountryCountry Use Use

Straightforward and credible Straightforward and credible Good job for a special assistantGood job for a special assistant

- But ratings must be But ratings must be reviewed/discussedreviewed/discussed

Provides immediate insights Provides immediate insights Auditors are suited to this taskAuditors are suited to this task

PMF: For PMF: For CountryCountry Use Use

A measure of change over A measure of change over time – milestones & markstime – milestones & marksA tool for interaction with A tool for interaction with

donorsdonorsthat can prove progressthat can prove progressThe basis for a “Platform The basis for a “Platform

Approach”Approach”

The platform approach is currently being implemented in a number of countries, supported by development agencies.

In Cambodia, for example, this approach is led by government and supported by a joint donor group.

There is an 8 year plan to move through the platforms.

Why Platforms?Why Platforms?

Reforms are often led by different agencies Reforms are often led by different agencies and donors, with insufficient attention and donors, with insufficient attention provided to the co-ordination and provided to the co-ordination and sequencing.sequencing.

This has typically led to a fragmented and This has typically led to a fragmented and partial approach, characterized by: partial approach, characterized by:

an undermining of government-led reforman undermining of government-led reform less trust between governments and less trust between governments and

donorsdonors administrative burdens on governmentadministrative burdens on government

Fragmented ApproachesFragmented Approaches too much too much focus on technicalfocus on technical

developments (e.g. complex developments (e.g. complex IFMIS)IFMIS)

a tendency to promote a tendency to promote parallel parallel systemssystems

implementation of reforms implementation of reforms frequently fails to complement each frequently fails to complement each otherother

an an inconsistent approachinconsistent approach to PFM to PFM reform between line ministries and reform between line ministries and the Ministry of Finance and the SAIthe Ministry of Finance and the SAI

Cambodia Platform 1: ACambodia Platform 1: A credible budget delivering credible budget delivering reliable and predictable reliable and predictable resources to budgetresources to budgetmanagersmanagers

Broad ActivitiesBroad Activities

• • Integration of budget (recurrent & Integration of budget (recurrent & capital budgets)capital budgets)

• • Strengthen macro and revenue Strengthen macro and revenue forecastingforecasting

• • Streamline spending processesStreamline spending processes

Enables a basis for Enables a basis for accountabilityaccountability

Cambodia Platform 2: Cambodia Platform 2: Improved internal control to Improved internal control to hold managers accountablehold managers accountable


• • Re-design budgeting classification Re-design budgeting classification systemsystem

• • Initial design of FMIS for core Initial design of FMIS for core business processesbusiness processes

• • Define the internal audit functionDefine the internal audit function

Enables focus on what is done with money

Cambodia Platform 3: Cambodia Platform 3: Improved linkage of Improved linkage of priorities and service priorities and service targets to budget planning targets to budget planning and executionand execution


••Re-design the budget cycle (e.g. MTEF)Re-design the budget cycle (e.g. MTEF)

• • Pilot program-based budgeting & Pilot program-based budgeting & budget analysisbudget analysis

• • Further fiscal decentralizationFurther fiscal decentralization

Enables more accountability for performance management

Cambodia Platform 4: Cambodia Platform 4: Integration of accountability and Integration of accountability and review processes for both review processes for both finance and performance finance and performance managementmanagement Broad ActivitiesBroad Activities

• • Full design of FMISFull design of FMIS

• • Develop IT management strategyDevelop IT management strategy

• • Initial design of asset registerInitial design of asset register

Do Not Wait For DonorsDo Not Wait For DonorsLearn the PEFA system nowLearn the PEFA system now Identify Identify

strengths/weaknessesstrengths/weaknessesCreate plans to raise ratingsCreate plans to raise ratingsDivide TA among donors Divide TA among donors

based on sequenced action based on sequenced action plans plans

Target Selected Target Selected IndicatorsIndicators

Decide what is critical Decide what is critical AND doableAND doable

Set practical steps Set practical steps

and timeframesand timeframes

Good Target IndicatorsGood Target Indicators

1 & 31 & 3 Aggregate out-turn vs. Aggregate out-turn vs. enacted- 1st step in deficit enacted- 1st step in deficit controlcontrol

22 Composition of out-turn vs. Composition of out-turn vs. enacted ---can highlight budget enacted ---can highlight budget execution quality and policy execution quality and policy strategiesstrategies

44 Arrears – often elusive, always Arrears – often elusive, always important to budget credibilityimportant to budget credibility

Good TargetsGood Targets

77 Off Budget spending – an Off Budget spending – an issue in most countries; can issue in most countries; can be a political power indicator be a political power indicator

1010 Public access – can be done Public access – can be done with websites, publications with websites, publications and public activities. Good and public activities. Good for an “early win.”for an “early win.”


1111 Annual budget process Annual budget process

1818 Payroll controls – one Payroll controls – one place to start the fight place to start the fight against corruptionagainst corruption


1616 Availability of funds – a key budget Availability of funds – a key budget execution improvement opportunityexecution improvement opportunity

2121 Effectiveness of internal auditEffectiveness of internal audit

2424 Budget reporting – a practical test Budget reporting – a practical test for the IFMIS, or existing systemsfor the IFMIS, or existing systems

Example

PI-21. Effectiveness of internal audit Dimensions to be assessed:

(i) Coverage and quality of the internal audit function.

(ii) Frequency and distribution of reports. (iii) Extent of management response to internal

audit findings.

Internal Audit – Rate Your System

Internal Audit Effectiveness Grade D:

(i) There is little or no internal audit focused on systems monitoring.

(ii) Reports are either non-existent or very irregular.

(iii) Internal audit recommendations are usually ignored (with few exceptions).

Effectiveness Grade C:

(i) The function is operational for at least the most important central government entities and undertakes some systems review (at least 20% of staff time), but may not meet recognized professional standards.

(ii) Reports are issued regularly for most government entities, but may not be submitted to the ministry of finance and the SAI.

(iii) A fair degree of action taken by many managers on major issues but often with delay

Internal Audit Effectiveness Grade B:

(i) Internal audit is operational for the majority of central government entities (measured by value of revenue/expenditure), and substantially meet professional standards. It is focused on systemic issues (at least 50% of staff time).

(ii) Reports are issued regularly for most audited entities are distributed to the audited entity, the ministry of finance and the SAI.

(iii) Prompt and comprehensive action is taken by many (but not all) managers.

Internal Audit Grade A:(i) Internal audit is operational for all central

government entities, and generally meet professional standards, It is focused on systemic issues (at least 50% of staff time)..

(ii) Reports adhere to a fixed schedule and are distributed to the audited entity, ministry of finance and the SAI.

(iii) Action by management on audit findings is prompt and comprehensive across government entities.

Problems with PEFAProblems with PEFA

Consultants with opinionsConsultants with opinions Differences in scoring or data- Differences in scoring or data-

weaknesses can cause problems of weaknesses can cause problems of appearance & substanceappearance & substance

Extra work requiredExtra work required Inadequate for major anti-Inadequate for major anti-

corruption effortscorruption efforts Donor add-on requirementsDonor add-on requirements

PEFA-based Reform PEFA-based Reform PlansPlans

Specify Specify indicator (s)indicator (s) for for improvementimprovement

Set a Set a timetabletimetable for change for changeReport monthlyReport monthly on on

milestones and manage milestones and manage setbackssetbacks

ExampleExample

GoalGoal: Improve the stability of : Improve the stability of the budget process through the budget process through improved procedures/circulars improved procedures/circulars

Objective:Objective:

Improve the BY07 Circular to Improve the BY07 Circular to raise Indicator 11 (policy raise Indicator 11 (policy based budget: orderliness and based budget: orderliness and participation)participation)

# 11 – Budget Circular# 11 – Budget Circular

Dimension (i) the Calendar (no change targeted)Dimension (i) the Calendar (no change targeted)

Score = BScore = B: :

A clear annual budget calendar exists, but A clear annual budget calendar exists, but some delays are often experienced in its some delays are often experienced in its implementation. implementation.

The calendar allows units reasonable time The calendar allows units reasonable time (at least four weeks from receipt of the (at least four weeks from receipt of the budget circular) so that most of them budget circular) so that most of them are able to meaningfully complete their are able to meaningfully complete their detailed estimates on timedetailed estimates on time

. .

# 11 Example# 11 Example

(iii) Timely approval by the (iii) Timely approval by the legislaturelegislature (no change needed)(no change needed)

Score = AScore = A: : The legislature The legislature has, during the last three has, during the last three years, approved the budget years, approved the budget before the start of the fiscal before the start of the fiscal year. year.

Improvement Plan TargetImprovement Plan Target

Dimension (ii): preparation of Dimension (ii): preparation of budget submissions budget submissions

Current Score = D:Current Score = D: the quality of the budget the quality of the budget

circular (instructions) is poor, circular (instructions) is poor, causing confusion about causing confusion about requirements and late requirements and late submissions of requestssubmissions of requests

TargetTarget

Desired Score = B:Desired Score = B: A comprehensive and clear A comprehensive and clear budget circular is issued budget circular is issued which reflects ceilings which reflects ceilings approved by Cabinet (or approved by Cabinet (or equivalent). equivalent).

Ceiling approval takes place Ceiling approval takes place after the circular after the circular distribution to units, but distribution to units, but before they have completed before they have completed their submission. their submission.

Plan Milestones

1. Agree on concept – Nov, 06

2. Inform spending units - Nov, 06

3. Draft the changes-Dec-Jan, 06-7

4. Gain cabinet approval for draft- Jan, 07

5. Training as needed- Feb, 07

6. Distribute Final Circular- March 15, 2007

7. Cabinet sets ceilings- April 15, 2007

8. Requests submitted –June 2007

What do you think?What do you think?

At what point might the plan At what point might the plan schedule most likely break down?schedule most likely break down?

Drafting and Training time Drafting and Training time adequate?adequate?

Reasonable target score?Reasonable target score? Unrealistic time frame for this Unrealistic time frame for this

change?change?

Other Potential Other Potential ComplicationsComplications

Possible disagreement with Possible disagreement with donors on the quality of a donors on the quality of a new or old budget circularnew or old budget circular

Failure of Cabinet to give Failure of Cabinet to give timely ceilings (results in a C timely ceilings (results in a C rating)rating)

Your observations?Your observations?

Rating ChangeRating Change

Country score for # 11 goes Country score for # 11 goes from ADB = B rating from ADB = B rating

to ABB = B+to ABB = B+ According to the PMF, policy According to the PMF, policy

based budgeting has based budgeting has advancedadvanced

Advances Country PFM Advances Country PFM Goals:Goals:

1. 1. TransparencyTransparency

2. 2. Accountability and CredibilityAccountability and Credibility

3. 3. Stability and SustainabilityStability and Sustainability

RecommendationRecommendation

1.1. Do your own PEFA Do your own PEFA ReviewReview

2.2. Set a PEFA focus for Set a PEFA focus for your planned your planned changes/reformschanges/reforms

3.3. Get measurable resultsGet measurable results

Further InformationFurther Information

Websites: Websites: www.ustreasury.hu/budget/frm.shtmlwww.ustreasury.hu/budget/frm.shtml

www.ustreasury.huwww.ustreasury.hu

Email: [email protected]: [email protected]

Remember:Remember:

1.1. Public Finance Management Public Finance Management impacts every citizen and impacts every citizen and public organizationpublic organization

2.2. PFM requires collaborationPFM requires collaboration

3.3. PFM ChangePFM Change occurs occurs through: through: personalpersonal, , technicaltechnical and and politicalpolitical processesprocesses

Two Sides to the PFM Two Sides to the PFM Reform CoinReform Coin

1.1. The design, training and technical The design, training and technical assistance faceassistance face

2.2. The management of people faceThe management of people face

These two aspects must be considered These two aspects must be considered for any reform activity to succeed.for any reform activity to succeed.

Change ManagementChange Management

Leaders want change but people and Leaders want change but people and organizations resist it.organizations resist it.

Why? We are not sure how it will Why? We are not sure how it will affect us and what our work will be affect us and what our work will be like after the change is made. like after the change is made. Uncertainty breeds resistance.Uncertainty breeds resistance.

SSystemsystems do not “work” or “fail” – do not “work” or “fail” – peoplepeople make them work or allow make them work or allow them to fail them to fail

Reactions: Anger & FearReactions: Anger & Fear

Those who are corrupt are angry Those who are corrupt are angry that someone is trying to expose that someone is trying to expose them.them.

Those who are honest worry that Those who are honest worry that someone intends to take away their someone intends to take away their work and security.work and security.

The Faces of ChangeThe Faces of Change

Responses to Change 1Responses to Change 1

DenialDenial This cannot work in our This cannot work in our

country because…country because… This only works in other This only works in other

countries….countries…. We cannot get political support We cannot get political support

for such an idea because….for such an idea because….

DenialDenial

We do not have the technical We do not have the technical expertise/staff capacity/etc. to do expertise/staff capacity/etc. to do thisthis

There are many other things that we There are many other things that we must do that are more importantmust do that are more important

We agree that this is a good idea and We agree that this is a good idea and we intend to begin, but only when we intend to begin, but only when the time is rightthe time is right

Response 2Response 2

BargainingBargaining Ok, we will do it, but let’s move Ok, we will do it, but let’s move

slowly;slowly; It would be better to do it this way It would be better to do it this way

than that way;than that way; Let’s study this thoroughly before Let’s study this thoroughly before

taking the next steps. Appoint a taking the next steps. Appoint a study committee!study committee!


DepressionDepression It has happened. It has happened. There is no going back. There is no going back. We could not stop it.We could not stop it.

BUT, BUT, this shows thatthis shows that thethe leaders of change are leaders of change are succeeding.succeeding.


AcceptanceAcceptance

The change becomes the new “old The change becomes the new “old way” and develops many defendersway” and develops many defenders

Are you trying to change Are you trying to change PFM?PFM?

Economic Forecasting?Economic Forecasting? Budget Formulation?Budget Formulation? Accounting Standards?Accounting Standards? Procurement?Procurement? Information Systems?Information Systems?

How do you plan to deal with the How do you plan to deal with the human side of change?human side of change?

Documents

Public Finance and Budgeting Public Finance and Budgeting Miami ICGFM, May 11, 2006 Richard Bartholomew OTA Senior Budget Advisor