Transcript Document 7152581

Public Expenditure and
Financial Management
Overview of Issues and Approaches
Bill Dorotinsky,
PREM public sector group
The World Bank
PEAM Course
January 13, 2004
Outline
• Framework for Review
• Approaches to PEM review
– What is reviewed?
• Common Problems
• Common Solutions
• Getting the basics right
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Framework
Three Objectives of Public Expenditure
Management Systems
• Macrofiscal discipline and stability
– Support economic growth and stability (and reduce
poverty)
– Avoid public finance crises
• Strategic allocation of resources
– Match government policy with programs, objectives
• And assure social safety nets, and promote growth
• Technical efficiency
– Getting the most from each zloty spent
• And just delivering core services
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Framework
Basic principles of PEM
• Comprehensiveness
– include all revenue and expenditure, all agencies
• Accuracy
– record actual transactions and flows
• Annuality
– cover a defined period of time (e.g. one year budget, multi-year
forecasts)
• Authoritativeness
– only spend as authorized by law
• Transparency
– information on spending is public, timely, understandable
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What institutions matter?
• Laws and regulations
– Fiscal, budget, procurement, civil service
• Process
– Policy
– Planning
– Financial/resource management
• Organizations
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Approaches to PEM Review
• Cycle, Process
• System
– broad scope
– organizations
• Functions/tasks
• Outcomes/Impact
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Expenditure Management Cycle
Financial management system boundaries
Planning
system
Project
appraisal
Medium term
plans, e.g. three
year rolling plans
Resource
allocation
Annual budgets
Development,
recurrent and
revenue
Expenditure
review
Public expenditure
review
Institutions
Fund release
procedure, e.g...
warranting
Accountability
Audit system
Reports and
financial statements
Accounting for
revenue and
expenditure
Source: Adapted from Integrated Financial Management. Michael Parry, International Management Consultants Limited.
Training Workshop on Government Budgeting in Developing Countries. THE UNITED NATIONS. December 1997.
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Budget and Policy Execution System in Hungary (1999)
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Core Functions
Public Finance Functions
Macroeconomic
Forecasting
Debt
Management
Fiscal Policy
Revenue
Administration
Non-core Functions
Budget
Formulation
Treasury
Internal
Audit
Financial Asset
Management
Financial
Investigations
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Procurement
Administration
Budget
Execution
Procurement
Policy
Lottery &
Gambling
Financial
Market
Regulation
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Core Tasks and Organizations
- Budget Allocations
- Supplemental Budgets
- Virements
- In-year monitoring and correction
- Warrants (cash allocations)
- Cash Flow Management
(forecasting, planning,
sequestration)
- debt management
- financial asset management
- accounting (policy, system
management, chart of accounts)
- make payments
- collect revenues
- account management and
reconciliation
- Central Bank relations
Ministry of Finance
- Macroforecasting
- Fiscal Policy
- Revenue administration
- Debt Management
Treasury
Spending
Ministry
Spending Unit
- internal control
- program management
- spending (commitments)
- recording & reporting
- payment orders
- verification of receipt of
goods/services
- program/cash plans
Financial Management is Everyone’s Responsibility
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Credibility of the Honduran Budget – In-year Deviations by Agency
(percent of the executed over the approved budget)
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Common PEM problems
• Weak links between policy, resource limits, and budgets
– failure to achieve strategic objectives
– abstract planning, unrelated to ways and means
• Annual focus leads to suboptimal choices
– Digging a hole; inability to climb out
– Complacency today, unaware of crisis tomorrow
• Separation between capital and recurrent budgets
– Lower than expected returns to capital
• Non-comprehensive budget
– Using other means to support favored programs
– Revenues not captured in budget
• Taking piecemeal decisions without reference to over-all effect
• Funds don’t reach intended beneficiaries
– Budget executed differently than approved
• Goods and services not delivered as planned
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Common Reforms
• MTEF
• Treasury
– IFMIS
• Performance Budgeting
• ‘Fragmentation’
– Procurement, Debt
• New Public Management
• Deconcentration, decentralization
• Administrative & Civil Service
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What is an MTEF?
• Conceptual framework for thinking about public finance systems
– ties together multiple technical reforms
– gives paradigm for understanding import of technical reforms
– teaching tool
• Process, not only components of public expenditure systems
–
–
–
–
process of government decision-making
developing a “public interest” in decision-makers
Multi-year emphasis
creating a learning system
• Emphasizing policy
– steering versus rowing for senior officials, organizations
– linking policy, inputs, outputs, objectives
• Effort to change paradigm of actors in system
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Core elements of an MTEF
• Multi-year fiscal envelope
• Setting broad policy priorities (sectors)
• Setting multi-year sector ceilings
– Sector budgets prepared under constraints
– Strategy, policy and objectives under
constraints
• Delivering resources as budgeted
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HIPC expenditure tracking assessment’s 15 indicators,
benchmarks of PEM system capabilities
Budget Management
Benchmark Description
Comprehensiveness
1. Composition of the budget entity
Formulation
2. Limitations to use of off-budget transactions
3. Reliability of budget as guide to outturn
4. Data on donor financing
Meets GFS definition of general government
Extra (or off) budget expenditure is not substantial
Level and composition of outturn is "quite close" to budget
Both capital and current donor funded expenditures included
Classification
5. Classification of budget transactions
6. Identification of poverty-reducing expenditure
Functional and/or program information provided
Identified through use of classification system
(e.g., a virtual poverty fund)
Projection
7. Quality of multi-year expenditure projections
Projections are integrated into budget formulation
Internal Control
Execution
8. Level of payment arrears
9. Quality of internal audit
10. Use of tracking surveys
Low-level of arrears accumulated
Internal audit function (whether effective or not)
Tracking used on regular basis
Reconciliation
11. Quality of fiscal/banking data reconciliation
Reconciliation of fiscal and monetary data carried out
on routine basis
Reporting
Reporting
12. Timeliness of internal budget reports
Monthly expenditure reports provided within four weeks of
end of month
13. Classification used for budget tracking
Timely functional reporting derived from classification system
Final Audited Accounts
14. Timeliness of accounts closure
15. Timeliness of final audited accounts
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Accounts closed within two months of year end
Audited accounts presented to legislature within one year
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Relative need for upgrading PEM Systems
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Agreed Assessment
(8) Number of Benchmarks met
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Benin (8)
Burkina Faso (9)
Chad (8)
Guyana (8)
Honduras (8)
Mali (8)
Rwanda (8)
Tanzania (8)
Uganda (9)
Little Upgrading
Required
Some Upgrading
Required
Bolivia (5)
Cameroon (4)
Ethiopia (6)
Gambia, The (5)
Ghana (1)
Guinea (5)
Madagascar (7)
Malawi (7)
Mauritania (7)
Mozambique (5)
Nicaragua (5)
Niger (3)
Sao Tome &
Principe (4)
Senegal (4)
Zambia (3)
Substantial Upgrading
Required
Source: “Actions to Strengthen the Tracking of Poverty Related Public Spending in Heavily Indebted Poor Countries (HIPCs), W orld Bank and IMF,
March 22, 2002. See http://www.worldbank.org/hipc/hipc-review/tracking.pdf
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The results indicated the need to improve basic
aspects of PEM systems
(Percent of countries not meeting each benchmark)
100%
Note: Based on 24 countries’ Final Assessments
Fiscal & monetary data reconciled
Month reports
3
4
5
6
7
8
9
10
11
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Formulation
Execution
Audited accounts to legislature within 1 year
Regular tracking
2
Accounts closed within two months of y/e
Quality of internal audit (effective or not)
0%
Benchmark
number: 1
Low level of arrears
10%
Projections integrated into budg. formulation
20%
Pov. Red. Exp. Identified
30%
Classification of budget
40%
Data on donor financing
50%
Outturn close?
60%
Extra (off) budget expend.
70%
Meets GFS definition of general government
80%
Timely functional reporting from class system
90%
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Reporting
Source: “Actions to Strengthen the Tracking of Poverty Related Public Spending in Heavily Indebted Poor Countries (HIPCs), W orld Bank and IMF,
March 22, 2002. See http://www.worldbank.org/hipc/hipc-review/tracking.pdf
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Comparison of selected PEM indicators for ECA PRSP countries and HIPCs
A recent draft study by the Bank’s Europe and Central Asia (ECA) region, entitled “BUDGET MANAGEMENT AND PRSP in ECA
PRSP COUNTRIES” (June 2003), employed an instrument similar to the HIPC expenditure tracking assessment. The instrument was
applied in 11* ECA countries. Many indicators in the ECA study are sufficiently different to prevent comparison with the HIPC
expenditure tracking results, but four can be compared:
Comprehensiveness of the budget. Budget reporting follows GFS. No ECA countries met the benchmark, compared to 10 percent of
HIPCs. Budget comprehensiveness challenges are a particular legacy of the former socialist countries, with the public sector still being
defined in many countries.
Multi-year forecasts integrated into the budget process. Ten percent of ECA countries met the benchmark, compared to 18 percent of
HIPCs. Relatively more emphasis has been placed in ECA countries on budget execution during the 1990’s, and budget formulation,
including medium-term forecasts and MTEFs, are a more recent phenomenon.
Internal audit effectiveness. None of the ECA countries met the benchmark, compared to about 12 percent of HIPCs. Even though
internal audit has generally been neglected in Africa, the function nominally existed. For ECA countries, the socialist heritage did not
include internal audit functions.
Audited accounts presented to the legislature. Fifty-five percent of ECA countries met the benchmark, compared to 17 percent of
HIPCs. ECA countries, as noted above, have placed relatively greater emphasis on budget execution, including auditing and reporting, in
the 1990’s, and this is reflected in the results. HIPCs in Africa have focused more on budget formulation (MTEFs) rather than budget
reporting.
HIPC countries generally scored better than ECA PRSP countries, and these reflect the differing initial conditions, capacity for reform,
and differing PEM reform emphasis in the regions.
* Albania, Armenia, Azerbaijan, Bosnia, Georgia, Kyrgyz Republic, Serbia, Macedonia, Moldova, Montenegro, and Tajikistan. Serbia
and Montenegro form one country, but are reported separately in the ECA study due to significant differences between the two Republics
PEM systems and capacity.
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HIPC Assessment Conclusions
• Execution and reporting relatively weaker
• Institutional reforms
– require continuous engagement and monitoring: not
one-off
– Country commitment also fundamental
• Unless some of these addressed, other PEM
reforms will have limited impact
• With limited policy space for reform, important
to focus on a few key areas, rather than laundry
list
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General References
•
•
•
•
•
•
•
SIGMA Policy Brief No. 1: Anatomy of the Expenditure Budget (1997) OECD
Managing Government Expenditure. Schiavo-Compo and Tommasi. Asian Development Bank. 1999
Government Budgeting and Expenditure Controls, Theory and Practice. Premchand. IMF. 1993
Public Expenditure Management. IMF. 1993.
Treasury Reference Model (Bank PE website)
A Contemporary Approach to Public Expenditure Management. Schick, Allen. World Bank Institute. 1999.
Public Expenditure Handbook. World Bank, 1998.
•
“Tracking of Poverty-Reducing Public Spending in Heavily Indebted Poor Countries,” Revision 1, March 28, 2001, SM/01/16, and
World Bank, March 30, 2001, IDA/SECM2001-0052/1
“Actions to Strengthen the Tracking of Poverty-Reducing Public Spending in Heavily Indebted Poor Countries,” Revision 2, March
21, 2002, SM/02/30, and World Bank, March 22, 2002, IDA/SECM2002-30/2
“Update on Implementation of Action Plans to Strengthen Capacity of HIPCs to Track Poverty-Reducing Spending,” March 11,
2003, SM/03/90; World Bank, March 13, 2003, IDA/R2003-0043.
•
•
All HIPC Papers available at:
http://www-wbweb.worldbank.org/prem/prmps/expenditure/hipc.htm
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Criteria for Assessing the Effectiveness of the Budget Process
Element
Budget Formulation Features
Aggregate  Multiyear macrofiscal framework used to set
public revenue, expenditure and debt policy
Fiscal
within realistic economic framework, supporting
Discipline
anticipation of crises, measured restructuring.
 The total budget envelope should be:
(i) explicit and set prior to determining individual spending allocations;
(ii) consistent with the broader macroeconomic
framework; and
(iii) sustainable over the medium term.
 Current policies, laws, and normatives and
programs reconciled in annual budget to assure
affordability.
 New policies with expenditure or revenue
implications adopted during year only if
affordable in medium-term framework, sources
of financing identified, and supplemental budget
approved to finance within budget targets.
 Budget is comprehensive, accurate, annual,
authoritative, and transparent.
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Budget Execution Features
 Commitment control system limits commitments
to available resources, supporting avoidance of
arrears during retrenchment.
 Treasury cash management further supports
matching of expenditures to revenues.
 Treasury payment system and internal controls
support proper payments.
 Accounting system and Financial Management
Information System (FMIS) support
comprehensive, timely and accurate information
on spending and revenues for government and line
ministry management.
 Fiscal and banking accounts regularly reconciled.
 Annual accounts closed in timely manner.
 Debt management assures sustainable debt policy,
timely issuance of debt for cash flow management
and reaching the spending target.
 Internal audit detects and corrects fraud, waste,
and abuse; assures integrity of financial
information.
 External audit assures fairness and accuracy of
financial reporting, effectiveness of internal audit
and control systems.
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Allocative  Expenditure allocations between and within
sectors are consistent with government policies
Efficiency
and priorities.
 Sectoral ceilings set early in expenditure
process to encourage ministry prioritization.
 Current policies, laws, and normatives and
programs reconciled in annual budget to assure
prioritization of resource use, possible program
restructuring.
 Resources are reallocated from lesser to higher
priority programs and from less to more
effective programs, across and within sectors.
 Commitment and Treasury controls execute the
budget as approved.
 Formal, transparent procedures used to amend
budget if necessary.
 Frequency of FMIS reporting allows management
action to correct deviations from approved budget.
 Budget planning (within resource ceilings and
supported via execution of budget as approved)
support productivity improvements and
management/program development.
 Budget process supports analysis and review of
performance, structure, staffing and
organization, policy, normatives.
 Program classification structure within
ministries supports focus on objectives, results.
 Basic program performance information allows
linking of resources with results, pressure for
increased efficiency.
 Program evaluation supports occasional review
of program impact, effectiveness.
 Budget execution (commitment and cash controls)
limits critical expenditures, but supports flexible
resource use at program level (e.g. across nonpersonnel economic classifications, with respect to
seasonal spending patterns) for efficiency (controls
are not excessively detailed to prevent
management of program).
 FMIS supports program managers.
 Civil service system supports quality public staff,
flexibility in reallocating staff resources,
restructuring workforce.
 Procurement system supports competitive,
efficient, timely contracting.
 Internal audit may identify options for improved
economy and efficiency.
Technical
efficiency
Source: From World Bank – Serbia and Montenegro Public Expenditure and Institutional Review – February 2003
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