adb grant 0133-cam: public financial management in rural development ministries (component 1)

ADB Grant 0133-CAM: Public Financial Management in Rural Development

Ministries (Component 1)

Day 1: April 26, 2010Framework of Budget Execution

Budget Execution, Budget Execution, April 26 - 30, 2010April 26 - 30, 2010Budget Execution, Budget Execution, April 26 - 30, 2010April 26 - 30, 2010

ADB Grant No.0133-CAM/Component 1: PFMRD

1. Objectives of budget execution2. Budget law3. Budget execution system4. Over/or under spending5. Expenditure cycle6. Reporting

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Session 1Framework of Budget Execution

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1. Objectives of Budget Execution

Budget execution must assist in achieving these objectives:

- Aggregate fiscal control- Strategic resource allocation- Operational efficiency- External transparency

ADB Grant No.0133-CAM/Component 1: PFMRD 4

- Aggregate Fiscal Control

• In many countries there is a substantial divergence between the formal budget and the implemented budget;• Some changes to budget during the year are normal – perhaps a mid-year review, contingency reserve;• Managers should have a defined level of resources – and be accountable for delivering a required level of works, goods and services.


• Budget preparation and execution issues are closely linked. e.g.

- Scope of the budget – extra-budgetary funds ?- Realism of both revenues and expenditures – can

the budget be implemented?- Budget preparation dialogue – do ministries

understand how much they have been allocated and for what purposes ?

- basis of accounting – does it follow the budget ?- how devolved or centralized is expenditure

control ?

- Aggregate Fiscal Control (continue)


• Different basis of budget measurement or point of control– obligations (commitments)– cash payments– costs (full accrual)

• A cash basis of budgeting does not of itself provide control over commitments - expenditure arrears may build up;

• Both commitment and cash controls information are needed;

- Aggregate Fiscal Control (continue)


- Strategic Resource Allocation

• Economic classification – corresponding to the national accounting and the Government’s chart of accounts;

• Administration classification – according to the activity line ministries (sector: social, economic administrations, security and defense);

• Program classification – appropriation allocation in each chapter by account/sub-account and by central/ provinces-municipals departments


- Operational Efficiency

• Importance of internal (self) controls – monitoring, inspections and internal audit;

• Importance of good fiscal reporting – regular budget execution reports and annual financial statements - timely reliable information based on international standards – which ones?


- External Transparency

• Getting value from external audit institutions - there needs to be something to audit, avoid a “gotcha” approach, add to the credibility of financial statements.

• Getting value from legislative review. To what extent can legislature amend the budget ? Legislatures may be part of the problem ? Is there much interest in past events?


2. Budget Law

1. Authorization Stage: Allotment process for money to be spent consistent with

legal appropriations

2. Commitment Stage: when a purchase order

is made or a contract is signed

3. Verification Stage: ensuring that

goods have been delivered as per

the contract

4. Payment Authorization Stage:Ordering person is different from the

authorizing person

5. Payment Stage: paying the actual bill

6. Accounting Stage:Transaction recorded in the

books as complete

1. The authorization stage • Once a budget is approved by the parliament, ministries are

authorized to spend money, consistent with the legal appropriations for each line item (see TOFE, RGC’s budget law 2010).

• Where parliament has not yet approved the budget before the budget year starts, it is normal to allow governments to start spending on a "Vote on Account" basis - a temporary authorization, often restricted to one-twelfth per month of the previous year's expenditure.

• In the francophone, Latin American, transition, and many Commonwealth countries, once approved, parliamentary authorization is for one year. In some Commonwealth countries, however, the authorization period may be set monthly or quarterly by warrant.

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Stages of budget execution


1. The authorization stage – ‘carryover’• In the majority of countries, unspent funds in one

year cannot be carried forward (carryover) to be spent in the next.

• In some OECD countries, however, unspent operating funds can be carried forward, usually up to a specified small percentage of the total funds (e.g., Australia, Canada, most Scandinavian countries, and the United Kingdom).

• In some countries, cash to pay for obligations incurred in one fiscal year but falling due in the next year can be carried over (e.g., Italy, Japan, New Zealand, and the United States).

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Stages of budget execution (continued)


1. The authorization stage – ‘carryover’• However, it is more common to allow the carry-

forward of some element of capital appropriations (or in some cases program expenditures), to allow for changes in the phasing of projects compared with the original budget plans, while still maintaining the same total cost.

• In some OECD countries the trend has been toward a greater use of such carryovers. However in developing countries, where the use of carryovers is generally discouraged in the interest of financial discipline.

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2. The commitment stage• This is the stage where a future obligation to pay is

incurred. • A commitment consists of placing an order,

awarding a contract, etc., for the services to be received.

• It entails an obligation to pay only if the third party has complied with the provisions of the contract.

• However the precise definition of “commitment”, in the budgetary sense, varies from one budget system to another, and depends on the economic category of the expenditure.

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3. The verification stage • This signifies that goods have been delivered fully or

partially according to the contract, or the service has been rendered and the bill has been received.

• Physical delivery can precede verification by some period of time. The line ministry or spending agency making the purchase usually has the financial and the administrative responsibility to check the bill; that is, to verify that the supply has been received in full compliance with any terms or conditions.

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3. The verification stage (continued)• The bill at this stage is recognized as a liability of the public

sector, and is therefore an important stage of the expenditure process.

• Even though it represents an accrued liability, it may not yet represent a cash liability, however--for example, when a grace period of 30 or 60 days was included under the terms of the purchase order.

• Information on verifications within the central government sector, however, is not usually available on a centralized basis.

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4. The payment authorization stage• This stage may have a different significance in different

systems:• Francophone system:

– The person who orders the supply (engagement) has to be different from the one who authorizes the payment (ordonnancement).

– The payment authorization officer is normally a public accountant who has specific responsibilities for authorizing the payment of verified bills.

– The spending unit verifies the bill and then requests payment from the payment authorization officer.

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4. The payment authorization stage (continued)• Commonwealth systems:

– The issue of payment orders is typically the responsibility of the financial officer with delegated responsibility for this function.

– Systems vary: the issue of payment orders and checks may be decentralized--with spending ministries carrying out these tasks and reporting back to the center -- or centralized in a treasury department, typically called the accountant general's department within the ministry of finance, which acts both as paymaster and prepares the final accounts of the government.

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4. The payment authorization stage (continued)• Transition economies:

– The situation also varies, but most countries now have treasuries that are increasingly responsible for the issue of payment orders.

– Some so-called "power" ministries, like defence and internal security, often retain separate systems.

– Where there are different tiers of spending units (first, second, third, etc.), some ministries of finance regard expenditure as having taken place when money is transferred from ministry of finance bank accounts to the first-tier units.

– But, in unreformed systems, that money may take some time to be further transferred to subsidiary units and then constitute "final" expenditure on goods and services. 19



5. The payment stage • At this stage, the bill is paid--by cash, check, or

electronic transfer. • In some systems, the payment is made through a single

ministry of finance account in the central bank or in a designated bank.

• In others, the payment is undertaken through the commercial banking system via bank accounts held in the names of individual line ministries. (This latter approach can make it more difficult for the ministry of finance to reconcile its accounts with those of the banking sector.)

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6. The accounting stage• Most countries still use cash based accounting, and

record the cash receipts and payments in their books. • Some countries have moved toward accrual based

accounting.• The accounts may be held centrally, as under the

French and Latin American systems and those Commonwealth countries with accountant general's offices. In unreformed transition countries, the accounts are held by line ministries at one or more commercial banks. These accounts will be audited at a later stage.

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3. Budget Execution System

Budget system should assure effective expenditure control. A good system should have:• A complete budgetary accounting system – tracking at

each stage of expenditure cycle (commitment, verification, payment) and movements between budget items (apportionment, supplementary estimates);

• Effective controls – at each stage of expenditure cycle, whatever their form and administration;

• A system for managing multi-year contracts and forward commitments;


3. Budget Execution System (continued)

Budget system should assure effective expenditure control. A good system should have:• A personnel management system – should include

staff ceiling in countries undertaking civil service reform;

• Adequate and transparent procedures – competitive procurement systems and contracting.


4. Over/or Under Spending

1. Overspending is sometimes caused by over-commitments by budget managers, who do not comply with the spending limits defined in the budget.

• Since cash allocated to spending units for appropriated expenditures is generally controlled centrally, these over-commitments turn into arrears (i.e. unpaid debts).


4. Over/or Under Spending (continued)

2. Overspending is often the result of off-budget spending (e.g. payments from “special accounts”).

• In some countries, the expenditure process can be so cumbersome that “exceptional procedures” have been created to bypass them.

• Payments made through these exceptional procedures are not controlled against the appropriations and are therefore an important cause of overspending.


3. Overspending • Lack of compliance can be addressed by:

– strengthening the internal and external audit systems;

– strengthening the budgetary control reporting system; and

– ensuring the effectiveness of basic budget execution controls.

• Exceptional procedures should be avoided.



4. Overspending can be caused by deficiencies in budget preparation, such as:– forgetting about the need for continuing

commitments for investment and entitlements, or

– badly estimating the impact of inflation on wages or other ongoing costs.



5. Overspending can be caused by particular interests and political pressures, for example:

• The executive or Parliament may pass decrees and laws that have a financial impact on the budget even if they do not concern the budget directly. The Ministry of Finance must review any regulation or draft decision that can have a fiscal impact.



6. Underspending can arise from a number of reasons, for example underspending of the official budget may coexist with off-budget spending.

• In a majority of cases, underspending is related to insufficiencies in budget preparation and program preparation. – An overestimated budget and unrealistic projections

of revenues lead to remaking the budget during budget execution.



7. Concerning the development budget, underspending is often related to insufficiencies in project/program preparation. – Optimistic financial planning that does not take into

account the time needed for procurement or for the mobilization of external funds is frequent.

– Development expenditures are difficult to plan accurately, but flexibility to reallocate funds from projects that are delayed to projects that are proceeding well could allow satisfactory implementation of the overall expenditure program.



7. Concerning the development budget, underspending is often related to insufficiencies in project/program preparation (continued).

– Programming investment needs to consider the availability of domestic resources.

– Including projects in a development budget only on the basis of the availability of donor funds leads to an underspent development budget.

– Moreover, in some countries, cash-flow budgeting is a means for the Ministry of Finance to take control over a development budget that it has not prepared.



5. Expenditure Cycle

Appropriation(Voted by Parliament)

Appropriation and Allotment

(Commitment basis)

Commitment(Contract awarded)

Verification of deliveries

Payment

SUPPLIER

Order

Delivery


Expenditure consist following phase:• Allocation of appropriations/release of funds to

spending units - Funds may be released through notification of cash limits, issue of warrant, funds transfers to imprest accounts, etc. In some countries, the release of funds includes two steps: (i) apportionment by the central budget office, which

consists of defining which part of the appropriation the line ministries and spending decision units can use; and

(ii) allotment by the line ministries and main spending decision units, which consists of allocating apportioned appropriations to subordinate spending units

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5. Expenditure Cycle (continued)


• Commitment - is the stage where a future obligation to pay is incurred, a commitment consists of placing an order, awarding a contract, etc., for the services to be received. It entails an obligation to pay only if the third party has complied with the provisions of the contract (commitment depends on the economic category of the expenditure).

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• Acquisition/Verification (or certification) - goods are delivered and/or services are rendered and their conformity with the contract or order is verified. Expenditure at the verification stage entails a liability, and arrears are the difference between expenditures at the verification stage and payments

• Payment - payments can be made through various instruments: checks, cash disbursed, electronic transfers, debt instruments, barter agreements, deduction from taxes, cash vouchers, etc.

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a. Budget implementation managementFor managing budget execution the following reports are needed:• Daily flash reports on cash flows - Reports should distinguish inflows and

outflows, but it is better for cash flow forecasting to have a breakdown of expenditure and revenue by broad economic categories (at least weekly).

• Monthly reports on budget execution based on the budget classification system - Reports must specify:- Initial appropriation;- Revision appropriation (if any);- Amount apportioned;- Commitments, expenditures at the verification stage, payments, or (at least)

arrears and payment;

b. Appropriation Account• In a majority of countries, an annual appropriation report (or budget

enforcement report) is generally submitted to the audit office and the legislature - This report is essential, but is insufficient to provide information on fiscal sustainability and performance and should be only one element of the reporting system.

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6. Reporting


• In many developing countries, the production and the publication of the annual report takes at least a year, making it useless for external users. Moreover, taking into account time needed to audit these accounts, preliminary information on budget execution must be available and published no later than two months after the end of the budget period.

• The reporting system must be designed to fit the needs of the different report users (the public, budget managers, policy decision makers, etc.). Minimum reporting requirements include:

- Budget management reports showing all movements in appropriations and line items (allotments, supplementary estimates, virements, etc.);

- Accountability reports to the legislature,- Financial reports: consolidated accounts of the general government, statement

of arrears, report on debt and contingent liabilities, and report on lending;- Reports assessing budget policy, and- Departmental reports.

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6. Reporting (continued)


In Cambodia (please see MEF/Annual Prakas on Guideline for Closing Account and Consolidate Report of the Annual Budget Performance; e.g. Prakas No. 944 MEF dated 28-October-2009 on Guideline for Closing Account and Consolidate Report of the 2009 Budget Performance).

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6. Reporting (continued)


Thank You for Coming Day 1

adb grant 0133-cam: public financial management in rural development ministries (component 1)

Documents

implemented budget

formal budget

budget law1

budget preparation dialogue

rgcs budget law

expenditure control

execution issues

basis of accounting