public expenditure and financial management overview of issues and approaches
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Public Expenditure and Public Expenditure and Financial ManagementFinancial ManagementOverview of Issues and Overview of Issues and
ApproachesApproaches
Bill Dorotinsky, Bill Dorotinsky, PREM public sector PREM public sector governance groupgovernance group PEAM Course
May 2, 2006
22
OutlineOutline Framework for ReviewFramework for Review Approaches to PEM reviewApproaches to PEM review
Budget CycleBudget Cycle FormulationFormulation ExecutionExecution
PFM SystemPFM System PFM FunctionsPFM Functions Outcomes/ImpactOutcomes/Impact
Common ProblemsCommon Problems Common SolutionsCommon Solutions Measuring PFM SystemsMeasuring PFM Systems
33
Three Objectives of Public Three Objectives of Public Expenditure Management SystemsExpenditure Management Systems Macrofiscal discipline and stabilityMacrofiscal discipline and stability
Support economic growth and stability (and reduce Support economic growth and stability (and reduce poverty)poverty)
Avoid public finance crisesAvoid public finance crises Strategic allocation of resourcesStrategic allocation of resources
Match government policy with programs, objectivesMatch government policy with programs, objectives And assure social safety nets, and promote growthAnd assure social safety nets, and promote growth
Technical efficiencyTechnical efficiency Getting the most from each zloty spentGetting the most from each zloty spent
And just delivering core servicesAnd just delivering core services
Framework
44
Basic principles of PEMBasic principles of PEM ComprehensivenessComprehensiveness
include all revenue and expenditure, all agenciesinclude all revenue and expenditure, all agencies AccuracyAccuracy
record actual transactions and flowsrecord actual transactions and flows AnnualityAnnuality
cover a defined period of time (e.g. one year budget, cover a defined period of time (e.g. one year budget, multi-year forecasts)multi-year forecasts)
AuthoritativenessAuthoritativeness only spend as authorized by lawonly spend as authorized by law
TransparencyTransparency information on spending is public, timely, understandableinformation on spending is public, timely, understandable
Framework
55
What institutions to What institutions to review?review?
Formal and Informal RulesFormal and Informal Rules Laws and regulationsLaws and regulations
Constitutions , fiscal, budget, procurement, civil Constitutions , fiscal, budget, procurement, civil service, special funds, sector laws, public service, special funds, sector laws, public enterprises, mandatory spendingenterprises, mandatory spending
ProcessProcess PolicyPolicy PlanningPlanning Financial/resource managementFinancial/resource management
Organizations and their rolesOrganizations and their roles InformationInformation
66
Approaches to PEM ReviewApproaches to PEM Review Cycle, ProcessCycle, Process SystemSystem
broad scopebroad scope organizationsorganizations
Functions/tasksFunctions/tasks Outcomes/ImpactOutcomes/Impact
77
Planningsystem
Medium termplans, e.g. three
year rolling plans
Annual budgetsDevelopment,recurrent and
revenue
Fund releaseprocedure, e.g...
warranting
Accounting forrevenue andexpenditure
Public expenditurereview Institutions
Reports andfinancial statements
Audit system
Project monitoring
Projectappraisal
Resourceallocation
Liquidity
managem
ent
Expend
iture
contro
l
Monitoring
& controlling
Post eventreview
Accountability
Expenditurereview
Financial management system boundaries
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.
Expenditure Management CycleExpenditure Management Cycle
88
Budget FormulationBudget Formulation Issues are typically aboutIssues are typically about
ProcessProcess Quality of EngagementQuality of Engagement
99
Process IssuesProcess Issues ““Due process”Due process”
Fair hearing for proposals, requests within governmentFair hearing for proposals, requests within government CoherenceCoherence
Budget process is planning processBudget process is planning process Planning within resource constraintsPlanning within resource constraints
Indicative ceilings for budget offered early in the processIndicative ceilings for budget offered early in the process ‘‘hard budget constraint’hard budget constraint’
Changing incentivesChanging incentives ComprehensivenessComprehensiveness
Capital, all revenues and expensesCapital, all revenues and expenses Civil society participationCivil society participation
‘‘decentralized’ impact analysisdecentralized’ impact analysis Legislative stageLegislative stage In executive via white papersIn executive via white papers
1010
Process (continued)Process (continued) Proper decision sequence for coherent Proper decision sequence for coherent
processprocess Macrofiscal, revenues, expendituresMacrofiscal, revenues, expenditures SectoralSectoral Administrative/program/projectAdministrative/program/project
Accountability: Link resources with management responsibilityAccountability: Link resources with management responsibility ScheduleSchedule
Budget calendar issuedBudget calendar issued Sufficient time for sound proposalsSufficient time for sound proposals
MinistriesMinistries Budget office analysisBudget office analysis Legislative reviewLegislative review
Two stage processTwo stage process
1111
Quality IssuesQuality Issues (improving process outcome)(improving process outcome)
Multi-year perspectiveMulti-year perspective Setting multi-year policy objectivesSetting multi-year policy objectives Conservative economic, revenue forecastConservative economic, revenue forecast
Likely versus ‘hoped for’Likely versus ‘hoped for’ Benchmarked against non-governmental forecastsBenchmarked against non-governmental forecasts
Realistic expenditure forecastRealistic expenditure forecast Provision for recurring ‘unanticipated’ eventsProvision for recurring ‘unanticipated’ events
Contingency reserves – with clear rules for useContingency reserves – with clear rules for use Indicative ceilings linked to second-year of prior budget forecast Indicative ceilings linked to second-year of prior budget forecast
(policy)(policy) Requests reconciled to prior year actuals, current year estimatesRequests reconciled to prior year actuals, current year estimates
Two aggregate forecasts (advanced)Two aggregate forecasts (advanced) Proposed policyProposed policy Current services/policyCurrent services/policy
Capital and recurrentCapital and recurrent
1212
Quality (continued)Quality (continued) Budget ownershipBudget ownership
Early, frequent engagement of policy officials on Early, frequent engagement of policy officials on structured decisionsstructured decisions
Fiscal policy paper to kick-off processFiscal policy paper to kick-off process Distinguish policy from recurrent revenueDistinguish policy from recurrent revenue
Proposed revenue sources versus historical trendsProposed revenue sources versus historical trends No spending allowed against proposed unless they materialize No spending allowed against proposed unless they materialize
(grants, tax revenue)(grants, tax revenue) CommunicationCommunication
Clear signals of direction, markets and agenciesClear signals of direction, markets and agencies Prepare public for change – sustainable adjustmentPrepare public for change – sustainable adjustment
1313
Quality (continued)Quality (continued)
Budget InformationBudget Information Prior year actual, current year estimate, budget year Prior year actual, current year estimate, budget year
+2, Staffing, Outputs+2, Staffing, Outputs Classification: economic, administrative, functional, Classification: economic, administrative, functional,
programprogram Requests distinguish between on-going, new spending; Requests distinguish between on-going, new spending;
mandatory, discretionarymandatory, discretionary Decision papersDecision papers
Basis for Minister of Finance, Gov’t decisionBasis for Minister of Finance, Gov’t decision Pulls together academic, audit, performance, Pulls together academic, audit, performance,
evaluation of prior years financial performance, other evaluation of prior years financial performance, other informationinformation
1414
Why is budget execution Why is budget execution important?important?
0.0
50.0
100.0
150.0
200.0
250.0
300.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Credibility of the Honduran Budget – In-year Deviations by Agency (percent of the executed over the approved budget)
1515
What is budget execution?What is budget execution? Processes and institutions to Processes and institutions to
implement the budgetimplement the budget Incentives – principle-agent problemIncentives – principle-agent problem Reflects that budget is NOT only an Reflects that budget is NOT only an
accounting documentaccounting document also a political documentalso a political document Planning/steering devicePlanning/steering device
1616
Objectives of budget Objectives of budget executionexecution Manage Spending and Revenues to budgetManage Spending and Revenues to budget
support choices of elected officialssupport choices of elected officials allow budget to be planning and steering toolallow budget to be planning and steering tool promote macrofiscal disciplinepromote macrofiscal discipline Reduce opportunities for corruptionReduce opportunities for corruption
Enable program implementationEnable program implementation Assure resources flow to programsAssure resources flow to programs allow budget to be aid to operational efficiency through allow budget to be aid to operational efficiency through
spending unit advance planning, efficient administrationspending unit advance planning, efficient administration enable program managers to achieve objectiveenable program managers to achieve objective
1717
General Phases of ExecutionGeneral Phases of Execution Phase 1: AllocationPhase 1: Allocation Phase 2: Ministry Spending PlansPhase 2: Ministry Spending Plans
link actions with finances; cash flow needslink actions with finances; cash flow needs Phase 3: CommitmentsPhase 3: Commitments Phase 4: VerificationPhase 4: Verification Phase 5: Liquidation of Financial Phase 5: Liquidation of Financial
Obligation Obligation
1818
Supplemen-tary budgets
Budgettransfers
(virements)
Purchaseorderissued
Invoicefrom
supplierPayment
Mediumterm
financialplan
Expenditurewarranted
Annualbudget
Time
Financial planning and budget systemFund control
systemCommitmentaccounting
Accrualaccounting Cash accounting
Phases of ExecutionPhases of Execution
Source: Integrated Financial Management. Michael Parry, International Management Consultants Limited. Training Workshop on Government Budgeting in Developing Countries. THE UNITED NATIONS. December 1997.
1919
Budget and Policy Execution System in Hungary Budget and Policy Execution System in Hungary (1999)(1999)
System
2020
Public Finance FunctionsPublic Finance FunctionsMacroeconomic
ForecastingBudget
FormulationBudget
Execution
TreasuryRevenue Administration
Debt Management
Financial Market
RegulationProcurementAdministration
Internal Audit
Financial Asset Management
Financial Investigations
Lottery & Gambling
Fiscal Policy
Core Functions
Non-core Functions
ProcurementPolicy
2121
- Macroforecasting- Fiscal Policy- Revenue administration- Debt Management
Core Tasks and Core Tasks and OrganizationsOrganizations
Ministry of Finance
Treasury
SpendingMinistry
Spending Unit
- 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
- 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
2222
Common PEM problemsCommon PEM problems Weak links between planning, policy, resource limits, and budgetsWeak links between planning, policy, resource limits, and budgets
failure to achieve strategic objectivesfailure to achieve strategic objectives abstract planning, unrelated to ways and meansabstract planning, unrelated to ways and means
Annual focus leads to suboptimal choicesAnnual focus leads to suboptimal choices Digging a hole; inability to climb outDigging a hole; inability to climb out Complacency today, unaware of crisis tomorrowComplacency today, unaware of crisis tomorrow
Separation between capital and recurrent budgetsSeparation between capital and recurrent budgets Lower than expected returns to capitalLower than expected returns to capital
Non-comprehensive budgetNon-comprehensive budget Using other means to support favored programsUsing other means to support favored programs Revenues not captured in budgetRevenues not captured in budget
Taking piecemeal decisions without reference to over-all effectTaking piecemeal decisions without reference to over-all effect Funds don’t reach intended beneficiariesFunds don’t reach intended beneficiaries
Budget executed differently than approvedBudget executed differently than approved Goods and services not delivered as plannedGoods and services not delivered as planned
2323
Common ReformsCommon Reforms MTEFMTEF TreasuryTreasury
IFMISIFMIS Performance BudgetingPerformance Budgeting ‘‘Fragmentation’Fragmentation’
Procurement, DebtProcurement, Debt New Public ManagementNew Public Management Deconcentration, decentralizationDeconcentration, decentralization Administrative & Civil ServiceAdministrative & Civil Service
2424
Measuring PFM SystemsMeasuring PFM Systems Field of PFM has evolved recently, moving Field of PFM has evolved recently, moving
towards more assessment standardizationtowards more assessment standardization New set of PFM indicators to monitor New set of PFM indicators to monitor
quality of PFM system at high-levelquality of PFM system at high-level See See www.pefa.orgwww.pefa.org
Recommended with approach to working Recommended with approach to working with countrieswith countries Country-led reform agendaCountry-led reform agenda Donor coordination around agendaDonor coordination around agenda Shared information pool – common PEFA Shared information pool – common PEFA
frameworkframework
2525
PFM PEFA IndicatorsPFM PEFA Indicators
Budget Execution
Accounting and Reporting
Budget Formulation
External Audit and Oversight
1. Aggregate expenditure out-turn2. Composition of expenditure out-turn3. Aggregate revenue out-turn4. payment arrears 5. Classification of the budget
11. Orderliness in annual budget process
12. Multi-year perspective
13. Transparency of taxpayer obligations and liabilities
14. Effectiveness of taxpayer registration and assessment
15. Effectiveness of tax collection16. Predictability of funds for commitment17. Recording/management of cash, debt
and guarantees18. Effectiveness of payroll controls19. Competition, value for money and
controls in procurement20. Effectiveness of internal controls21. Effectiveness of internal audit
22. Accounts reconciliation23. Resources received by
service delivery units24. Quality and timeliness of
in-year budget reports25. Quality and timeliness of
annual financial statements
26. External audit27. Legislative scrutiny
of budget28. Legislative scrutiny
of external audit reports
6. Comprehensiveness of information7. unreported government operations8. Transparency of inter-governmental fiscal relations9. Oversight of aggregate fiscal risk10. Public access to key fiscal information
Cross-cutting Indicators
2626
General ReferencesGeneral References SIGMA Policy Brief No. 1: Anatomy of the Expenditure Budget (1997) SIGMA Policy Brief No. 1: Anatomy of the Expenditure Budget (1997)
OECDOECD Managing Government ExpenditureManaging Government Expenditure. Schiavo-Compo and Tommasi. Asian . Schiavo-Compo and Tommasi. Asian
Development Bank. 1999Development Bank. 1999 Government Budgeting and Expenditure Controls, Theory and PracticeGovernment Budgeting and Expenditure Controls, Theory and Practice. .
Premchand. IMF. 1993Premchand. IMF. 1993 Public Expenditure ManagementPublic Expenditure Management. IMF. 1993. . IMF. 1993. Treasury Reference Model (Bank PE website)Treasury Reference Model (Bank PE website) A Contemporary Approach to Public Expenditure ManagementA Contemporary Approach to Public Expenditure Management. Schick, . Schick,
Allen. World Bank Institute. 1999. Allen. World Bank Institute. 1999. Public Expenditure HandbookPublic Expenditure Handbook. World Bank, 1998.. World Bank, 1998. Managing Public Expenditure: A Reference Book for Transition CountriesManaging Public Expenditure: A Reference Book for Transition Countries. .
Richard Allen and Daniel Tommasi, Eds. OECD. Paris, 2001.Richard Allen and Daniel Tommasi, Eds. OECD. Paris, 2001. Public Financial Management Performance Measurement FrameworkPublic Financial Management Performance Measurement Framework. .
PEFA. Washington, D.C. June 2005.PEFA. Washington, D.C. June 2005.
See See www.pefa.orgwww.pefa.org for PEFA Performance Measurement Framework for PEFA Performance Measurement Framework
2727
Application: Rules and Application: Rules and IncentivesIncentives
Budget ImpasseBudget Impasse Executive-legislative relationsExecutive-legislative relations
What rules might govern a budget What rules might govern a budget impasse?impasse?
How might they effect incentives How might they effect incentives between the legislature and executive?between the legislature and executive?
What might be important What might be important considerations for designing a rule?considerations for designing a rule?
2828
Rules and OutcomesRules and Outcomes
Table 2: Provisions for spending in the event no budget is enacted prior to the fiscal year, by system of government Non-OECD OECD Presidential
(8) Parliamentary
(5) Presidential
(3) Parliamentary
(23) Executive’s budget takes effect
38 % 20 % - 17 %
Previous year’s budget takes effect
50 % 80 % - 26 %
Legislature must vote other measures
- - 33 % 39 %
Executive falls, new elections held
- - - 4 %
Other (including no provisions)
12 % - 66 % 13 %
Source: World Bank – OECD budget procedures database at http://ocde/dyndns.org/
Application
2929
Informal RulesInformal RulesDominican Republic Budget Deviation, 1996-2000
Identifying sources of weakness for further investigation
Identifying incentives at work
0%
100%
200%
300%
400%
500%
600%
Congreso N
acional
Presiden
cia
Fuerzas
Armad
as
Relacio
nes E
xterio
res
Finanza
s
Deporte
s
Trabajo
Agricultu
ra
Industria
y Comerc
io
Turis
mo
Poder Ju
dicial
Junta
Centra
l Elec
toral
Source: Dominican Republic PER 2003, background data
Application
3030
Dominican RepublicDominican Republic
1979-86 1987-96 1997-2000Partido del Presidente PRD PRSC PLDPresidencia de la República 2.09 7.35 2.53 Interior y Policía 1.06 1.00 1.06 Fuerzas Armadas 1.06 0.86 0.97 Finanzas 1.94 0.54 1.06 Secretaría de Estado de Educación y Cultura 0.96 0.86 0.95 Salud Pública 0.87 0.68 0.78 Agricultura 0.82 0.35 0.76 Obras Públicas 0.98 0.44 0.88 Otros 1.19 1.13 1.08
Budget Deviation (ratio of executed to approved budget)
Identifying trends for transparency
Source: Dominican Republic PER 2003, background data
Application
3131
100 clinics,but only 70 operating
10 built with donor funds, donor funds off-budget
Budget not comprehensive
10 built with domestic funds, capital budget
separate
Budget fragmented
10 funded in budget, but no cash allocated
to operate
Cash triage
Donor ring-fencing for “accountability”
Line ministry gets flexible resource pool
Local staff seek higher PIU pay
Above-the-waterline observation
WHY?
Weak budget law Too rigid budget execution Low public pay
WHY?
WHY?
And what can be done about it?
ExploringExploringproblemsproblems
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