The World Bank

Public Financial Management:Good Practices

Bill Dorotinsky

Halong Bay, Vietnam

October 9, 2003

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OutlineI. Framework

a. Expenditure Management Cycle 3b. Three Objectives 4c. Five Principles 5

II. Good Practices 6a. Basic Institutions 7b. Core processes 8

III. Budget Execution – Objectives 9a. Core treasury functions 10b. Contingent liabilities 11c. Expenditure Control Approaches 12

1. Central versus Delegated Control 132. General Tensions 14

d. Managing Well 15e. FMIS 16f. Essential of Good Financial Management 20

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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

Expen

ditur

e

contr

ol

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 Cycle

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Three Objectives of Public Expenditure Management Systems

• Macrofiscal discipline and stability– Avoid public finance crises– Support economic growth and stability

• Strategic allocation of resources– Match government policy with programs,

objectives

• Technical efficiency– Getting the most from spending

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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 are Good Practices?

• Attaining and Maintaining Good Basic Institutions – Basic public finance institutions must work

well for good policy and program outcomes – Too often countries reach for advanced OECD

reforms, neglecting basic institutions

• Dedication to continuous system examination, learning and improvement– institutional development is long term

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LawsPractices

Organizations

What are the basic institutions?

Accounting and Record Keeping

Info. System

Control Environment

Report

ing

Treasury Budget

Cash

Mgmnt

Debt

Mgmnt

Internal Audit

Multi-year

Plan

ComprEhensIve

External Audit

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Core Processes

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

And Service Delivery is also MoF’s Responsibility

- asset management- procurement, contracting- payroll/personnel mngmnt

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Objectives of budget execution

• Manage Spending and Revenues to budget– support choices of elected officials– allow budget to be planning and steering tool– promote macrofiscal discipline– Reduce opportunities for corruption

• Enable program implementation (service delivery)– Assure resources flow to programs– allow budget to be aid to operational efficiency through

spending unit advance planning, efficient administration– enable program managers to achieve objective

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Core Treasury Functions

• Cash management (flow and stock)• Financial asset management• Debt management, servicing;

– Guarantee and contingent liability management

• Accounting (policy, chart of accounts, general ledger) and reporting

• Revenue collection, forecasting• Account management (payment, collection,

reconciliation)• Central Bank relations

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Contingent liabilities

• Government acts as a guarantor of debt repayment in the event that the borrower cannot make repayment, or of payment under certain conditions– Loan, pension benefit, bank deposit, agricultural price

• Contingent debt must be managed with the same detail as direct debt.

• As with direct debt these contingent debts must be inventoried and monitored in a central location

• Active identification, monitoring, management of risk important

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Expenditure Control Approaches

Ex Ante (to commitment)

Ex Poste

External (to spending unit)

Centralized commitment control (transaction approval)

Allocations (commitment limits) Warrants (cash limits) Procurement rules Personnel/pay rules

Central internal audit, external audit

Regular reporting Quarterly close-outs

Internal Ministry or spending unit transaction approval

Procedures to minimize risk (internal controls)

Ministry internal audit Performance

Management

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Central control versus Managerial Flexibility

• Tensions between needs of center to– Control cash flow– Control policy

• And agency need to manage programs– Larger, less detailed allocations– Longer time horizon– Greater transfer authority/flexible application

of resources

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General Tensions

Central control

Delegation

Efficiency, economy + -

Agent “accountability” for results + -

Agent Incentive for off-budget activity

+

-

Fin

anci

al

Man

agem

ent

auth

orit

y

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To manage well requires:

• Monitoring/managing– Cash balances– Cash flow

• Inflow• outflow

– Commitments– Arrears– Contingent liabilities– New legislation/mandates– Off-budget activity– Understanding future impact of current decisions

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What is an FMIS?• Financial management system:

– Information system that tracks financial events and summarizes information

– supports adequate management reporting, policy decisions, fiduciary responsibilities, and preparation of auditable financial statements

– Should be designed with good relationships between software, hardware, personnel, procedures, controls and data

• Generally, FMIS refers to automating financial operations

Definitions

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What are core and non-core FMIS systems?

• Core systems– General ledger, accounts payable and

receivable. May include financial reporting, fund management and cost management.

• Non-core systems– HR/payroll, budget formulation, revenue (tax &

customs), procurement, inventory, property management, performance, management information

Definitions

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What is “integrated” FMIS?

• Can refer to core and non-core integration• But, generally, four characteristics*

– Standard data classification for recording events

– Common processes for similar transactions– Internal controls over data entry, transaction

processing, and reporting applied consistently– Design that eliminates unnecessary duplication

of transaction entry

Definitions

*from Core Financial System Requirement. JFMIP-SR-02-01. Joint Financial Management Improvement Program. Washington, D.C., November 2001.

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What constitutes a good FMIS system?

• Ability to*– Collect accurate, timely, complete, reliable, consistent

information– Provide adequate management reporting– Support government-wide and agency policy decisions– Support budget preparation and execution– Facilitate financial statement preparation– Provide information for central agency budgeting,

analysis and government-wide reporting– Provide complete audit trail to facilitate audits

*from Core Financial System Requirement. JFMIP-SR-02-01. Joint Financial Management Improvement Program. Washington, D.C., November 2001.

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Essentials of Good Financial Execution

• Timely, accurate in-year reporting– Internal controls, audit

– External audit

• Sufficient detail to identify sources of overspending

• Sufficiently regular reporting to allow timely management intervention

• Comprehensive system• Accountability framework, control environment

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Criteria for Assessing Budget Execution SystemElement Budget Execution Features

Aggregate Fiscal Discipline

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. Allocative Efficiency

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. Technical efficiency

Budget execution (commitment and cash controls) limits critical expenditures, but supports flexible resource use at program level (e.g. across non-personnel 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.

Source: Draft Federal Republic of Yugoslavia PEIR, May 2002