1. International Monetary Fund Fiscal Affairs Department
Local Government Cash Management – International Experience and Options International Seminar on Local Government Treasury Cash Management - December 10-11, 2009
International Monetary Fund
Fiscal Affairs Department
Holger van Eden
Deputy Division Chief
Public Financial Management Division II
Fiscal Affairs Department
Sanya, Hainan Province,
People’s Republic of China

2. Overview What is Government Cash Management?
The Treasury Single Account: a key component
How have countries developed Cash Management?
How can central and local governments coordinate development of cash management?
What model does international experience suggest for China?
Factors to consider
Questions and Discussion

3. 1. What is Government Cash Management
Formal Definition: Government Cash Management is:
“the strategy and associated processes for managing cost-effectively the government’s short-term cash flows and cash balances, both within government, and between government and other sectors” [1]
Informal Definition: cash management is the neglected “little brother” of debt management >>> often seen as less urgent, significant costs to implement well, benefits broader than just lower cost
[1]Government Cash Management, Good –and bad – practice, Mike Williams, 2004

4. Why is Cash Management important?
Without it:
Budget execution can be disrupted by lack of funds
Excess liquidity - idle balances – can accumulate at non-treasury units and spent inappropriately
Payments can be delayed, revenues held up, benefitting mainly the banking sector
Cash shortages can exist while overall government has a cash surplus, requiring unnecessary borrowing >>>inefficient use of cash resources
Cost of cash accumulation can be substantial>>> it is financed implicitly by government debt, and/or the remuneration is very low (opportunity costs)
Short-term borrowing and investment of cash can be very risky (interest rate risk, roll-over risk, investment risk, credit risk, non-availability risk)

5. Two objectives of cash management
Ensure availability of cash resources at all times for efficient and unconstrained) implementation of the annual budget
Use available cash with the least cost and risks
>>> Developing countries usually initially focus on the first objective; first task of government is to provide public goods and services to citizens

6. Main elements of Modern Government Cash Management
A Treasury Single Account (TSA) for pooling liquidity, held preferably at the central bank
A government direct payments system, centralized through a Treasury-managed TSA, or decentralized payment by ministries and agencies through zero-balanced bank accounts connected to the TSA
Immediate transfer of all government revenues to TSA, including of so-called “own-revenues” of line ministries and agencies
Policies for better matching expenditure and revenue flows, including timing of higher-level government grants
A cash flow forecasting system
Targeting of a remunerated TSA balance (usually slightly positive)
Use of appropriate short-term financial instruments, both at the liability and at the asset side

7. Why is Cash Management difficult? (1)
A comprehensive payment and related accounting system needs to be developed (either fully centralized in MOF, or decentralized with zero-balancing of commercial accounts overnight to TSA)
Setting up a comprehensive TSA can be politically difficult and technically a lot of work; is seen to infringe on line ministry, agency, or local government independence
>>> message: control over cash is not the same as control over the budget
Commercial banks need the capacity to provide electronic payments services, and perform sweeping with central bank
Cash forecasting is inherently difficult (economic uncertainties, lots of information needs, an IFMIS is required)

8. Why is Cash Management difficult? (2)
Financial markets need certain level of development to offer required financial instruments
Central bank may resist remuneration of cash balances and/or government using commercial banks or financial markets
Capacity (systems and staffing) constraints in government
Coordination needs (with debt management, Central Bank, other parts of government)
Central bank and commercial banks may resist structural decrease of cash holdings

9. 2. TSA central element of government cash management
Definition: “ a unified, hierarchical structure of government bank accounts that provides a consolidated framework for government cash management” Three essential elements: 1. Allows full fungibilty of government cash resources (at a the level of government the TSA deals with); 2. No bank accounts outside supervision and (ultimate) control of Treasury; 3. Comprehensive consolidation of cash resources (both budgetary and extra-budgetary)

10. Characteristics of TSA
TSA balance almost always held at central bank (no credit risk, usually cost-effective, CB acts as bank clearing house)
Payment transactions often channeled through banking system, not central bank (depends on development of banking system)
Bank accounts of ministries are usually transformed into ledger accounts, that is accounting identities; cash balance is transformed into drawing rights on TSA, up to budget allocation
TSA arrangements generally ensure that revenue and disbursement floats are minimized >>> direct payments, electronic transfers, sweeping

11. Objectives of a TSA Aggregate control over government cash resources
>>> pre-condition for active cash management
>>> does not detract from budget authority of ministries and agencies
Maximizes use of cash resources; minimizes idle balances
Minimizes borrowing costs
Minimizes transaction costs, i.e. the float, and allows central negotiation of banking services
Provides control and monitoring of payments and revenues of government agencies
Facilitates reconciliation between banking and accounting data
>>> provides essential information for cash forecasting

12. Who to include in TSA? Ministries, agencies, all budget units
Extra-budgetary funds such as social insurance funds , health funds, road funds, etc.
Donor funds, debt financing
Local government ??? In some cases....
Not: public enterprises, civil service pension funds that invest, other investment vehicles
If not included: set up own TSA to enable cash management

13. Two types of TSA
Centralized: all payments executed by Treasury through TSA held at central bank
Decentralized: most payments executed through ministries and agencies through commercial bank accounts (and possibly, central bank bank accounts) which are swept overnight in main TSA account
>>> centralized model includes centralized accounting,
>>> decentralized model requires adequate commercial banking infrastructure, and linkage of central and ministry accounting systems
>>> various decentralized models

14. TSA rarely one account !
Main TSA account at central bank operated by Treasury
TSA sub-accounts or ledger accounts for all ministries and agencies (cash is usually not actually held in these accounts)
Zero-balanced transaction accounts at commercial banks held by ministries/agencies
Imprest accounts for petty cash, held by ministries/agencies
Transit accounts held for bookkeeping purposes, either at CB or commercial banks
To monitor revenue flows
To facilitate revenue sharing among levels of government
>>> should be swept in main account daily

15. TSA and automated systems
TSA can be established with manual payment and accounting system, but an integrated financial management information system enhances efficiency greatly
A treasury ledger system is essential in keeping track of cash flows over the TSA
Automated systems allow daily reporting of expenditure and revenues transacted over the TSA
In both centralized and decentralized payments systems Treasury control is largely automated. Spending limits are set per agency and line item, per time period (month, quarter, or year)
Modern treasuries perform only limited transaction audits

16. 3. Phases in Cash Management Development (1)
Not necessarily exactly in this order:
Ad hoc cash rationing and/ or resort to central bank financing
Orderly cash rationing through budget and cash allotments
Cash pooling through initial TSA development, limited sweeping
More efficient payment mechanisms and revenue collection (direct payment mechanism)
Basic cash monitoring and cash flow pattern analysis
Cash matching through adjustment of timing revenue intake, transfers and expenditure flows – measures that are not detrimental to budget execution
Remuneration of TSA balance

17. Phases in Cash Management Development (2)
Smoothing of major fluctuations in TSA balance; use of treasury bills and (collateralized) term deposits for rough tuning
Completion of TSA, comprehensive sweeping arrangements
Development of more sophisticated forecasting casting capacity, based on pattern analysis, IFMIS and notification system
Deepening of T-bill and term deposit market, development of repo market
Fine-tuning: targeting of TSA balance, at slightly positive level
Coordination with debt management
Improvements to departmental, and lower level of government cash management >>> incentives
Improved information exchange and coordination with central bank;
No government impact on money markets/monetary policy

18. Characteristics of Underdeveloped Cash management
Recurring cash shortages; cash determines budget execution, does not facilitate it
Multitude of departmental and MOF bank accounts, quite a few unused
Uncertainty over timing MOF transfers, both to the same and lower levels of government
Use of advances, instead of direct payments
Delays in payments and in receipt of revenues
Retention of own revenues at line ministries and agencies
Use of central bank for short-term financing and investment needs, at non-market rates
Impact of government cash flows on monetary conditions

19. 4. Cash Management and lower levels of government
International experience is quite divers
Lower levels of government have developed cash management usually after central government
Local government is constrained by more limited market access, and by more limited capacity, and by regulation
Some countries have chosen full integration with central government, some full autonomy for local government
Intermediate models are also possible, and most prevalent
In almost all countries local government borrowing and short-term borrowing is regulated

20. Full integration with central government
Used in France, and in many smaller transition and developing countries
Requires integration, or at least linkage of payment and accounting systems between levels of government
Implies integration of local government bank accounts in TSA, both at CB and commercial banks
Requires separation of authorization and control functions from payment mechanisms (centralized or decentralized) – France exception
Often makes use of decentralized treasury offices
Use of commercial banks for payments essential, unless very large central bank network

21. Benefits of full integration
Minimizes cash needs of general government
Provides control and transparency of government cash flows;
avoids misuse of funds
simplifies overall fiscal policy control
provides insight for higher levels of government on lower level budget execution
Addresses low systems and staff capacity concerns at lower levels of government
Utilizes capital market access at center
Coordination with central bank easier

22. Challenges of full integration
Extremely complex to develop and manage required payment and accounting system if country is large >>> example: requires in France 50k staff (on country of 50 million)
Consolidation of bank accounts may infringe on fiscal autonomy, unless central government acts only as payment facilitator
Remuneration and interest payment issues for cash surpluses and shortages, respectively, need to be sorted out
Cash forecasting becomes even more complex
Provides little incentive for lower levels of government to use cash efficiently

23. Full autonomy
In many federal governments around the world: US, Germany, Brazil, Latin America, even smaller European countries, local government not included in central TSA
Full autonomy, however often limited by some regulation and oversight
Local governments need to :
develop own TSA, and payment and accounting systems
develop own cash forecasting cash forecasting capacity
own capital market access
>>> in summary: local governments need to develop cash management capacities mirroring those of central government

24. Benefits and challenges of full autonomy
Enables gradual development of cash management through the layers of government
No need for full systems integration/linkage
Does not infringe on local autonomy
Challenges
More difficult for lower levels of government to set up TSAs, and payment and accounting systems due to weaker financial management capacity
Does not provide information and control for central government over lower levels
Money market access of lower levels of government may be very limited >>>will lead to higher cash balances for general government

25. Intermediate models for decentralized cash management
Various dimensions:
Central government facilitates TSA and IFMIS development >>> sets norms, provides support
Central government provides/intermediates short-term borrowing and lending >>> Eurozone members, quite a few developing countries
Partial integration: some layers of general government are integrated, but perhaps not central government and 2nd-tier
Central government sets regulatory framework: limits short-term borrowing, defines norms for short-term investment, requires reporting
>>> a number of intermediate models possible

26. Benefits and challenges of Intermediate models
Local government can reap synergies from central government systems experience
Less complex, more gradual development path
Control and oversight is improved
Local government can utilize central government market access
Challenges
There are differences in capacity and needs between local governments at same level and different levels >>> makes it complex for central government to support development and provide regulation
Oversight and control remains problematic

27. 6. An intermediate model for China? (1)
Assumed starting position:
TSAs already set up at provincial and larger city levels (levels 2 and 3), but coverage not complete
Financial management capacity declines at lower levels of government, uneven distribution
Payment and accounting systems in development, but not standardized over layers of government;
In-year reporting of expenditures and revenues between layers of government limited
Local government cash holdings very large, but distribution uneven
No direct access to capital market for local government

28. An intermediate model for China? (2)
Possible model, for discussion:
TSA, payment and accounting systems to be standardized at respective levels of government >>> regulation
Higher levels of government to retain independent TSAs; lowest levels of government to be integrated in provincial or larger city level
Central government to facilitate inter-provincial cash exchanges and capital market access for rough-tuning
On voluntary basis only
Remuneration/interest payments at market rates
At risk of provincial governments
Center sets ranges for minimum and maximum cash balances
Approach can be cascaded downward
Gradual development in coordination with PBC
Relaxation of capital market access in medium-term for provinces, larger cities >>> regulated autonomy in future

29. An intermediate model for China? (3)
Limitations:
Solution would not work for fine-tuning
Cash down- and up-flows could not be avoided due to lack of oversight on lower level budget execution
Further development of TSAs at local government levels is first priority, including sweeping capacity
May be to restrictive for advanced provinces and larger cities

30. Benefits of intermediate option for China
Builds on present developments and provides reasonable autonomy for stronger levels for local government;
Less complex, requires much less central coordination and management than full integration
Can be gradually cascaded downward
Keeps full control on formal borrowing and investments of local government

31. Disadvantages of intermediate option for China
Will not reduce cash balances as much as centralized option
Will not provide center as much oversight and control as centralized option
More advanced provinces, cities may want to opt out, and gain market access earlier
Still requires substantial capacity building effort by central and provincial MOF/finance departments, including new regulation

32. 8. Factors to consider in model choice
Development level of existing TSAs and payment and accounting systems at various levels of government
Scope for integration/linkage of automated systems between levels of government
Capacities of systems and staff at various levels
Available technologies of central bank and banking sector, and geographical coverage of branch network
Capital market development/access of smaller players
Level of fiscal transparency and accountability at lower levels of government

33. Questions & Discussion
1. What are the most urgent reforms/improvements necessary for local government cash management?
2. Would an intermediate model (independent TSA for provinces, capital market access via center, standards and norms through regulation and support) be appropriate for China?
3. Is there need for a Local Government Finance Law?

34. Thank You - 谢谢 !