The World Bank Public Financial Management: Good Practices Bill Dorotinsky Halong Bay, Vietnam October 9, 2003

The World Bank 2 Outline I.Framework a.Expenditure Management Cycle 3 b.Three Objectives 4 c.Five Principles 5 II.Good Practices 6 a.Basic Institutions 7 b.Core processes 8 III.Budget Execution – Objectives 9 a.Core treasury functions10 b.Contingent liabilities11 c.Expenditure Control Approaches12 1.Central versus Delegated Control13 2.General Tensions14 d.Managing Well15 e.FMIS16 f.Essential of Good Financial Management20

The World Bank 3 Planning system Medium term plans, e.g. three year rolling plans Annual budgets Development, recurrent and revenue Fund release procedure, e.g... warranting Accounting for revenue and expenditure Public expenditure review Institutions Reports and financial statements Audit system Project monitoring Project appraisal Resource allocation Liquidity management Expenditure control Monitoring & controlling Post event review Accountability Expenditure review 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 Expenditure Management Cycle

The World Bank 4 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

The World Bank 5 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

The World Bank 6 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

The World Bank 7 Laws Practices Organizations What are the basic institutions? Accounting and Record Keeping I n f o. S y s t e m Control Environment R e p o r t in g Treasury Budget C a s h M g m nt D e bt M g m nt Internal AuditInternal Audit M u l t i- y e a r Pl a n C o m pr E h e n s I v e External Audit

The World Bank 8 Core Processes - 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

The World Bank 9 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

The World Bank 10 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

The World Bank 11 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

The World Bank 12 Expenditure Control Approaches

The World Bank 13 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

The World Bank 14 General Tensions

The World Bank 15 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

The World Bank 16 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

The World Bank 17 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

The World Bank 18 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 Joint Financial Management Improvement Program. Washington, D.C., November 2001.

The World Bank 19 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 Joint Financial Management Improvement Program. Washington, D.C., November 2001.

The World Bank 20 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

The World Bank 21 Criteria for Assessing Budget Execution System