State Domestic Expenditure Arrears Management Guidelines Technical Workshop

State Domestic Expenditure Arrears Management Guidelines Technical Workshop World Bank and DMO October, 2019 1

1. Welcome, Introductions, SFTAS Overview, Workshop Objectives and Agenda 2

Workshop Participants Introductions World Bank and DMO Trainers State Delegation World Bank • WB Senior economist /SFTAS Task Team Leader: Yue Man Lee • WB economist: Mohammed Isa Shuaibu • Senior WB consultant Per Olof Jonsson • Senior WB consultant Ayodeji Ogunyemi • Team Assistant: Ifeoma Clementina Ikenye • State Accountant General’s Office • State Ministry of Finance • State Treasury Office • State Budget and Planning Office • State Debt Management Department • State Public Procurement Agency Debt Management Office (DMO) • Head of the Strategic Programmes Department Elizabeth Ekpenyong • Francis Anyanwu • Wuraola Oluwasile • Chima Edomobi • Ruth Shikmuut • Greg Anowuru • Abdulkadir Haruna • Halima M-Tukur • Amaka Ezeh • Ibrahim Najib • State SFTAS Focal Person for the Pfor. R Component • SFTAS Focal Person for the TA Component

The State Fiscal Transparency, Accountability and Sustainability Program for Results (SFTAS) • Objective: Strengthen state-level fiscal transparency, accountability and sustainability by implementing the Fiscal Sustainability Plan and the Open Government Partnership agenda • Size and Duration: US$750 m, 4 -year program 2018 -2022 - US$700 m in annual performance grants to states achieving the annual eligibility criteria OVERVIEW and DLIs. Performance assessed in each of the four years: 2018 -2021 - US$50 m technical assistance for FMOF Home Finance to coordinate, OAu. GF to verify results, and state capacity building activities by Nigeria Governors Forum, Public Service Institute of Nigeria, Debt Management Office and OGP Secretariat DISBURSEMENT-LINKED INDICATORS (DLIs) Max Grant per YEAR Max Grants for 2018 -21 Eligibility Criteria: Publish annual budgets AND audited financial statements 1: Improved budget reliability and reporting 1. 3 5. 2 2: Increased citizens’ engagement in the budget process 0. 8 2. 5 POTENTIAL 3: Implementation of Treasury Single Account GRANTS 1. 5 6. 0 4: Strengthened Internally Generated Revenue collection 4. 0 10. 0 PER STATE 5: Biometric registration and BVN to reduce payroll fraud 1. 5 5. 0 6: Improved procurement practices 3. 0 5. 5 7: Strengthened debt management 2. 5 4. 0 8: Clearance of domestic expenditure arrears 2. 0 7. 0 9: Improved debt sustainability 1. 5 6. 0 US$18. 1 m US$ 51. 2 m Maximum total grant (if achieve all results) 4

SFTAS is now officially effective so the focus in on Program implementation Implementation Progress to Date • State Governors endorsed the Program at the March 2018 National Economic Council • Post NEC, all 36 State submitted written expressions of interest signed by the Governor and COF to the Federal Ministry of Finance (FMOF) to participate in the Program • The World Bank Board approved USD 750 million for the SFTAS Program on 27 th June 2018 • Completed intensive sensitization of the Program with state officials (10 per state) from all 36 participating states Sept-November 2018 - DLI verification protocols disseminated • Implementing agencies and partners have prepared extensively for implementation • SFTAS was declared effective 3 rd May 2019: 1. Appointment of the Office of the Auditor-General for the Federation as the independent verification agent (IVA) 2. Establishment of the Program Coordination Unit (PCU) at FMOF Home Finance 3. Program operations manual finalized (implementation arrangements) Post-effectiveness next steps • NGF, DMO, OGP and PSIN, OAu. GF will start to deliver capacity building activities to states to help them achieve the DLIs (workshops, just-in-time support, peer learning) – start by Q 4 2019 • The IVA will conduct the 1 st year/2018 annual performance assessment – target Q 4 2019 so that disbursements of 1 st set of performance-based grants to states can take place by Q 1 2020. 5

Despite delays in effectiveness, states have made excellent progress States Performance • Most (but not all) states have established the institutional structures for SFTAS: Steering Committees, chaired by the State Co. F, and SFTAS Focal Points • IVA findings: 24 states out of 36 states fully met the 2018 eligibility criteria: • 28 states published online FY 17 audited financial statements by Dec 2018; and • 28 states published online FY 19 budgets by Feb 2019 States achieving the 2018 EC will receive performance grants for 2018 DLIs achieved (to be verified by the IVA) To receive grants for 2019 performance these states still need to achieve the 2019 Eligibility Criteria and DLIs These states are still able to enter the Program in 2019 and receive grants for 2019 performance if they achieve the 2019 Eligibility Criteria and DLIs ALL states can benefit from Technical Assistance even if they do not achieve the Eligibility Criteria and DLIs 6

Role of the DMO in the SFTAS Program • The Debt Management Office (DMO) has a mandate to strengthen debt management at the federal and state level. • At the state-level, the DMO has supported States to set up their DMDs, adopt legislation and best-practices concerning public debt management, and has provided regular training and hands on support to the state DMDs since 2008, on areas such as debt recording and reporting • Under SFTAS, DMO will expand the scale and scope of capacity building activities to States. • The role and scope of the DMO in the SFTAS Program is summarized as follows: i. Design and formulation of a multi-year program for Technical Assistance (TA) and Capacity Building (CB) to the States to enhance their performance under the SFTAS Pfor. R ii. Implementation of TA and CB program through different modalities including provision of guidelines, tools and templates, conducting central, zonal and state-level technical workshops, as well as, providing just-in-time advisory services to individual states to enhance the ability of the States to achieve the DLIs under SFTAS Key Result Area (KRA) 4 on Strengthen Debt Sustainability iii. DMO will also support the process of verification of debt-related DLIs by providing inputs to the IVA during the annual performance assessments. Result Area 4: Strengthen Debt Sustainability DLI 7 Strengthened public debt management and fiscal responsibility framework DLI 8 ü ü DLI 9 ü Improved debt sustainability Improved clearance/reduction of stock of domestic expenditure arrears

World Bank technical assistance to DMO on developing guidelines for states on domestic expenditure arrears management World Bank technical assistance to DMO: • Development of guidelines on domestic expenditure arrears to support states to take actions towards achieving the SFTAS DLI#8 (meeting the SFTAS DLI verification protocols). • The guidelines draw from the WB’s global experience and international good practice on domestic arrears management. However, they have been specifically designed for the institutional context of Nigerian states and are focused on providing practical support to states to help them meet the requirements SFTAS domestic arrears DLI #8. • Support DMO to rollout technical workshops to states to disseminate the guidelines, starting in Q 3 2019 so that states can attempt to achieve DLI #8 for the 2019 performance year. Process of developing the Guidelines • Extensive consultations and testing with state officials led by the State Accountant. Generals were held from April to July 2019 with 8 states* in two Abuja-based workshops and on field missions to 6 states to pilot draft guidelines. *Enugu, Delta, Abia, Kogi, Edo, Ekiti, Kebbi and Kaduna.

Agenda for Domestic Arrears Technical Workshop Day 1

Agenda for Domestic Arrears Technical Workshop Day 2

GROUP A and GROUP B

“ 1 -1 CLINICS” WITH TRAINERS (30 MINS PER STATE TEAM) – PLEASE BOOK SLOT THROUGH WB MOHAMMED Slot Time DAY 1 1 17. 30 -18. 00 2 18. 00 -18. 30 3 18. 30 -19. 00 DAY 2 4 12. 15 -12. 45 5 12. 45 -13. 15 6 16. 00 -16. 30 7 16. 30 -17. 00 8 17. 00 -17. 30 9 17. 30 -18. 00 10 18. 00 -18. 30 State

GUIDELINES TO STATES ON DOMESTIC EXPENDITURE ARREARS MANAGEMENT Attachments to these Guidelines: • Template/tool #1 Cash flow forecasting xls-based tool and user manual (The user manual is a separate word document) • Template/tool #4 Multi-year funding plan for clearing arrears xls-based tool (The xls tool includes user guidelines in the same xls file) • Template/tool #6 SARVCR Section 1 Table (xls file) 13

Definitions • Government domestic expenditure arrears are defined as financial obligations that have been incurred by any level of the government sector for which payments have not been made by the due date. • Payments may be overdue based on a legal obligation (such as payment of social security benefits, or salaries), a specific contractual commitment (such as payment for construction of a road), or a continuing service arrangement (such as payment for electricity supply). • The main categories of expenditure arrears are as follows: contractors´ arrears; pension and gratuity arrears; and salary arrears. There may be other types of domestic arrears, depending on the state. States are encouraged to be exhaustive in their identification, recording and management of all the types of domestic expenditure arrears. • The shorter terms: “domestic expenditure arrears”, “domestic arrears”, and “arrears” used variously in these guidelines refer to government domestic expenditure arrears.

Domestic expenditure arrears nearly doubled during 2014 -2017 with majority of states accumulating significant arrears • • The stock of arrears across all states nearly doubled between 2014 -2017. During the fiscal crisis of 2015 -16 oil revenues declined significantly. The lower statutory transfers to Nigerian states combined with existing weaknesses in public financial management led to the accumulation of substantial domestic expenditure arrears. The end of year stock of arrears continued to increase between 2017 and 2018 despite the steady rise of the oil price between 2016 and 2018. Figure 1: Total state-level domestic expenditure arrears (reported), 2011 -2018 In 2018: 32 states reported having contractor arrears, 30 states reported having pension and gratuity arrears and 10 states reported having salary arrears

SFTAS and Disbursement-Linked Indicator (DLI) #8: Improved clearance/reduction of stock of domestic expenditure arrears The negative socio-economic impact of having significant arrears on individuals, households and businesses led to the SFTAS Program DLI #8

DLI #8 Verification Protocols (Annex 1 of the Guidelines) • Annex 1 contains the full definition of DLI#8 and the requirements to be met by states to achieve DL 1#8, extracted from the SFTAS verification protocol (version 2. 0, August 2019). Please read Annex 1 carefully. • In summary, DLI #8 on domestic expenditure arrears require states to establish several processes and systems and to reduce their stock of domestic arrears. • The key processes and systems required can be summarized as the following: - All domestic arrears are recorded in an internal domestic expenditure arrears database that is regularly updated (at the least on a quarterly basis, recommended on a monthly basis); - A robust arrears verification process is in place and arrears categorized as either valid, contested or rejected; - Selected elements of the internal arrears database are made publicly-accessible online; - The website supporting the online publicly-accessible arrears database contains an electronic link that permits contractors to query/verify their claims; - An Arrears Clearance Framework (ACF) is established and published on a state official website. The ACF contains the planned actions to settle arrears and an explicit prioritization of expenditure arrears to be settled.

DLI #8 Verification Protocols (Annex 1 of the Guidelines) • In addition, states are required to clear domestic expenditure arrears and achieve a reduction in their total stock of domestic arrears (those that have been verified and categorized as valid): - For the basic target: At least a 5 percent decline in the stock of total domestic expenditure arrears at the end of the year, compared to the previous year, or maintain the stock of arrears below 5 billion naira. - For the stretch target: At least a 20 percent year-on-year decline in the stock of total domestic expenditure arrears at the end of the year, compared to the previous year. *The 5 billion naira represents a small amount of technical arrears (non-repayment because of delay in payment advice, contested claims, delays in payment by treasury which lead to short-term timing mismatches) • To achieve a reduction in the stock of domestic arrears requires both prevention of new arrears and clearance of existing arrears • The clearance of arrears must be consistent with the Arrears Clearance Framework (ACF) of the state. • The Office of the Auditor-General for the Federation—who acts as the independent verification agent (IVA) for the SFTAS program—will assess each state’s achievement of DLI#8 – on both the process/system requirements and the reduction of the stock - against the verification protocols and using the procedures as described in Annex 1. • Each state prepares and submits a State Arrears Reporting, Verification, and Clearance Report (SARVCR) and submit to the DMO and IVA within one month after year end.

About the Guidelines and important points to note The guidelines consist of the written guidance and templates contained in the word document as well as the attachments of excel-based tools (with user instructions/manuals). Important points to note: • The use of the guidelines by states is not compulsory. States are ultimately assessed by the IVA against the verification protocols (Annex 1), not against these guidelines. For example, the guidelines recommend establishing a formal domestic arrears committee to oversee domestic arrears management, but the committee is not a requirement of the DLI. • The guidelines are not an exhaustive set of guidance on domestic expenditure arrears; they focus on the narrower set of requirements for achieving SFTAS DLI #8. • On the prevention of arrears, these guidelines focus on cash forecasting and management. There will be separate guidelines and tools developed to support states to develop realistic and credible budgets under the SFTAS program and SFTAS DLI #1 provides performance-based grants to states that strengthen their budget credibility. • On the clearance of arrears, these guidelines do not provide guidance on the borrowing options if the state was to borrow to clear the arrears. There will be separate guidelines and tools developed to support states to develop a medium-term debt management strategy (MTDS) under the SFTAS program and SFTAS DLI #7. 2 provides performancebased grants to states that develop and publish their MTDS.

2. Prevention of Domestic Expenditure Arrears Accumulation 20

Content • Global experience in the accumulation and prevention of arrears • Current experience on accumulation and prevention of arrears in Nigeria • Guidance: strategies to prevent accumulation of arrears in Nigeria • Cash flow forecasts used for limiting commitments • Quarterly budget fund releases 21

Global experience in the accumulation and prevention of arrears Background Paper on Arrears 22

Introduction The accumulation of government expenditure arrears is one of the most common problems in public financial management (PFM). According to the Public Expenditure and Financial Accountability (PEFA), in almost one-fifth of the countries the stock of central government arrears was more than 10 percent of total central government expenditure. 23

Global Experience in the Accumulation and Prevention of Arrears - Causes of Arrears Persistent expenditure arrears are typically a symptom of underlying weaknesses in a country’s PFM system. Expenditure arrears can be the result of failures at any or all stages of the PFM cycle, including inadequate legal frameworks, unrealistic budgeting, weak or cumbersome expenditure controls, inefficient cash management, lack of or problems with a financial management information system (FMIS), or gaps in fiscal reporting 24

The Most Common Causes of Arrears - Typically Formulation of unrealistic budgets. Unrealistic budgets can be the result of overly optimistic macroeconomic or revenue projections and/or under-provisioning for compulsory expenditure items Lack of commitment controls. Commitment controls should be in place to effectively limit commitments to approved budget allocations and to actual cash availability. Strong empirical correlation according to PEFA between strength of commitment control and arrears Note: If the budget is not realistic there is a gap between the approved budget allocations and the cash availability 25

The Most Common Causes of Arrears – Typically, cont. . Poor cash flow forecasting and management. Commitment limits need to be linked to projected cash inflows and debt instruments used to smooth the revenue inflows (integrated debt and cash management) Other causes: delays in processing of payments, deliberate deferral of payments, inadequate sanctions 26

Global Experience in the Accumulation and Prevention of Arrears Measures to Prevent Arrears depend on the causes and could e. g. be: • Strengthening the legal and regulatory framework • Enhancing the credibility and realism of the budget • Improving accounting and reporting, especially in a cash accounting framework • Strengthening commitment controls 27

Measures to Prevent Arrears depend on the causes and could e. g. be: • Improving and integrating cash and debt management • Enhancing oversight of subnational governments and state-owned enterprises • Implementing other technological solutions, e. g. prepaid or centralized payment solutions • Upgrading the government financial management information systems (FMIS) 28

Current Experience on Accumulation and Prevention of Arrears in Nigeria – Unrealistic Budgets • Consultations with states in Nigeria highlighted that unrealistic budgets – in the form of overoptimistic revenue estimates - have been the main driving force behind the accumulation of contractors´ arrears, pension and gratuity arrears and salary arrears. • To this can be added inadequate commitment controls and weak cash flow forecasting. 29

Shortfall in Recurrent Revenues • The budget estimates for recurrent revenues, namely statutory transfers and internally generated revenues (IGR), are used to plan procurements and enter into contracts (commitments). • For one-off revenues such as Paris Club refunds and financing from borrowing, contracts are not typically entered until the funds have been received. • Therefore, shortfalls of the latter forms of funds do not typically create obligations that cannot be paid for. • However, shortfalls in recurrent revenues will create problems. 30

Centralizing the Expenditure Process • In principle states work under a devolved treasury system where the MDAs process their own payments for overhead and capital expenditures under warrants that are issued for the entire budget year appropriations. • In practice, states have centralized the expenditure process significantly. Contracts over certain thresholds, and sometimes all contracts, are approved at a higher level, often at the level of the Governor. This potentially could reduce the risk of arrears accumulation should the higher levels be well informed on the fiscal situation. However, this has typically not been the case. 31

Cash Flow Forecasting • • • Accurate cash flow forecasts for the entire year could provide the information needed for taking the necessary measures to reduce the commitments to forecasted available cash. States typically have a legal requirement to develop a cash plan on a monthly basis for the year, but this exercise is mainly conducted on formal grounds and is not well integrated in the actual operations and cash plans are not updated during the year. Very often there are no staff fully dedicated for doing cash flow forecasting and the forecasting is instead conducted by staff having other duties as their main duties. 32

Commitments Entered not Backed by Cash Flow Forecasts • • • Cash flow forecasting, if conducted at all, is mainly focused on the coming month providing information for prioritization of received invoices. This prioritization is often conducted by a cash management committee. Thus, the cash flow forecasting is an instrument for prioritization only at the very end of the expenditure cycle when commitments have already been made. None of the states in the workshop and in the piloting were using the cash flow forecasts to provide guidance on the cash availability for entering into contracts, i. e. commitments. Thus, even though the expenditure process has been centralized, the risk of arrears accumulation is still significant since the centralized decisions on entering contracts are not guided by accurate cash flow forecasts. 33

Commitments that cannot be paid, thus in arrears • In summary, a common scenario for states is having an unrealistic budget , cash flow forecasting which do not provide any compensation for the unrealistic budget, and commitments entered without any realistic assessment of cash availability. • So, when the authorities are faced with higher amounts of invoices to pay for than the available cash, they must prioritize the invoices and this can affect the obligations to contractors, salaries, pensions or gratuities. 34

Contract Financing Facility • With extensive accumulated contractor arrears, states face problems with contractors not willing to enter into new contracts due to the risk of nonpayment. As a response, an instrument called “contract financing facility” is being used by some states to provide assurance to contractors. This instrument seems to be a standard bank facility offered by Nigerian commercial banks. 35

Contract Financing Facility… • Basically, it is a tripartite agreement between the state, the contractor (or a set of contractors) and a bank. The bank lends funds to the contractor to finance a project. The state is servicing this debt through an irrevocable standing payment order (ISPO), typically on its internally generated revenue (IGR) receipts. States claim that the debt servicing is contingent upon contractors´ delivery of goods and services, but the Bank-DMO team was not able to verify this as legal documents were not provided to the team. This facility is also used for repayment of arrears 36

FMIS • Several states have implemented an FMIS or are in the process of implementing one. The systems could be designed so that warrants are released monthly or quarterly, although currently this feature is not there in the states consulted. • One state had implemented monthly cash ceilings on overhead costs, but the limit seemed to constrain the payments rather than the commitments. 37

Guidance: Strategies to Prevent Accumulation of Arrears in Nigeria Two steps 1. Cash flow forecasts used for limiting commitments • Simple cash flow forecasting framework • Comprehensive cash flow forecasting framework 2. Quarterly budget fund releases 38

Cash Flow Forecasts • Increasing the realism and credibility of budgets is key but may take some time as it involves political processes. • In the absence of realistic budgets, accurate cash flow forecasts which extend for at least one year and use an adequate forecasting tool, can be used to inform decisions on budget fund releases (warrants) and not just payments. • This is therefore recommended to be the first part of the main strategy to limit the accumulation of new arrears. 39

Cash Flow Forecasts • Improved cash flow forecasting should be complemented with measures to increase the credibility of the budget and to build a more stable infrastructure for the budget execution process through the full roll-out of an FMIS supporting the entire expenditure chain. • In due time, it may also be considered appropriate to develop a flexible short-term borrowing facility for cash management purposes for states 40

A Simple Cash Flow Forecasting Framework • This framework is based on the notion that unrealistic parts of a budget typically can be identified already at the start of the budget year by comparing the actuals for the previous year with estimates for that year in the Budget. • Very often the Budget estimate for year 1 is compared with the Approved Budget for year 0 or maybe an updated but still not very realistic estimate for year 0. • Typically the estimate for year 0 is far away from the actuals for this year (which is known at the beginning of the Budget year 1) 41

Example, budget figures IGR, NGN bill 2017 70. 1 2018 71. 3 2019 73. 4 • The increase from 2018 to 2019, 3%, seems prudent • But at the start of the Budget year AG knows that the actual for 2018 was 54. 1, which implies an increase of 36% in order to reach the Budget estimate, which in the absence of specific measures is not very realistic 42

Realistic Estimates of IGR growth • One option is to use the growth rate for IGR in the Budget, i. e. 3% but apply it on the actual level for 2018 • 1. 03 * 54. 1 = 55. 7 • Another option is to assume that the annual growth rate at end of 2018 should be extended for 2019 also. Thus, if the annual growth rate at end of 2018 was 10% (we do not know that in the example) we apply 10% on the actuals for 2018 also • 1. 10 * 54. 1 = 59. 5 43

Realistic Estimates of IGR growth • A third option is to assume that the IGR follows the nominal GDP and use estimates of the GDP to forecast the IGR for 2019. According to independent observers the nominal GDP may increase with 12% between 2018 and 2019 • 1. 12 * 54. 1 = 60. 6 • Based on the limited information we have in this case third option may be the preferred option. • Thus, the revenue shortfall compared with the Budget is 73. 4 -60. 6 = 12. 8 44

Marginal Adjustment of Commitments for Discretionary Expenditures • The expected 12. 8 billion in shortfall should lead to a corresponding reduction of commitments for discretionary expenditures in order to avoid accumulating arrears. • The same analysis should be conducted for the FAAC revenues also, including the VAT • The total expected shortfall in these revenues should lead to correspondingly lower commitments for discretionary expenditures 45

Discretionary Expenditures • Discretionary expenditures are expenditures that have not yet been committed, typically overhead costs and capital expenditures • Note: Already-committed overhead costs and capital expenditures are no longer discretionary • It is only the non-committed part of the budgeted overhead costs and capital expenditures that should be adjusted as indicated here • Information on committed expenditures are typically provided by the FMIS 46

A Comprehensive Cash Flow Forecasting Framework • • • In the simple model described above, just a few revenues and expenditures items are subject to revised estimates and only at the start of the current budget year. A more comprehensive approach, instead, consists in forecasting all revenues and expenditures—including also financing items and the resulting cash balances—and next, incorporating those forecasts into an annual, comprehensive cash plan formulated at monthly frequency and updated regularly (ideally, once a month). The Fiscal Responsibility Act for the Federal Government and for some states also requires that an annual cash plan on monthly basis is produced and regularly updated 47

Options for Cash Flow Forecasting • • To implement this comprehensive framework, the first step it to produce cash-flow forecasts for all revenues and expenditures within the budget year, at monthly frequency. One option is to request the MDAs, including the revenue authority, to provide a monthly breakdown of the expected revenues and expenditures during the year. While this approach recognizes MDAs’ expertise in assessing incoming revenue collections and expenditure payments, the process of compiling, understanding, and conciliating forecasts provided by several units is rather cumbersome and presumably requires a significant amount of resources. 48

Options for Cash Flow Forecasting • Another option is to produce cash-flow forecasts built on the fact that revenue collections and non-discretionary expenditure payments often exhibit a stable, regular pattern within any given year. Tax collections and salary payments, for instance, typically occur in certain dates during the year, and thus show a pattern of realizations that repeats year after year 49

Example of Tax Revenue Collection Pattern 50

Using the Historical Pattern forecasts • • • The stability of the pattern for key revenues and expenditures could be used for constructing the seasonality pattern based on an annual estimate in the budget. The stability of the pattern could also be used to provide indications that the annual estimates in the budget are not accurate. If for instance the actuals are significantly lower than the monthly forecasts for three months in a row, the problem is most likely not that the seasonality has changed but that the annual estimate is not accurate, and a revised annual estimate should therefore be constructed more in line with the actuals. 51

Using the Historical Pattern forecasts • An excel-based cash flow forecasting tool (template/tool #1) using historical time series analysis and its respective user manual have been developed to accompany these guidelines • In the next session the tool will be presented 52

Annual Cash Plan on Monthly Basis • • • Next step is to build a cash plan using the cash-flow forecasts for revenues and expenditures. The cash plan is prepared on a monthly basis for the budget year, and details the main revenue, expenditure and financing items. The focus of the cash plan is the balance on the main bank account (or an aggregation of several bank accounts) managed and controlled by the Treasury, and not the budget itself. The bank account must have a positive balance every month (or be within an overdraft limit), otherwise the cash plan is not consistent and the revenues and/or the expenditures may have to be adjusted accordingly. 53

Example Cash Plan 54

Fiscal Space for Commitments • • The cash plan can be easily used to determine the ‘admissible’ level of overhead costs and capital expenditures that is consistent with the cash plan and targets for the bank-account balances. Such an admissible level, referred to as ‘fiscal space’, may well differ from the forecasted figures for those expenses. It is computed as the residual that matches all other revenue and non-discretionary expenditure included in the cash plan, on the one hand, and on the other, the targets for bank-account balances. The fiscal space available for overhead costs and capital expenditures therefore cannot be larger than what is required to achieve those targets And this calculated fiscal space should be used to limit the commitments for overhead costs and capital expenditures 55

Linking Cash Flow Forecasts and Commitments • • • The objective of cash flow forecasting in relation to prevention of arrears is to limit (restrict) the commitments to the available cash, and thereby avoid a situation where invoices cannot be honored and arrears accumulate. The fiscal space for discretionary expenditures calculated using the cash plan should therefore be converted into limits for the line ministries to incur/commit expenditures. The limits are usually submitted to the line ministries as warrants or other forms of budget fund releases. 56

Warrant Releases in States • • • In Nigerian states, the warrants for overhead and capital expenditures are typically issued annually following the approval of the budget. In such a case there is no technique available for linking the commitments to cash availability. In practice, the warrant system is not adhered to since contracts over certain thresholds are approved by the State Ministry of Finance, the Governor, or the EXCO. These entities are often not informed about the availability of cash 57

Warrant releases in FGN • • • In the FGN, warrants are released after the monthly meetings of the cash management committee or by the Minister directly following a presentation of actual cash availability, pending payments and some forecasts Arguably, this system is less prone to arrears accumulation than the system used by the states. Payments incurred under the warrants should be possible to execute. The drawback of this solution is that the warrant releases are very erratic, leading to serious planning and prioritization issues by the MDAs, and consequently, to an inefficient service delivery to the public. 58

Quarterly Budget Fund Releases • • • Instead, it is recommended that warrants be released on a quarterly basis, in line with the requirements of the annual cash plan being updated regularly on a monthly basis. Quarterly fund releases are generally regarded as a good compromise, allowing for a flexible budget implementation (e. g. , ensuring that payments resulting from the commitments entered into can be paid on due date) on the one hand, and on the other hand, providing adequate planning possibilities for the MDAs. The details of the budget fund releases should be developed by the Budget Department based on the size of the aggregate fiscal space estimated using the cash plan. 59

Use of FMIS • • For states having an FMIS, the quarterly warrants should be uploaded into the system and constitute the limits for expenditure commitments. In order to reduce the possibilities for MDAs to commit over the limit, only the purchase orders produced by the FMIS should constitute a legal basis for purchases. Changes in the configuration of the existing FMIS used in states may be required. This approach should make it possible to go back to the devolved treasury system previously used where the MDAs are conducting their own payments. 60

Limiting Commitments without FMIS • • • For states not having an FMIS, physical warrants have to be issued and the State Ministry of Finance must keep track of the contracts entered. In a devolved treasury system, this will be difficult to implement effectively. However, since the expenditure process has become centralized, it should be possible to handle this process in manual ledgers. 61

Limiting Commitments without a Comprehensive Cash Flow Forecasting • • For states choosing a simple cash flow forecasting framework that only relies on assessing budget realism (and not on a comprehensive cash plan), the warrant releases and/or the decisions by the State Ministry of Finance, the Governor, or the EXCO, should be guided with conservative revenue estimates for the current budget year and consequential marginal adjustments of the level of expenditure commitments as described before. This approach cannot be expected to mitigate all the risks of accumulating arrears, but it would go a long way in improving the current practice in Nigerian states. 62

Practical Session: Template/tool #1 Cash flow forecasting xlsbased tool and user manual Breakout Room IT Equipment: Laptops, mouse and chargers (at least 2 sets per delegation)

3. Recording, Verification and Reporting of Domestic Expenditure Arrears 64

Content • Global lessons in recording, verification and reporting of arrears • Current practice of recording, verification and reporting of arrears in Nigeria • Guidelines for strengthening the recording, verification and reporting of arrears in Nigeria 65

Global lessons in recording, verification and reporting of arrears • Successful arrears management requires strong accounting and reporting systems. • Reporting of payables and identifying arrears should be an integral part of the regular fiscal reports. • This information should also be disclosed in the annual financial statements • This is important regardless of the accounting framework (Whether cash or accrual basis) 66

Global lessons in recording, verification and reporting of arrears • In practice, fiscal reports vary widely in coverage from country to country. • This depends on; • • • national and state legal requirements, the standards in use, and the frequency, quality, and timeliness of data. • Countries and states are to devise methods to ensure information is collated and validated in a timely manner. • The responsibility for arrears compilation and recording should be clear. 67

Global lessons in recording, verification and reporting of arrears – Examples (1/2) Good practice suggests that this function should be allocated to the Accountant General Offices Portugal • Enacted legislation mandating the preparation of a monthly report showing outstanding invoices and classifying the arrears according to their typology. • All information on arrears was made available on the MOF website and was updated monthly. 68

Examples (2/2) Tanzania • • • The Accountant General Department first started to collate quarterly information on payment arrears and then increased frequency to monthly reports. Circulars requesting the information were sent to all Accounting Officers. A standard template was used to summarize liabilities; • • • by period (e. g. 30 days or less; between 30 and 60 days; between 60 and 90 days; and more than 90 days) and by broad expenditure category (e. g. supplies; utilities; office rent; construction works; and staff claims). Monthly reports were consolidated into quarterly reports and shared within the MOF, the Bank of Tanzania and the IMF. 69

Global lessons…. . • International experience shows the importance of a thorough verification process. Therefore claims need to be verified to ensure that these are legally genuine claims. The main objective of the verification process is to validate arrears claims and to identify those claims that are fraudulent or contested. Arrears claim verification has two main components: • • • an agent who is assigned to perform a verification process and • the process that needs to be followed. The appropriate agent/organization will depend on the legal and institutional arrangements as well as capacity and resources available to states. In different countries, the verification of arrears claims has been conducted by the Supreme Audit Institution, an inspectorate or an internal audit in the Ministry of Finance, and private audit firms. 70

Current practice of recording, verification and reporting of arrears in Nigeria • • • Weak systems - The current processes of recording, verification, and reporting of domestic expenditure arrears across Nigerian states appear to be fragmented, weakly coordinated, and reliant on the best efforts of individual officials. The principle is accepted - There is a general acceptance of the need to account for, manage, and clear arrears; however, a strong appreciation of the need for accuracy, completeness, and timeliness was usually not observed. No Terms of Reference - In some instances where states have created a structure, it appears ad-hoc, undocumented, and without clear terms of reference. 71

Key traits observed across several states Recording of domestic expenditure arrears • • • There are gaps in the understanding of what constitutes domestic expenditure arrears and several states record all contractual commitments not paid as arrears, Some are unaware of the need to capture various less significant types of arrears, including judgement debts and government-to-government debts. Several states rely upon the payment function of the State Accountant-General to provide records of arrears. i. e. liabilities not already approved or queued for payment and sent to the State Accountant-General for settlement are not counted as arrears when the due dates have passed. 72

Key traits observed across several states Recording of domestic expenditure arrears • Several states have arrears accumulated under previous regimes which are not recorded in full. • Data records are also generally fragmented and held on a combination of paper documents and spreadsheets. • Some states have successfully implemented FMIS applications (SIFMIS or other applications) and are attempting to use these systems for the recording and tracking of domestic arrears. 73

Key traits observed across several states Verification of domestic expenditure arrears • The process varies among states but relies mainly on prepayment checks carried out by the State Accountant-General. • In several states, only arrears that were ready (or queued) for payment were verified. • Some states relying on special purpose committees for verification, and others on the existing M&E and audit functions. • Many states warehouse verified arrears within the Office of the Accountant General. • The majority of states do not have a complete and accurate register of verified arrears awaiting clearance. • The decisions on which arrears to verify (and clear) are mostly subjective. 74

Key traits observed across several states Verification of domestic expenditure arrears SIFMIS / FMIS • For the states with FMIS in place, there should be an existing record of verified liabilities and arrears. • However, not all pre-FMIS arrears are recorded on FMIS and a full coverage of all accounting or reporting units has not generally been achieved yet. • In particular, payroll systems are yet to be integrated within FMIS, and salary and pension arrears are being recorded off FMIS and validated separately. 75

Key traits observed across several states Reporting of domestic expenditure arrears • States are reporting arrears in order to; • • disclose the level of the state’s indebtedness, and; seek executive approval to clear and settle arrears. • States are to report the aggregate stock of the main types of arrears (contractors, pensions and gratuities, salaries and other staff claims) as part of the quarterly domestic debt reports submitted to the DMO via the State Debt Management Departments. 76

Key traits observed across several states Reporting of domestic expenditure arrears • • The State DMDs prepare a comprehensive domestic debt report including domestic arrears and present the report to the State Co. F/State AG approval and submission to the DMO. The State Co. F is to present the same domestic debt report to the State Ex. Co for executive approval to settle arrears. There appears to be little alignment between the reports prepared for the purpose of seeking approval to settle arrears and the reports prepared for the DMO. The process of reporting arrears to the Executive runs parallel to (and mostly independent from) the process of reporting arrears to the DMO. 77

Guidelines for strengthening the recording, verification and reporting of arrears • • These guidelines are intended to apply to FMIS and non-FMIS states. Where the FMIS is in effective use across all accounting units, it will hold a record of arrears that should not need to be duplicated. It would also hold information on the transaction controls and verification processes. However, very few states (if any) have implemented FMIS in full to cover all forms of expenditure and arrears (including those outstanding before the FMIS was implemented). The guidelines therefore focus on the accounting principles, which apply regardless of the level of automation in the recording and processing of transactions. 78

Guidelines for strengthening the recording, verification and reporting of arrears The guidelines consist of five recommended components; 1. Establishment of a governance framework; 2. Adoption of records management guidelines for domestic arrears; 3. Adoption of verification guidelines for domestic arrears; 4. Establishment of a consolidated internal domestic arrears database and a publicly-assessible online version of the database; and 5. Standard reporting of domestic arrears to end-users. Steps 2, 3 and 4 are necessary to achieve the minimum requirements of SFTAS DLI #8; steps 1 and 5 are not required but are recommended. 79

Component 1: Establish a clear governance framework (1/6) • • Accountant-General (AG) typically is responsible for the arrears recording, verification, and reporting processes. Where an effective governance process led by the AG is not already in place, each state should establish a sustainable governance framework. If possible, the governance framework should also cover the prioritization of arrears for settlement and management of the Arrears Clearance Framework. Where a framework is already in place the state should compare it with the recommended framework in these guidelines and make enhancements. 80

Component 1: Establish a clear governance framework (2/6) The recommended governance framework includes the following elements: a) An institution / entity / body / committee with responsibility for the accurate reporting of arrears balances across all types and maintaining an internal domestic arrears database and the publicly-accessible online version of the database. (referred to as the Domestic Arrears Committee or the Committee). This could be a cross-ministerial arrears/debt management committee with members from the Debt Management Department, Office of the State Accountant-General, Bureau of Procurement, etc. It is expected that the Committee will be chaired by the AG or the Commissioner of Finance; however, each state is able to determine the arrangements most likely to be effective. 81

Component 1: Establish a clear governance framework (3/6) b) Establishment of a formally-approved process for the continuous oversight of each stage by the Domestic Arrears Committee - in particular, for the verification and reporting of findings. This should include adequate terms of reference for the Committee and clear authority, backed by an executive order or legislative approval, if necessary. An example terms of reference for the Committee is included as template/tool #2. 82

Component 1: Establish a clear governance framework (4/6) c) Introduction of specific guidelines by the Domestic Arrears Committee, setting out the roles and responsibilities of the individuals and institutions for the recording of arrears, i. e. , the roles and responsibilities of each Primary Record Holder, which is the entity primarily responsible for keeping the records for each type of arrears. This will include specific reporting requirements, i. e. , the use of agreed recording templates for submission to the Domestic Arrears Committee and any supporting schedules and timelines (recommended monthly). An example recording template is included as template/tool #3) 83

Template/tool #3: Proposed template for the recording of arrears User guide/instructions for the template/tool Additional data fields may be included, what is shown in the template is the recommended minimum information to be recorded. Definitions/Explanations: 1. Debtor details: the government entity incurring the liability, agency, extra-budgetary fund, or state-owned enterprise. 2. Creditor details: the database should capture the creditor name classified by type: employees, private individuals, private businesses, financial institutions etc. 3. Contact Information: the appropriate address for each creditor 4. Arrears owed (Cumulative): the total amount owed as at the date of reporting 5. Effective / Billing date (i. e. Vintage): this should be the original due date on each invoice, or the date when the amount owed fell into arrears. It will enable classification of the arrears into those overdue by 1 -3 months, 3 -6 month, 6 -12 months and more than 12 months 6. Amounts settled / part paid: this will indicate how much was previously owed and has been settled. 7. Nature of the debt: this will enable differentiation between various types of arrears, for example, goods supplied, services supplied, salaries, pensions, gratuities, judgement debt etc. 8. Contract terms and penalties: this is to record any interest or penalties that are due or may become due on the arrears 9. File reference: this is to provide a unique file/record identifier that can enable the location of primary documents (relevant for the verification) 10. Economic category should be in accordance with the National Chart of Account (NCOA) Primary Record Holder: For example: Ministry of Public Works Type of Arrears: For example: Contractor payment arrears / Salary Arrears / Pension and Gratuity Arrears S/No 1 2 etc. Debtor details (MDA) Creditor details Contact information Arrears owed (cumulative) N Effective / Billing date Amounts settled / part paid to date Nature of the debt Contract terms (interest & penalties) File Reference Economic Category Comments, including notes on risk of nonpayment (litigation etc. ) Verified / Contested / Rejected

Component 1: Establish a clear governance framework (5/6) d) Introduction of specific guidelines by the Domestic Arrears Committee setting out the roles and responsibilities of individuals and institutions for the verification of debt balances. This will include reporting requirements, i. e. , the use of agreed verification templates and any supporting schedules and timelines (recommended monthly) for submission to the Domestic Arrears Committee e) Oversight of the overall recording, verification and reporting processes for domestic expenditure arrears to ensure that they meet the requirements of SFTAS DLI #8 as described in the SFTAS verification protocols. 85

Component 1: Establish a clear governance framework (6/6) Annex 2 of the main Guidelines document contains a country example – from Albania - of guidelines issued by a domestic arrears committee. 86

Component 2: Adopt records management guidelines for domestic arrears (1/3) To address risks to the completeness and accuracy of record keeping, the state through the Domestic Arrears Committee should do the following: A. Identify the various forms of arrears and the entities primarily responsible for keeping the records for each type of arrears. B. Review the existing format for the recording of each form of arrears and confirm it holds the minimum required information needed to populate the data fields in the domestic arrears database. 87

Component 2: Adopt records management guidelines for domestic arrears (2/3) B)…Cont’d…The minimum required information is as follows: i. Name and contact information for the person or entity owed ii. Cumulative amounts owed at the end of each reporting period (each month). For the purpose of achieving the SFTAS DLI#8, the reporting period needs to include the amounts owed at the end of December 2018 up to the present. iii. Effective date the debt was incurred or fell due – the billing date if applicable. iv. Nature of the debt – the nature of the goods and/or services procured. v. Reference to supporting records to substantiate the debt. vi. A unique reference number or identifier for each debt (except salary, pensions and gratuity arrears which can be reported as aggregate balances). vii. Other information 88

Component 2: Adopt records management guidelines for domestic arrears (3/3) C. Where the existing format for recording domestic arrears does not include some of the above information, consider replacing the recording template with the proposed template/tool #3 (or similar) and communicating this to all Primary Record Holders. D. Where the existing format does not hold some of the necessary minimum information, require the Primary Record Holders to conduct an exercise to update the records appropriately. E. Oversee and ensure the conduct of completeness checks by Primary Record Holders for each type of arrears to establish a clean baseline. Primary Record Holders can deploy their Internal Auditors or any similar monitoring unit to conduct the checks for completeness. 89

Types of Domestic Arrears and likely Primary Record Holders Type of Domestic Likely Primary Record holder(s) Arrears a. Salaries Accountant-General, Head of Service, Payroll Dept or Service Provider b. Pensions and Pensions Board, Accountant-General Gratuities c. Contractor Bureau of Public Procurement, Accountantarrears General, Ministry of Budgets (Contracts M&E Dept) d. Unremitted Accountant-General, Individual MDAs, deductions (Tax) Head of Service, Payroll Dept or Service Provider 90

Types of Domestic Arrears and likely Primary Record Holders Type of Domestic Arrears a. Unremitted deductions (Nontax and subscriptions, e. g. Union dues, Agric Credit Scheme, Housing Scheme, Car loan etc. ) a. Judgement debts a. Unpaid grants and subventions (scholarships, staff claims for medical expenses etc. ) Likely Primary Record holder(s) Accountant-General, Individual MDAs, Payroll Dept or Service Provider Min of Justice, Office of Attorney General Scholarships Board or equivalent at the Ministry of Education, Accountant-General, Individual MDAs, Accountant. General a. Overhead expenses, including staff claims and out of pocket expenses a. Other. . . Include as necessary 91

Proposed initial checks of completeness Type of Initial checks of completeness Domestic Arrears a. Salaries Review payment records to confirm if the history of payments and dates of last payments agrees with the record of arrears. Test a sample of recipients to ensure arrears balances recorded by b. Pensions the individual and balances held on official records are the same. and Ensure the tests include a check to confirm that any adjustments for Gratuities inflation have been properly made. Review the backlog of cases at the Pensions Commission to identify systematic issues (issues affecting groups of individuals and with the same root cause) and consider the impact of these issues on the arrears database and balance. Obtain the results of any recent internal and external audits, especially checks of the integrity of biometric databases etc. , and consider implications for the accuracy of the database. 92

Proposed initial checks of completeness Type of Initial checks of completeness Domestic Arrears c. Contractor Review contract files at the primary record keeper(s) and arrears determine whether balances held on the files agree with balances held on the records/database. Conduct checks of all contracts over Naira 20 million and a sample check of files for contracts below Naira 20 million. Confirm that the cut-off dates for treatment as arrears are properly determined. i. e. the debts are past the due date agreed for settlement. Review any disputes between the contractor and the relevant MDA and confirm that any undisputed amounts/elements are included as arrears. Where entire balances are in dispute, assess the minimum liability exposure and confirm it is included as arrears. 93

Proposed initial checks of completeness Type of Domestic Initial checks of completeness Arrears d. Unremitted deductions (Tax) e. Unremitted deductions (Nontax and subscriptions) Review payroll records at the primary record keeper(s) and determine whether balances held on the individual files agree with balances held on the records/database. Conduct a check of payroll deductions for a sample of individual records. Review deduction records at the primary record keeper(s) and determine whether balances held on the individual files agree with balances held on the records/database. Conduct a check of payroll deductions for a sample of individual records. 94

Proposed initial checks of completeness Type of Domestic Initial checks of completeness Arrears f. Judgement Review Judgement records at the primary record keeper(s) and debts determine whether balances held on the individual files agree with balances held on the records/database. Conduct a check of debts balances from file to database for a sample of individual cases. Confirm that the cut-off dates for treatment as arrears are properly determined. i. e. the debts are past the due date agreed for settlement. g. Unpaid grants Review the entitlement and payment records at the primary and subventions record keeper(s) and determine whether balances held on the (scholarships individual files agree with balances held on the records/database. etc. ) Conduct a check of debts balances from file to database for a sample of individual cases. Confirm that the appropriate cut-off dates for treatment as arrears are being applied. i. e. the debts are past the due date agreed for settlement. 95

Proposed initial checks of completeness Type of Domestic Arrears h. Overhead expenses, including staff claims and out of pocket expenses i. Other… Initial checks of completeness Review the expense arrears records at the Primary record keeper(s) and determine whether balances stated are valid claims. Confirm that the appropriate cut-off dates for treatment as arrears are being applied. i. e. the arrears are past the due date agreed for settlement. Include as necessary 96

Component 3: Adopt verification guidelines for all types of domestic arrears To address risks of invalidity and misstatement (understatement or overstatement) of the debt balances, the state through the Domestic Arrears Committee should introduce the following verification processes and actions……. . 97

Proposed verification processes/procedures Type of Domestic Arrears a. Salaries Likely Primary Record holder(s) Accountant-General, Head of Service, Payroll Dept or Service Provider b. Pensions and Gratuities Pensions Board, Accountant-General Verification process / guidelines Internal Audit - regular payroll audits (minimum annually), including the validation of individual arrears balances, reviews of biometric data management processes etc. Ensure the audit tests include a check to confirm that any adjustments required for inflation have been properly made. Revalidation of pensioners, in addition to the procedures set out above 98

Proposed verification processes/procedures Type of Domestic Arrears c. Contractor arrears Likely Primary Record holder(s) Verification process / guidelines Bureau of Public Procurement, Accountant. General, Ministry of Budgets (Contracts M&E Dept) Establish a publicly-accessible arrears database and includes electronic links to enable contractors to validate their balances, as well as submit claims for excluded amounts. See Component 4 B guidelines below for the expected functionalities of the portal. Internal Audit (or equivalent), Verification Committees, Monitoring Units, Verification Agents/Consultants – to conduct contract audits to verify work done, completion certifications and amounts owed. (possibly on a sample basis for contracts below the set threshold. See Component 4 B guidelines below for more detail. 99

Proposed verification processes/procedures Type of Domestic Arrears d. Unremitted deductions (Tax) Likely Primary Record holder(s) Accountant-General, Individual MDAs, Payroll Dept or Service Provider e. Unremitted Accountant-General, deductions (Non-tax Individual MDAs, and subscriptions, e. g. Payroll Dept or Union dues, Agric Service Provider Credit Scheme, Housing Scheme, Car loan etc. ) Verification process / guidelines Can be covered as part of the verification process for payroll (above) 100

Proposed verification processes/procedures Type of Domestic Arrears f. Judgement debts Likely Primary Record holder(s) Min of Justice, Office of Attorney General Verification process / guidelines Internal Audit (or equivalent), Legal experts – to contact case file audits to verify judgement debts are correctly and properly recorded as due g. Unpaid grants and Scholarships Board Internal Audit (or equivalent) – subventions or equivalent at the to conduct beneficiary file (scholarships, staff claims Ministry of audit to verify the entitlement for medical expenses etc. ) Education, to stated balances. Possibly on Accountanta sample basis. General, Individual MDAs 101

Proposed verification processes/procedures Type of Domestic Arrears h. Overhead expenses, including staff claims and out of pocket expenses i. Other… Likely Primary Verification process / Record holder(s) guidelines Individual MDAs, Internal Audit – to conduct Accountantexpenditure claim audits General, (minimum annually), including the validation of individual arrears balances. Possibly on a sample basis. Include as necessary 102

The proposed verification process for each claim A. Collation of information on unpaid arrears by the Chief Financial Officer of each Debtor entity or Primary Record Holder, and then preparation of a consolidated record or database. B. Verification of claims - Also note that the legal validity of each payable can be verified by checking that: i. the transaction was duly authorized by a responsible officer; ii. it was in accordance with authorized public finance and procurement laws, rules, and regulations; iii. it was consistent with budgetary authorizations; and iv. the transaction reflects a valid charge on the public purse for which commensurate goods and/or services have been received by the Government. The verification process should also establish the correct value of the amount payable. 103

The proposed verification process for each claim C. Categorization of claims. Each claim should be categorized as one of the following: i. Valid (claims are those for which adequate documentation exists to recognize a government liability). ii. Contestable (claims are those for which incomplete documentation has been provided and/or items under litigation). iii. Rejected (claims are those for which legitimate documentation has not been presented). 104

Component 4 A: Establish a consolidated internal domestic expenditure arrears database • • The Domestic Arrears Committee, through its secretariat, is to establish and maintain a comprehensive database of all the state’s domestic arrears. Where a state has FMIS in place containing a comprehensive record of all arrears, there should be no need for a separate database. Some configuration of the reporting function may however be required, to ensure all the necessary information is captured. The database should have the capacity and functionality to record all the steps set out in Component 3 - in particular, Step C, which is the categorization of the arrears claims and balances into valid, contestable, and rejected. 105

Features and functionalities of the consolidated internal domestic expenditure arrears database The table on the next slide sets out the minimum information requirements for the consolidated domestic arrears database as required in the SFTAS verification protocols. Note that the required information fields are already captured in the template/tool #3 for the recording of domestic arrears. 106

Minimum information to be contained in the internal domestic arrears database 107

Recommended process for establishing the database • Designate a unit - could be the Domestic Arrears Committee Secretariat - and specific staff for collecting arrears data, maintaining the information and updating the database. This work will be overseen by the Domestic Arrears Committee. • The data can be held on excel spreadsheets or in a specialized database software. Note that the proposed database is ‘software/system agnostic’ and can be created using spreadsheets at its most basic. • There should be a clear definition of arrears, data requirements and a monthly cut-off date for inclusion of new arrears. These will require circulars/ instructions/ guidelines and templates for the institutions and entities that are to provide the arrears data. • 108

Recommended process for establishing the database • Note: cash or accrual accounting systems will need accurate reporting of accounts payable and be able to identify those in arrears. Cash accounting systems may need to be supplemented with a separate reporting mechanism for monitoring expenditure commitments, invoices received and verified, accounts payable, invoices paid, and arrears • The arrears data should be certified by the Head of Finance of the respective institutions (the primary record holders) as a true and complete account of all arrears and include all necessary documents/information for validation and verification. • There should be sanctions for non-reporting or late reporting of the arrears. 109

Component 4 B: Establish a publicly-assessible online version of the consolidated internal domestic expenditure arrears database States are to publish online elements of the internal domestic arrears database on a state official website. This will constitute the online publicly-accessible arrears database. Furthermore, the website should provide contractors with amounts owed above a set threshold the opportunity to confirm that their debts are included within the database. 110

Features of the online domestic arrears database (1/3) (as per the SFTAS verification protocol) 1. The online publicly-accessible arrears database must include the following information about domestic expenditure arrears categorized as valid in the internal domestic arrears database: a. The amount of total domestic expenditure arrears (across all types). b. The aggregate amount of contractors' arrears; c. The aggregate amount of pension and gratuity arrears; d. The aggregate amount of salary arrears and other staff claims; and e. A list of individual contractors with recognized arrears of 20 million naira or more in the database. For each of these contractors, the name of the contractor, the nature of the goods and services procured, and the billing date should be provided. The amount of the contractor's claim and other billing data does not need to be provided. The public can only see that the contractor’s claim is at least 20 million naira. f. Information /instructions for contractors to be able to verify that their claims are being accurately reported in the database (see point 2). 111

Features of the online domestic arrears database (2/3) (as per the SFTAS verification protocol) 2. The website supporting the online publicly-accessible arrears database shall contain an electronic link that permits any contractor creditor whose individual claim is listed in the database (in the list of individual contractors with recognized arrears of 20 million naira or more) to request a restricted disclosure of the information not reported on the online database (namely, the amount of the contractor's claim and other billing data), by filling a confidential form online and attaching supportive evidence of her claim. • If the State Ministry of Finance confirms the validity of this claim, the restricted disclosure will be provided to the creditor. • If the creditor believes the amount recorded in the database is incorrect, they can request the State Ministry of Finance to review and provide supportive evidence. • If the State Ministry of Finance confirms the validity of this further claim, the correction will be made to the internal and online version of the database 112

Features of the online domestic arrears database (3/3) (as per the SFTAS verification protocol) 3. The website supporting the online publicly-accessible arrears database shall contain an electronic link that permits any potential contractor creditor whose individual claim is not listed in the database (in the list of individual contractors with recognized arrears of 20 million naira or more) to communicate this exclusion to the State Ministry of Finance, by filling a confidential form online and attaching supportive evidence of her claim. • If the State Ministry of Finance confirms the validity of this claim, it shall be added to the internal domestic arrears database and included as relevant in the online publicly-accessible arrears database. 113

Component 5: Standard reporting of domestic arrears to end-users The Domestic Arrears Committee will also be responsible for the maintenance and accuracy of the data required for reporting to key decision makers and stakeholders, primarily, • the Executive Governor, • the State Cash Management or Cash Budget Committee (if separate), • the State Ministries of Finance, Budgets and Economic Planning, • the State Debt Management Departments and the DMO. As such, the reporting requirements of these various stakeholders should be determined and built as a function into the operations of the Domestic Arrears Committee. 114

Component 5: Standard reporting of domestic arrears to end-users • The Domestic Arrears Committee should be able to generate directly from the consolidated internal domestic expenditure arrears database all the information it requires to fulfil its standard reporting obligations. • The standard reports should be generated at least on a quarterly basis (to feed into the quarterly state domestic debt reports sent to DMO) if not on a monthly basis (recommended). • The reports will be key in monitoring the implementation of the state’s arrears clearance framework (ACF) and progress towards achievement of SFTAS DLI #8. • The Domestic Arrears Committee should produce the annual State Arrears Recording, Verification and Clearance Report (see section 5 of the guidelines). 115

Work-flow for recording, verification and reporting of domestic arrears The Domestic Arrears Committee should introduce the following processes and actions (or similar): 1. On a monthly basis, Primary Record Holders are to submit their full records of arrears to the Domestic Arrears Committee using the agreed recording template. 2. The Domestic Arrears Committee coordinates the verification of the arrears engaging the services of Internal Audit, Inspectorates, Consultants etc. 3. The Domestic Arrears Committee submits the verified arrears to endusers in a standard format and informs the Primary Record Holder of arrears which did not pass the verification checks (for further substantiation or for write-off). These processes and actions can be managed using an FMIS if implemented. 116

Work-flow for the recording, verification and reporting of domestic arrears (A) Primary Record Holder Accountant-General / Min of Finance Ministry of Budgets and Economic Planning Head of Service / Pensions Board Bureau Public Procurement Min of Justice…etc Monthly arrears records (unverified) (C ) Likely Verifiers Contestable and Rejected arrears (B) Domestic Arrears Committee To establish and manage the internal consolidated arrears database and the publiclyaccessible online database Submits arrears for verification Internal Audit Monitoring Inspectorate Consultants Contract Verification Committee Project Monitoring Unit Min of Budgets M&E Unit Submits results of verification Monthly reports on verified and valid arrears (D) End-users Cash/Budget Management Committee Debt Management Agency for DMO reporting Executive Governor and State Ex-co For preparation of Arrears Clearance Framework For preparation of Annual SARVCR 117

Further considerations (1/3) Funding for the various activities - All the proposed activities - in particular, the verification process - will require adequate funding to be effective. Adequate funding for the verification process may also reduce the risk of collusion/fraud that exists around most verification exercises. Sensitization and awareness raising - All actors within the framework described above should be made aware of the end-to-end process, and the impact of not performing their aspects of the process. The opportunity presented through the SFTAS program can also be emphasized, along with the potential to win funds for the State. 118

Further considerations (2/3) Dedicated awareness raising on the contractor database - For the purposes of achieving DLI #8, a key outcome from the properation of the arrears validation function within the online contractor database is for all previously unrecorded arrears to be captured within the first year of implementing the function. Where updates (i. e. previously unrecorded arrears) trickle in over a number of years, this will affect the effective implementation of the state’s arrears clearance framework and the state’s ability to achieve a year-on-year reduction in the total arrears balance. 119

Further considerations (3/3) Possible changes to the existing financial regulations (FRs) or similar framework - The processes described within these guidelines may require some changes to the existing financial regulations. Each participating state may need to review the procedures outlined and identify any areas where the existing financial regulations (FRs) may require amendment. New FRs may be required, or a clear communication that the new processes supersede any contrary guidance within the existing FRs. 120

Q&A 121

Exercise #1: Identification by type of arrears, the primary record holder, test and verification checks # Type of Domestic Arrears 1 Salaries Arrears 2 Pensions and Gratutities Arrears 3 Contractor Arrears 4 5 6 7 8 Primary Record Holder Initial Checks of Completeness Verification Process

4. Prioritization and Clearance of Arrears 123

Global lessons in prioritization and clearance of arrears The IMF’s Guidelines on Government Expenditure Arrears Management prescribe several key characteristics of an effective arrears clearance strategy, which can be summarized as the following: • Comprehensiveness. The arrears clearance strategy should apply to all outstanding payments incurred by a state government, including budgetary institutions and stateowned enterprises. • Transparency. The clearance of arrears should proceed according to a public timetable and criteria for prioritizing clearance should be transparently stated and adhered to. • Realism. The government’s annual budget and medium-term fiscal projections should make adequate provision for the cash cost of arrears clearance. • Credibility. To demonstrate commitment to addressing the root causes of the problem, the strategy should include measures to avoid the accumulation of new arrears, and ministries or agencies that fail to implement these measures should be penalized appropriately.

Current practice of prioritization and clearance of arrears in Nigeria • To varying degrees, states have institutional mechanisms for prioritizing the payment of domestic expenditure arrears. In some states, the process begins with a commitment to clear some or all arrears in the forthcoming budget year. • While these commitments may or may not be reflected in the officially adopted budget, actual payment decisions are typically made during month-to-month budget execution and depend upon the actual availability of funds and competing priorities. • These decisions are typically overseen by a liquidity or cash management committee. The committees decide which arrears are paid, with some principles and criteria being applied (for example for contract arrears, the size of arrears, the level of completion of projects), although the prioritization criteria are in most cases not formally documented or published, allowing for substantial discretion and undermining transparency. It was mentioned that the lack of a formal prioritization criteria meant that contractors with strong political connections are likely to be paid first. • It should be noted that the arrears repayments so far have been significantly less than the accumulation of new arrears in total across all states.

Guidelines for the establishment of an Arrears Clearance Framework • The SFTAS DLI #8 requires states to establish and publish an Arrears Clearance Framework (ACF) to ensure that the reduction of arrears is carried out according to an objective and transparent process. The SFTAS verification protocol (Annex 1) defines the content of an ACF for the state in very general terms, only requiring the ACF to at a minimum contain (i) planned actions to settle arrears, and (ii) an explicit prioritization of arrears to be settled. The verification protocol deliberately allows each state considerable flexibility in defining its arrears clearance framework. • The guidelines for establishing an ACF for the state consist of five steps/components: 1. Development of a multi-year funding plan for clearing arrears 2. Development of a formal prioritization criteria 3. Ensuring a supportive institutional mechanism to clear arrears 4. Publication of the ACF 5. Clearance of arrears according to the ACF

1. Development of a multi-year funding plan for clearing arrears (1) Develop a realistic multi-year funding plan for clearing the stock of arrears, based on realistic estimates of the total funds available. Broadly, there are two sources of funds: 1. The state’s revenues and grants: • FAAC-allocated statutory transfers - the state’s share of oil revenues and VAT net of deductions. • IGR, which have been growing rapidly (from low levels) in many states. • One-off revenues and grants such as the Paris Club refund. • The amount of revenues available potentially to clear arrears will reflect the state’s revenue position and competing state expenditures such as personnel costs. 2. The state’s borrowing: • Federal government loans such as the Budget Support Facility. Any current programs? In the future? • CBN development financing schemes • State bonds – is this available in your state? • Commercial bank loans – is this available in your state? • Securitizing the arrears. The state would swap its arrears with market-negotiable securities with explicit timetables for payments and interest rates. This would have the benefit of providing a tradable security to the creditors, making it possible for them to get funds immediately while providing some time for the state to pay its obligations. The feasibility of this approach is dependent on whether creditors would be willing to accept securities in lieu of existing claims.

1. Development of a multi-year funding plan for clearing arrears (1 b) Develop a realistic multi-year funding plan for clearing the stock of arrears, based on realistic estimates of the total funds available. Broadly, there are two sources of funds: cont…. 2. The state’s borrowing: …. • Contract Financing Facility. This technique is developed for ensuring that contractors can be interested in continuing providing goods and services to the government but it can also be used for arrears repayments. The contractor borrows in an commercial bank to an amount corresponding to the agreed arrears repayment. The state service the debt to the bank through an ISPO. Thus, the contractor gets the arrears repaid. The bank will take a normal risk associated with lending to the state since the debt servicing is guaranteed by the ISPO. And the state replaces the contractors arrears with a debt in a commercial bank. • This technique is similar to the securitization in the sense that also securities issued under a securitization scheme will be subject to an ISPO arrangement. The main benefit with securitization from the state´s point of view is that the terms and conditions on the securities could probably be lower than on the loan borrowed from the bank under the contract financing facilities since the counterparties in the securitization will be the contractors, very eager to have an ISPO on their claims, whereas for the bank it will just be an ordinary lending to the state and it will be priced accordingly.

1. Development of a multi-year funding plan for clearing arrears (2) At a minimum, the ACF should contain a funding plan for the current budget year showing the total funds available to clear arrears, based on an analysis of the estimated cashflows for the year. However, given that the total stock of domestic arrears is unlikely to be cleared in one year, the recommendation would be for the state to develop and include in the ACF a multi-year plan for reducing the stock of domestic arrears. The multi-year plan should have the following features: • Be consistent with the state’s medium-term expenditure/fiscal/budget framework (the total revenue, expenditure, and budget balance in those frameworks). For example, if the state intends to clear arrears using revenues and grants, then the MTEF should contain large enough projected budget surpluses to do so. If the MTEF is not realistic, the plan should use the state’s MTEF with appropriate adjustments. • Be consistent with the state’s medium-term debt strategy (the level of debt and composition of debt targeted). For example, if the state targets a reduction in contractual debt, the multi-year plan should not rely on future borrowing to fund the clearance of arrears. • Be consistent with achieving the basic or stretch targets of SFTAS DLI#8 for 2019 -2021. For example, if the state targets a 20 percent decline year-on-year to meet the SFTAS DLI #8 stretch target, the multi-year plan should show that will be fully funded.

1. Development of a multi-year funding plan for clearing arrears (3) To accompany these guidelines, an excel tool for developing a multi-year (2019 -2023) funding plan for clearing arrears (template/tool #4) is included. By testing various scenarios, the state can estimate the total funds available to clear arrears each year and the associated fiscal and debt implications. An illustrative example using the tool is shown in Table 6 of the Guidelines (Page 39). Note that the example is purely illustrative and may not be realistic for some states, given their fiscal and debt contexts and borrowing capacity

1. Development of a multi-year funding plan for clearing arrears (4) An illustrative example using the tool is shown in Table 6 of the Guidelines (Page 39). • The state has N 45 bn of domestic arrears at the end of 2018. It targets a rapid clearance of arrears: N 10 bn annually during 2019 to 2022 and then N 5 bn in 2023 to completely pay off the arrears. • This clearance schedule would allow it to achieve the stretch target of SFTAS DLI #8 in 2019 -2021 as the annual percentage decline is more than 20 percent. The state funds the clearance of arrears in a variety of ways. • In 2019, the state receives N 10 bn in Paris Club refunds, leading to a budget surplus of N 12 bn. The state uses this to clear arrears. • In 2020, as the Paris Club refund is a one-off, the annual budget surplus falls to N 5 bn (the target set by the state in its medium-term expenditure framework). The state clears arrears using a combination of the annual budget surplus and N 7 bn of new FGN borrowing, which it has been able to negotiate with the FGN. • During 2021 -2023, the arrears clearance is funded from a combination of the annual budget surplus and new borrowing from commercial bank(s). • As the budget is running a surplus throughout the projection period, the overall debt stock also declines during this period. The composition of debt changes with FGN borrowing and commercial bank stock increasing as domestic arrears stock declines.

1. Development of a multi-year funding plan for clearing arrears (5) • Once an estimate of the total amount of domestic arrears to be cleared is reached, this should be reflected in the state’s annual budget and borrowing plan. At present, many state budgets merely include a line for ‘amortization of debt’. To make sure that funds are set aside for clearing arrears, it would be helpful to have a separate budget line. • During the execution of the budget and borrowing plan, the allocation for arrears clearance should be vigorously enforced. In Nigeria, revenues are routinely overestimated during the budget preparation process. As the budget year proceeds and revenues fall short of projections, the government must reduce expenditures to match the actual revenues. There is a risk that the planned funding for arrears clearance could be cut during this process. It is therefore important that the funding plan for clearing arrears should be in the first place based on realistic budgets and MTEFs. The SFTAS DLI #8 rewards actual reductions in arrears, not amounts that are budgeted for this purpose. • The reduction of domestic arrears stock is measured based on the total stock of domestic arrears at the end of the current year compared to the total stock of arrears at the end of the previous year. Therefore, it is important that no significant new arrears be incurred in the current year, or at least that the sum of new arrears plus reductions in old/existing arrears yield a reduction in total arrears equal to the target.

2. Development of a formal prioritization criteria (1) • In most states, the volume of arrears will be too large to be cleared within a single year. The ACF must therefore set out the criteria to be used in deciding which arrears will be paid first. • One simple way to start prioritizing arrears is by organizing them first into the main types of arrears (e. g. , contractors, pensions and gratuities, salaries, etc. ) and then allocating a certain proportion of the total available funding for clearing arrears to each group. • How much should be allocated to each type of arrears? One approach would be to allocate the funds among the types of arrears in proportion to their share of the total outstanding stock of arrears. In Table 7, contractors account for 50 percent of total arrears stock at the end of 2019, so 50 percent of the total available funding for clearing arrears in 2019 would be allocated for settling contractor arrears. Table 7: Illustrative example of prioritization criteria across different types of arrears

2. Development of a formal prioritization criteria (2) Another approach is to focus all available funding on a particular type of arrears: • If public servants are threatening to strike unless past salary arrears are paid, a state might choose to pay salary arrears first. • If the state has large numbers of retirees who are solely dependent on their pensions to make ends meet, a state might want to focus on paying pension arrears. • There is also a case for focusing on contractors. Spending on public works can stimulate the local economy. Paying off arrears can enable contractors to pay overdue wages to their own employees and overdue bills to their own suppliers. There is a strong case for paying a certain subset of contractors—those involved in ongoing construction projects. Most large construction projects involve a series of payments: an initial mobilization payment to enable the contractor to purchase required supplies and equipment, and a series of subsequent payments that are due when fixed stages in the work are certified as completed. If a state fails to pay when one of these intermediate payments falls due, the contractor may walk off the job, leaving the works completed so far to deteriorate.

2. Development of a formal prioritization criteria (3) Because the allocations to each type is unlikely to be sufficient to pay all the arrears owed to each of them, the ACF will have to specify how payments within each type will be prioritized. Options to consider: • Prioritize on the basis of size or vintage, i. e. , to pay the largest or oldest arrears first, working down a list of arrears until the available budget resources are exhausted. This may draw objections from those whose arrears are small or recent; recent retirees may be negatively affected as they would not be paid anything until those who had retired earlier had been paid in full. • Prioritizing arrears that accrue interest and penalty charges or may result legal action • Prioritizing arrears that create a risk of service interruptions (such as utilities) or delays in the completion of ongoing public works • Prioritizing arrears that have severe socio-economic implications, such as arrears on salaries and pensions of low-income current and former state employees. A combination of criteria may be adopted, e. g. , pay contractor arrears on ongoing projects first, then allocate the remaining funds among completed projects, on the basis of vintage. An alternative to prioritizing within each type, is to simply pay a fixed percentage of the arrears it owes to each individual or firm, e. g. , in the case of pension arrears if the amount allocated in total is only sufficient to cover 15 percent of the total stock of pension arrears, the state would pay 15 percent of what it owes to each retiree.

2. Development of a formal prioritization criteria (4) The ability of a state to impose any of these prioritization criteria will depend on the extent of the data available on individual arrears. Table 8: Potential prioritization criteria, rationale and data requirements Criteria CONTRACTORS Ongoing works first Largest first Rationale Ensures ongoing works are completed Largest injury (in terms of arrear value) is addressed first Allows many individual arrears to be paid immediately and focuses funds on small firms that may be vulnerable to cash flow problems (assuming most small arrears are owed to Smallest first small contractors) Oldest first Creditor who has been waiting longest is paid first Subject to penalties Paying arrears that bear penalties for late payment reduces first cost to state PENSIONS AND GRATUITIES Oldest first Largest injury (in terms of delay) is addressed first All pensioners receive something, regardless of when they Equal percent to all retired SALARIES Oldest first Largest injury (in terms of delay) is addressed first Allows many individual arrears to be paid immediately and focuses funds on lowest paid workers that may be vulnerable to cash flow problems Smallest first All staff receive something, regardless of when salary Equal percent to all payment was first missed or level of salary Data Required* Status of project construction Value of outstanding arrear Date missed payment was first due Contract terms: whether provide for late penalties Date missed payment was due Amount owed to each pensioner Date missed payment was due Value of outstanding arrear Amount owed to each staff

3. Ensuring a supportive institutional mechanism to clear arrears • Most countries that confront a major arrears crisis have found it useful to appoint a temporary committee that will be responsible for managing the arrears clearance process. Such a committee is usually housed within the ministry of finance and may include representatives of the minister, the entity responsible for preparing the annual budget, the treasury and the relevant sectoral MDAs. It may also include the supreme audit institution as an observer to ensure the integrity of the process. The committee is typically charged with implementing the agreed prioritization criteria and preparing periodic reports on its progress, highlighting any non-reporting spending units and recommend remedial actions. • In the case of Nigeria, establishing a separate committee to oversee the clearance of arrears may not be necessary. The guidelines on arrears recording, verification, and reporting in Section 3. 3 recommend that each state establish a Domestic Arrears Committee with overarching formal responsibility for the accurate recording, verification and reporting of domestic arrears balances, establishment of the Arrears Clearance Framework (ACF), oversight of its implementation, and reporting on progress made. The ACF document itself should clarify the organizational arrangements that will be used to oversee the implementation of the arrears clearance process. In case it is the same Domestic Arrears Committee, the terms of reference for that Committee should include responsibilities for establishing the ACF and overseeing its implementation (as in the case of the template/tool #2: Sample Terms of Reference for the Domestic Arrears Committee contained in these guidelines)

4. Publication of the ACF and 5. Clearance of arrears according to the ACF • Once the multi-year funding plan for clearing arrears and the prioritization criteria have been developed and the organization mechanism to oversee the clearance has been agreed, the state needs to document these plans and decisions in an official government document as the state’s arrears clearance framework (ACF). See template/tool #5 for the ACF document. • The ACF needs to be published on an official state website as per the SFTAS DLI #8 requirements. the Governor. • Once the ACF is established, SFTAS DLI #8 requires the clearance of domestic arrears to be consistent with the ACF. For example, if the prioritization criteria in the ACF states that the oldest contractor arrears are cleared first, the actual clearance of arrears should be based on vintage with the oldest contractor arrears settled first.

Template/tool #5: Sample of the State Arrears Clearance Framework document User guide/instructions for the template/tool The suggested structure and content reflect the minimum information required for achieving the SFTAS DLI #8. It is not meant to be exhaustive. Additional information may be included in the ACF document. Structure and Contents of the State Arrears Clearance Framework (ACF) document Section 1: Background (1 -2 pages) Presentation of data on the current total stock of domestic expenditure arrears with at the minimum details of the aggregate amounts by types (contractors, pension and gratuities, salary and other claims). [This information should be pulled from the state’s domestic arrears database. It is recommended that the state also includes historical data of the stock of arrears at yearend for the past 5 years]. Description of the State’s general policy on: 1) the prevention of new arrears accumulation; and 2) the clearance of existing arrears, including quantitative targets for reducing the stock of arrears. Section 2: Planned actions to settle arrears (1 -2 pages) Description of the multi-year plan for clearing/settling arrears, with details on the actions to be taken in the current year. The description should include: 1) the total amount of domestic arrears being targeted to be cleared; 2) the funding strategy, whether it will be funded from earmarked revenues, general budget surplus and/or borrowing (which debt instrument); and 3) the implications of clearing/settling arrears on the budget and debt situation of the State and consistency with the State’s budget/fiscal/debt policies and frameworks. Summary tables of the multi-year funding plan – see template/tool #4 for example Section 3: Prioritization criteria for arrears to be settled the implementation of the arrears clearance framework (1 -2 pages) Description of the prioritization criteria to be applied to determine the sequence of arrears to be settled. The description should include (as applicable): 1) the prioritization between types of arrears with rationale; and 2) the prioritization within types of arrears with rationale. Section 4: Organizational/institutional arrangements for overseeing the implementation of the ACF (1 -2 pages) Description of the organizational/institutional arrangements for overseeing the implementation of the ACF, including details of committees, responsibilities and monitoring and reporting arrangements.

Practical Session: Template/tool #4 Multi-year funding plan for clearing arrears xls-based tool Breakout Room IT Equipment: Laptops, mouse and chargers (at least 2 sets per delegation)

Exercise #2: Prioritization criteria Exercise: ACF Prioritization Year: 2019 NOTES All numbers are presented in billion naira All input cells are coloured pink All calculation cells are coloured yellow Type of Arrears Total stock at end of 2018 PLANNED Prioritization criteria to be applied Criteria for allocation amount to be to arrears within each type of among types cleared in arrears 2019 Contractors Pensions and Gratuities Salaries Other Total 0. 00

5. Monitoring and Reporting for SFTAS on the Domestic Arrears DLI 142

Guidelines on monitoring progress on the domestic arrears DLI #8 It is recommended that states regularly (on a monthly basis) monitor progress of each of the key requirements of DLI #8 and share progress with the Domestic Arrears Committee, the SFTAS focal points and the SFTAS Steering Committee. Table 9 shows an example of a checklist and action plan that can be used to monitor and report internally on progress. # SFTAS Domestic Arrears DLI #8 CHECKLIST of Key Steps 1 Optional: A domestic arrears committee established with clear To. Rs and authority All domestic arrears should be recorded in an internal domestic arrears database that has updated data on the total stock (recommended on a monthly basis) An arrears verification process is in place and arrears categorized into valid, contested and rejected 2 3 4 5 6 7 8 Status (Not Started, In Progress, Complete) Complete Actions to be taken Responsibility Timeline (MDA, Dept) (Month, Year) Complete the categorization of contractor arrears Design of the webpage on the ministry of finance website Office of State By Sept Accountant 2019 General Complete In Progress A publicly-accessible arrears database online, including info: Not Started (1) total contractors' arrears, total pension and gratuity arrears, total salary arrears; and (2) a list of names of contractors with recognized arrears exceeding 20 million naira The website supporting the online publicly-accessible arrears database shall contain an electronic link that permits contractors to query/verify their claim The State Arrears Clearance Framework is published online containing: 1) The planned actions to settle arrears; and 2) An explicit prioritization of expenditure arrears to be settled Clearance of arrears is in accordance with the ACF At least 5% decline in the stock of total domestic expenditure arrears* at end of FY 2019 compared to FY 2018 Domestic Arrears Committee overseeing the IT dept By Oct 2019

Guidelines for reporting to the DMO and IVA on the domestic arrears DLI #8 • To support the assessment of the state’s achievement of the SFTAS DLI #8 on domestic arrears, each state is to prepare and submit a State Arrears Reporting, Verification, and Clearance Report (SARVCR) to the DMO and IVA within one month after the year end. • The SFTAS verification protocol (Annex 1) stipulates the following: The SARVCR and supporting documents and data must include the following information: 1) the total stock of domestic expenditure arrears at the end of each year as recorded in their internal domestic expenditure arrears database; 2) the policies and actions taken to verify arrears, including the verification process triggered by individual contractors who submitted online queries to communicate the non-reporting of their claims to the State Ministry of Finance; 3) the policies and actions taken to settle arrears in the past year, including explanations on their consistency with the state's arrears clearance framework; 4) the policies and actions taken to prevent the occurrence of new arrears in the past year (if applicable); 5) attach electronic files showing evidence of the internal domestic expenditure arrears database; 6) the electronic link to the online publicly-accessible domestic expenditure arrears database. • A template for the SARVCR (template/tool #6) is included. It is recommended that states follow this template to facilitate a smooth assessment process.

Template/tool #6: The State Arrears Reporting, Verification and Clearance Report (SARVCR) (1) User guide/instructions for the template/tool The proposed structure and content reflect the minimum information required for the SARVCR. Additional information may be included in the SARVCR if considered appropriate by the state. Structure and Contents of the State Arrears Reporting, Verification and Clearance Report (SARVCR) Introduction: (1 page) Summary of the content of the report Details of who prepared the report and contact information for follow up Summary of the state’s own view on its progress towards achievement of each of the requirements of SFTAS DLI #8, highlighting successes and challenges. Section 1: Statement of the stock of domestic expenditure arrears (1 page) Presentation in a table of the total stock of domestic expenditure arrears at the end of each year, accompanied by a short narrative: o The figures should refer to those arrears which have been verified and categorized as valid in the internal domestic expenditure arrears database. o The figures should show total stock of arrears for each type of arrears (must include contractors, pensions and gratuities, salary and other claims) and the overall total. o At a minimum, the stocks at the end of the previous year and the current year should be shown. The figures should be accompanied by evidence such as signature by the Commissioner of Finance that these figures are official. A template for the table to present the figures for this section is included in the accompanying excel file. The template with illustrative numbers is shown below.

Template/tool #6: The State Arrears Reporting, Verification and Clearance Report (SARVCR) (2) SARVCR Section 1 Table with illustrative figures

Template/tool #6: The State Arrears Reporting, Verification and Clearance Report (SARVCR) (3) Section 2: Policies and actions taken to strengthen the recording, verification and reporting of arrears (2 -3 pages) Description of any organizational/institutional arrangements established to manage domestic expenditure arrears and oversee the implementation of the ACF, including details of committees, responsibilities and monitoring and reporting arrangements. Description of the policies and actions taken by the State in the past 12 months to strengthen the process and system for the recording, verification and reporting of arrears in the State, including details of the following: o The verification process undertaken for each type of arrears (summary); o In detail the process of publishing the online version of the database and the verification process triggered by individual contractors who submitted queries to the state; o The web address of the online publicly-accessible arrears database; o The type and level of detail of information on arrears recorded in the state’s internal domestic expenditure arrears database with electronic files showing evidence of the database attached; and o Any changes or restatements of the stock of domestic arrears as a result of the policies and actions.

Template/tool #6: The State Arrears Reporting, Verification and Clearance Report (SARVCR) (4) Section 3: Policies and actions taken to reduce the stock of domestic expenditure arrears (2 -3 pages) Description of the policies and actions taken by the State in the past 12 months to prevent the accumulation of new arrears. This could include actions to develop more realistic budgets, strengthen cash forecasting, expenditure commitment controls, shortterm financing. Description of the policies and actions taken by the State in the past 12 months to clear/settle existing arrears. The description should include: o The funding source - whether it was from earmarked revenues, general budget surplus and/or borrowing (which debt instrument); o How the clearance/settlement of arrears were prioritized and sequenced i. e. which arrears were cleared in the past 12 months and why. The description should include (as applicable): 1) the allocation between types of arrears; and 2) which arrears were cleared/settled within each type of arrears; and o Details of any settlement agreements reached. The State’s own assessment on whether the policies and actions taken by the state were consistent with the State’s arrears clearance framework (which is attached as an annex). Where there were inconsistencies, provide an explanation for the deviation. Inclusion of figures to demonstrate compliance with the State’s arrears clearance framework. Table 10 below provides an illustrative example of a table of figures that could be provided to show compliance with the prioritization criteria Annexes/Attachments: 1. Copy of the approved and published state arrears clearance framework (ACF) 2. Electronic files showing evidence of the internal domestic arrears database 3. Other evidence that supports the content of the SARVCR as deemed appropriate by the state

Template/tool #6: The State Arrears Reporting, Verification and Clearance Report (SARVCR) (5) The state planned to clear N 20 billion of arrears by the end of 2019. The allocation between types of arrears is proportional to the share of total arrears. Although only a total of N 10 billion of arrears was cleared in the end, the amount cleared of each type of arrears was still proportional. Within contractor arrears, the state planned to clear the largest contractor arrears first. With a planned N 10 billion of clearance, the state planned to clear the arrears of contractors A, B and C. Although only a total of N 5 billion of contractor arrears was cleared, the state cleared the largest first (A) and part of the arrears of the second-largest (B). Table 10: Example of table with supporting figures to show compliance with the ACF

Exercise #3: Readiness assessment # 0 1 2 3 4 5 6 7 SFTAS Domestic Arrears DLI #8 CHECKLIST of Key Steps Optional: A domestic arrears committee established with clear To. Rs and authority All domestic arrears should be recorded in an internal domestic arrears database that has updated data on the total stock (at the least on a quarterly basis, recommended on a monthly basis) An arrears verification process is in place and arrears categorized into valid, contested and rejected A publicly-accessible arrears database online, including the following information: (1) the aggregate amount of contractors' arrears, pension and gratuity arrears, salary arrears; and (2) a list of names of contractors with recognized arrears exceeding 20 million naira and information for contractors to be able to verify that their claims The website supporting the online publicly-accessible arrears database shall contain an electronic link that permits contractors to query/verify their claim The State Arrears Clearance Framework is established and published on a state official website containing: 1) The planned actions to settle arrears; 2) An explicit prioritization of expenditure arrears to be settled Clearance of arrears is implemented in accordance with the ACF At least 5% decline in the stock of total domestic expenditure arrears* at end of FY 2019 compared to FY 2018 (*arrears which have been verified and valid across all categories) Status (Not Started, In Progress, Complete) Actions to be taken (to Responsibility Timeline Notes complete the key (MDA, Dept) (Month, Year) element)

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