Tracking Progress and Controlling Funds Bill Dorotinsky PREM

Tracking Progress and Controlling Funds Bill Dorotinsky, PREM BEFA Course January 10 -12, 2005 The World Bank

Outline • Concepts in Budget Execution Management • Cash Management • Analysis of budget execution – Exploring problems – Fun with data The World Bank 2

Concepts Post Budget Stages • Release of Authority to Spend or Funds – Notification of approved budget – Commitment authority issued (if done) • Financial plans, apportionments – Warrants issued (cash draw) – Cash transfer (if done) • In-year modifications – Transfer authority – within ministry across accounts – Virements – across ministries – Supplemental Budgets The World Bank 3

Concepts Financial commitment stages • • Encumbrance/pre-commitment/reservation Commitment/obligation Receipt of goods and services Invoice Verification Paid Cashed/cleared The World Bank 4

Concepts • • • Budget classifications Administrative Economic/object class/’inputs’ Functional Program Fund Line Item The World Bank 5

Concepts Control Approaches Ex ante Ex Poste (to commitment) External (to spending unit) (centralized) Internal (decentralized) The World Bank • Centralized commitment control (transaction approval) • Allocations (commitment limits) • Warrants (cash limits) • Procurement procedures • Personnel/pay rules • “continuous auditing” • Disbursement rules • Central internal audit • External audit • Regular reporting, management intervention • Quarterly close-outs • Cash rationing • Performance reporting • Ministry or spending unit transaction • Ministry internal audit approval • Performance management • Procedures to minimize risk (internal controls) • Transparency 6

Concepts Central control versus Managerial Flexibility • Tensions between needs of center to – Control cash flow – Control policy • And agency need to manage programs – Larger, less detailed allocations – Longer time horizon – Greater transfer authority/flexible application of resources The World Bank 7

Cash management • Objectives: – Assure fund availability for meeting government obligations (liquidity) – Cash conservation – Minimize borrowing, borrowing cost – Maximize returns from idle cash – Risk management • Tools: – – – Treasury consolidated fund (single account) Financial plans Warrants (allowable draws on TCF) Invoice payment/cash rationing Debt issuance Supplemental budgets The World Bank 8

Cash management Treasury Consolidated Fund (treasury single account) • Single account or accounts under treasury management – consolidation of cash – The more accounts, the more difficult to manage, report • Payment arrangements will vary: – Centralized: direct transaction from TCF – Deconcentrated: payment by spending agency from TCF – Decentralized: payment by spending agency from imprest account The World Bank 9

Cash management Financial plans • Important link between budget, agency programs and activity, cash flow – Links commitments and cash • Used for cash flow forecasting when combined with revenue forecast – Allows planned, orderly debt issuance • Usually monthly • Periodic variance analysis to plan, budget The World Bank 10

Cash Forecast and Balances: Rudiments of cash management 1 2 3 4 5 6 7 8 9 10 11 12 Revenues Central Forecasts Spending Agency Financial Plans/Allotments Balance Annual predictable pattern The World Bank Seasonal revenue fluctuation, spending patterns Structural revenue fluctuation, spending patterns Arrears Overcommmitment Random 11 revenue shocks

Corrective Measures: Smoothing cash flows Cash Balance Seasonal: 1. Keep allotments or commitments below revenue, build balances 2. Short-term debt 3. Limit cash payments to cash balances (arrears) The World Bank Structural: 1. Budget retrenchment 2. Long-term debt 3. Allow commitment/spending only if revenues actually received 4. Contingent liability management 5. Comprehensiveness 6. Commitment controls Who bears the risk of fiscal adjustment under each option? 12

Cash management Cash rationing (misnomer cash budgeting) • Last resort liquidity management • Disruptive to programs, vendors • High corruption potential – Need transparent ex ante rules – Public procedure • Likely to undermine budget priorities The World Bank 13

Applications The World Bank 14

Above-thewaterline observation 100 clinics, but only 70 operating Exploring problems WHY? Budget not comprehensive 10 built with donor funds, donor funds off-budget Budget fragmented 10 built with domestic funds, capital budget separate Cash triage 10 funded in budget, but no cash allocated to operate WHY? Weak budget law Too rigid budget execution Low public pay WHY? Donor ring-fencing for “accountability” The World Bank Line ministry gets flexible resource pool And what can be done about it? Local staff seek higher PIU pay 15

Dominican Republic Budget Deviation, 1996 -2000 Identifying sources of weakness for further investigation Identifying incentives at work The World Bank Source: Dominican Republic PER 2003, background data 16

Dominican Republic Budget Deviation (ratio of executed to approved budget) Identifying trends for transparency 17 The World Bank Source: Dominican Republic PER 2003, background data

Level 1 Issues Republic budget revenues have performed closely to budget estimates, owing in large part to ZOP efficiency in revenue collection. Between 1995 and 2001, actual revenues collected averaged 99 % of planned levels. (This excludes own revenues and other off-budget revenues. ) Republic expenditures have been less successfully contained. Between 1996 and 2001, actual Republic expenditures averaged 106 % of planned expenditures, with the variation growing to 119 % for 200 and 117 % for 2001. The Pension Fund has run a deficit in five of seven years between 1995 and 2001. The Health Fund has run a deficit in three of the last seven years, broke-even in three years, and had a surplus one year. The financing gaps requiring Republic Budget or other nonsocial contribution support has been increasing. Source: Serbia and Montenegro PEIR 2003, Volume III Montenegro The World Bank 18

Level 3 Issues Technical efficiency In terms of technical efficiency, as with the Federal and Republic of Serbia systems reviewed in Volume 1, we have no detailed numbers on costs per unit of service delivered, or comparative procurement costs. However, a proxy measure is variation in aggregate budget position. For 2000, the wage bill variation from approved budget, by budget users, was 15 percent, ranging from a high of 42 % above budget for the Ministry of Justice to a low of 54 % below budget for the Customs Service. This degree of volatility in funding levels undermines effective program implementation. Budget users cannot plan in advance, focus on program effectiveness, efficiency, or improved productivity, if they are spending most of their time battling arrears or having no funds to operate their program. Source: Serbia and Montenegro PEIR 2003, Volume III Montenegro The World Bank 19