Tracking Progress and Controlling Funds

1. Tracking Progress and Controlling Funds Bill Dorotinsky, PREM BEFA Course January 10-12, 2005

2. Outline • Concepts in Budget Execution Management • Cash Management • Analysis of budget execution • Exploring problems • Fun with data

3. 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

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

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

6. Concepts Control Approaches

7. 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

8. 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

9. 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

10. 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

11. 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 Seasonal revenue fluctuation, spending patterns Structural revenue fluctuation, spending patterns Arrears Over-commmitment Random revenue shocks Annual predictable pattern

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

13. 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

14. Applications

15. Above-the-waterline observation 100 clinics, but only 70 operating Exploringproblems WHY? Budget not comprehensive Budget fragmented Cash triage 10 built with donor funds, donor funds off-budget 10 built with domestic funds, capital budget separate 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” Line ministry gets flexible resource pool Local staff seek higher PIU pay And what can be done about it?

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

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

18. 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

19. 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