Oil Revenue Management Workshop

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Oil Revenue Management Workshop
Quasi-Fiscal Expenditures and Compensation
Mechanisms

• By Francisco Carneiro, The World Bank
• Luanda, 16-19 de Maio de 2006

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Objectives of the Presentation

• Brief description of the public finance
  management system in Angola.
• Highlight what has been done and what remains to
  be done to strengthen it.

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MethodologyBased on the PEMFAR of 2004-05

• Assessment of the legal, institutional, and
  regulatory frameworks and comparison with actual
  practices.
• Diagnosis and possible solutions based on
  existing discrepancies in the legal-institutional
  frameworks and in the practical implementation of
  the legislation, rules and procedures.
• Prioritization of the role of the Government in
  the reforms already adopted (e.g., PMFP, EMTA).

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Main Topics Covered in the PEMFAR

• Main Themes
• 1.  Fiscal Performance
• 2.  Public Expenditure Management
• 3.  Financial Accountability
• 4.  Relation between Planning, Policies, and
  Budget
• 5. Credibility and Transparency in the Management
  of Public Funds

• Fiduciary Aspects
• 1.  Legal and institutional frameworks
• 2.  Budget preparation
• 3.  Budget execution and monitoring
• 4.  Public Accounting
• 5.  Internal control
• 6.  External fiscal control
• 7. Legislative monitoring

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Institutional Weaknesses and Fiscal Position
INSUFFICENT BUDGETARY FUNDING
FISCAL INDISCIPLINE
EXTRA-BUDGETARY EXPENDITURES QUASI-FISCAL
DEFICITS DISCREPANCIES

• In 2002, quasi-fiscal deficit of 6 of GDP and
  extra-budgetary expenditures of 14,7 of GDP.

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Dois Sistemas de Gastos Públicos
Two Systems of Public Spending
Non-Conventional System   Led by
Sonangol. Transactions outside of
SIGFE  Oil-backed debts Other quasi-fiscal
expenditures Responsible for some 11 of total
expenditures in 2002.
Conventional System   Led by DNT. Transactions
registered in the SIGFE.
Compensation Mechanisms Tax Retentions, Profit
Oil
Treasury Operations
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Negative Implications

• Informal mechanisms of compensation (MINFIN e
  Sonangol)
• Blurs transparency and accountability channels
• Weakens the budgetary process
• Creates uncertainty about the actual fiscal
  stance
• Impairs planning

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A Transitional Strategy
Situation in 2004      ?Co-existence of
conventional and unconventional public spending
system.     ? Compensation mechanism between
Sonangol and MINFIN.     ? Growing fiduciary
risk and weak supervision.     ? BNA not acting
as monetary authority in control of foreign
exchange     ? Ongoing reforms in Sonangol,
MINFIN, and BNA.
Transition Period       ? Identify expedient
mechanisms.      ? Eliminate fuel price
subsidies.      ?  Identify Sonangols
quasi-fiscal activities and transfer them to
appropriate institutions.      ? Implement a
debt management strategy, reduce the need for
oil-backed loans.      ? Capacity building in
MINFIN, MINPET, BNA.
Arrival Point           ? Respect fully the
Lei Quadro do Orçamento.          ? Respect
fully the Lei Quadro do Banco Central.         
? Transfer Sonangols concessionaire functions to
MINPET.
                             
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The PEMFAR Recommendations to Restore
Normality

• Pilar I
• Strengthen the conventional system
• Expand and strengthen the credibility and the
  effectiveness of the budget
• Respect the Lei Quadro do Orçamento

• Pilar II
• Gradual elimination of the non-conventional
  system
• Reduce Sonangols treasury-like operations
• Transfer these activities to MINFIN
• Strengthen the monitoring role of the Tribunal of
  Accounts

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A Gradual Strategy Towards Normality
Establish clear reporting mechanisms among
Sonangol, MINFIN and BNA Strengthen internal
control mechanisms (MINFIN e Sonangol) to ensure
that treasury-like operations respect fiscal
policy objectives and acceptal public finance
practices Improve accounting procedures to
allow DNC to receive the necessary information to
prepare quarterly budget execution reports
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Government Actions in the Domain of

• Budget Preparation
• Budget Execution
• Public Accounting and Monitoring

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Government Actions to Strengthen the Budget
Process

• Budget Preparation
• Improve capacity to make projections
• Adoption of AUPECs financial model
• Increased coordination between MINFIN-MAPESS to
  improve the capacity to estimate with more
  precision the governments wage bill

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Government Actions to Strengthen the Budget
Process

• Budget Execution
• Guarantee the consolidation of the CUT
  (Treasurys Single Account)
• Follow the correct procedures to execute public
  expenditures (cabimentação, liquidação,
  pagamento)
• Train staff to operate SIGFE

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Government Actions to Strengthen the Budget
Process

• Public Accounting and Monitoring
• Adoption of a double entries system (SIGFE)
• Training staff of the budgetary units
• Establish appropriate accounting mechanisms to
  administer the governments non-financial assets
• Adoption of an accounting manual and a new Plan
  of Accounts

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There Are Still Important Steps To Be Taken
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Elimination of Quasi-Fiscal Expenditures

• Careful assessment of the racionality for the
  different categories of such expenditures.
• Eliminate those with weak justification.
• Elaborate an action plan to transfer those which
  are justifiable to the appropriate organizations
  in the Government.

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An Appropriate Fiscal Strategy

• Fiscal Policy and Debt Strategy
• Adopt a sustainable and forward-looking fiscal
  policy (MTEF).
• Design a clear debt management strategy in which
  the need for oil-backed loans should be gradually
  reduced in a realistic timeframe.

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Improve Governance and Transparency

• Deal with Conflicts of Interest
• The effectivness of Sonangol could be
  strengthened if there was a clear separation of
  its roles as (a) regulator (b) commercial
  enterprise and (c) social contributor.
• Define a clear strategy to ring-fence and
  separate these functions and transfer them to the
  appropriate agencies/ministries within a
  reasonable timeframe.

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Phase Out Subsidies

• (World Bank UK Study)
• Gradual, through periodic price adjustments.
• Generate substantial fiscal savings.
• Plan and implement parallel social safety net
  programs.

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Complicating Factors

• Sonangol Concessionaire
• Regulatory functions
• Conflicts of interest
• Decisions about acquisitions (Local Content)
• Ring-fencing? Transfer to Ministry of Petroleum?

• Sonangol Commercial
• Commercial orientation
• Clarify functions as a state enterprise
• Focus on core activities
• Internal control and financial accountability
• External audits

• Issues to Address
• Significant flows of public funds
• It is essential that these be integrated in the
  formal expenditure and revenue circuits of the
  Government
• Activities performed by Sonangol are clearly
  important, but it is necessary to increase the
  degree of oversight and control of the Government

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A Reform Agenda