Tracking Progress and Controlling Funds

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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

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Post Budget Stages
Concepts

• 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

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Financial commitment stages
Concepts

• Encumbrance/pre-commitment/reservation
• Commitment/obligation
• Receipt of goods and services
• Invoice
• Verification
• Paid
• Cashed/cleared

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Budget classifications
Concepts

• Administrative
• Economic/object class/inputs
• Functional
• Program
• Fund
• Line Item

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Control Approaches
Concepts
Ex ante (to commitment) Ex Poste
External (to spending unit) (centralized) 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
Internal (decentralized) Ministry or spending unit transaction approval Procedures to minimize risk (internal controls) Transparency Ministry internal audit Performance management
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Central control versus Managerial Flexibility
Concepts

• 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

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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

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Treasury Consolidated Fund(treasury single
account)
Cash management

• 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

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Financial plans
Cash management

• 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

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Cash Forecast and BalancesRudiments 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
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Corrective MeasuresSmoothing 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?
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Cash rationing(misnomer cash budgeting)
Cash management

• Last resort liquidity management
• Disruptive to programs, vendors
• High corruption potential
• Need transparent ex ante rules
• Public procedure
• Likely to undermine budget priorities

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Applications
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Exploringproblems
Above-the-waterline observation
100 clinics, but only 70 operating
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?
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Dominican Republic
Budget Deviation, 1996-2000
Identifying sources of weakness for further
investigation Identifying incentives at work
Source Dominican Republic PER 2003, background
data
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Dominican Republic
Budget Deviation (ratio of executed to approved
budget)
Identifying trends for transparency
Source Dominican Republic PER 2003, background
data
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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
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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