February 2009 prem 4 Africa Region
Public Finance Management Organizational Structure
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Public Finance ManagementOrganizational StructureMFAP is responsible for planning, budgeting, financial management, accounting, and internal auditing. MFAP is in the process of institutional reform. In 2001 Law 30 introduced the separation of Treasury and Public Accounting functions, previously performed in the General Directorate of Treasury (DGT), and established the General Directorate of Budget (DGO), responsible for the recurrent budget. The following entities at MFAP play a role in the different stages of the public financial management cycle: General Directorate of Planning (DGP) prepares and monitors the execution of the Public Investment Program (PIP). It also is responsible for the preparation of planning instruments (for example, MTEF). General Directorate of Budget (DGO) prepares and monitors the execution of recurrent budget. It also commits and liquidates capital expenditures. General Directorate of the Treasury (DGT) programs and manages financial resources and manages debt (internal and external). It also is in charge of the financial management of the state budget (payments). General Directorate of State Assets (DGPE) commits and settles the procurement of goods and services and other recurrent expenditures in accordance with contracts (electricity, water, phone, fax, insurance). General Directorate of Public Accounting (DGCP) commits and settles outlays, except capital expenditure and these expenditures linked to the operations of public institutions. It also is in charge of implementing the National Plan for Public Accounting. General Directorate of Tax (DGCI) collects income tax revenues. General Directorate of Customs (DGA) collects customs revenues. General Inspectorate of Finance (IGF) undertakes internal control and auditing of the financial activities of the executive. The current organizational model of public finance management is highly centralized under MFAP. The first steps of decentralization were taken in 2007. Decentralization started in 2007 with the transfer to line ministries of the process of commitment and liquidation of expenditure, which used to be the exclusive responsibility of MFAP. Hereafter, other budget execution processes will be gradually transferred to the line ministries. Once decentralization is completed, the general directorates of MFAP should be in charge of establishing the guidelines for line ministries. General directorates should only undertake budget execution except when centralization provides operational benefits with regard to costs or control (usually nondiscretionary expenditure such as salaries, debt, and transfers to municipalities). Moving forward with the decentralization of budget execution will require capacity building in line ministries. The MFAP General Directorates that are more in need of reforming their attributions are DGCP and DGPE, because implementing budget execution should not be the responsibility of central accounting structures. As part of decentralization DGCP and DGPE should be freed from budget execution activities. DGCP should concentrate on implementing the National Plan of Public Accounting and on structuring the patrimonial accounting. DGPE should be fully responsible for identifying state assets and their evaluation criteria to register them correctly. To successfully implement this reform, it is critical, first, to evaluate the personnel structure of DGCP and DGPE. Second, it is critical to effectively integrate the accounting and state assets modules in the Integrated System of Budgetary and Financial Management (Sistema Integrado de Gestão Orçamental e Financeira, or SIGOF). Decentralization should be accompanied by a strategic plan of organizational attributions that reflects the intended decentralization. The following organizational systems could be institutionalized: Planning and Budgeting, Financial Management, Accounting, Internal Control, Assets, Human Resources. Each of these organizational systems should be supported by an administrative structure and technological systems (such as modules in SIGOF). Administratively, the General Directorates of MFAP should have coordination responsibility, supported by the line ministries or decentralized structures (or both). Annex 2 describes the responsibilities and structure of each organizational system. Budget ProcessThe current legal framework that guides the preparation and execution of the central government budget is comprised of three main instruments: (a) The Budget Framework Law (Law 78/V/98) defines the general guidelines, principles, procedures, deadlines, and instruments related to the entire process of budget preparation and execution (box 3.3); (b) the annual budgetary laws (Finance Laws) provide guidance on year-based rules, especially on recruitment of human resources, policies, endowments (captive), and transfers to local governments22; and (c) the decrees of budget execution, published annually, provide guidance on rules and procedures related to budget management. These include rules for hiring staff and remuneration, percentage of salary increase, and norms for the external acquisition of goods and services. In addition, MFAP prepares and distributes to the line ministries the Guidelines for State Budget Preparation (Directivas para a Elaboração do Orçamento do Estado). The guidelines include a manual for budget preparation, which is reviewed annually, and establish priorities for budget preparation operational procedures. They also indicate the timeframe for sector budget preparation and submission to the DGO. The budget elaboration cycle is carried out according to a reliable schedule. The main phases can be summarized as follows: First phase: (ends March 31): Starts with the definition of its macroeconomic parameters (predicted GDP growth, inflation).23 Next, MFAP assembles estimates of revenues (DGCI and DGA) and expenditure (DGO). Second phase: (ends July 15): Once fiscal goals and the level of expected revenues have been defined, DGO and DGP prepare the first analysis of expenditure ceilings. After their discussion and validation by DGO and DGP, the Minister of Finance submits the ceilings to the Council of Ministers. Once they are approved by the Council, MFAP elaborates the call circular and sends it to the line ministries, specifying ceilings for recurrent and capital expenditure. Then each ministry distributes its overall ceiling to its subordinate units and provides the details on economic classification.24 Third phase: (ends September 15): Sector proposals usually bid for values higher than the initial ceilings, resulting in a negotiation. MFAP, through the DGO, consolidates all the proposals and revises them according to policy objectives. In the event of an unsuccessful negotiation, DGO will make the adjustments as needed. Once the negotiation is finished, the MFPA completes the budget and submits it to the Council of Ministers for approval. Fourth phase: (ends October 15): The government presents the draft budget bill to Parliament. Fifth phase: Parliament votes on the draft budget bill within 60 days of its presentation. The Budget Framework Law mentions the existence of a recurrent budget and multiyear Public Investment Programs (Programa Plurianual de Investimentos Públicos, or PIP). However, PIP has been prepared on an annual basis and included in the budgetary law with a common designation of “investment budget.” Although PIP should derive from the GPRSP-1 and MTEF, PIP clearly diverges from these two instruments (chapter 2). The existing recurrent budget constitutes what is known internationally as an “entry budget.” Expenses are classified according to their nature and represent activity inputs, while no attention is paid to results. It thus is difficult to evaluate sectoral objectives and goals. This situation will change after approval of the new budgetary law, which also will establish the use of the program budgeting technique for recurrent expenditures. The 2009 budget should incorporate a pilot exercise of program budgeting of recurrent expenditures. As included in the draft project proposal of the Budget Framework, all budgets should be prepared under the program budgeting principle. However, the transition between an entry budget and a program budget is not simple and requires a number of conditions: among others, a monitoring and evaluation (M&E) system in place, changes to the IT system, definition of implementation methodologies, and capacity building. The transition could be facilitated if the government decided to undertake a pilot exercise in 2 ministries with the 2009 budget. To this end, the M&E system needs to be strengthened. The authorities are aware of limitations of the existing system25 so have recently channeled human and financial resources to M&E. The volume of investments planned for a certain year is directly linked to the availability of funds at the national level for each line ministry. The line ministries, once they receive their respective ceilings, propose inscription or maintenance of projects in the state budget, with respective financial values. The inclusion of new projects or the expansion of existing ones is conditioned by the availability of national counterpart funds26 for the project itself and for the eventual implications for the recurrent budget. The implementation of some investment projects have large implications for the recurrent budget (for example, construction of a hospital). Accordingly, the corresponding recurrent expenditures need to be taken into account. Box 3.2: Summary of the Draft Budget Framework Law The main changes proposed by the Draft Budget Framework Law are: Budgetary principles and rules. Almost all internationally accepted budgetary principles are included and described in the proposal, which includes new principles such as participatory budget and the request for program budgeting for all types of expenditure. Management instruments. The proposal introduces the Financial Comptroller, who is to be responsible, under budget execution decentralization, for the legality, regularity, and execution of the different phases of revenue collection and expenditure. Budgetary execution regimes. The proposal specifies three different types of budgetary execution: (i) integrated services, under the juridical-financial regime of administrative autonomy, with the Financial Comptroller, the Authorizing Officer, and the Treasury payment system responsible for budget execution; (2) autonomous services and funds, which are the responsibility of its managers, with expenses covered by own revenues (non-earmarked) and procurement of goods and services through public tender; and (3) social security, which falls under the responsibility of the Instituto Nacional de Previdencia Social (INPS) (in the case of the subsystem of contributions) and of a management entity (in the case of the subsystem of noncontributions). Revenues and expenditures are treated jointly (both subsystems), in articulation with DGT. No management unit can undertake funding operations without prior authorization by the government, and any financial balances can be used only with government authorization. Public accounts reporting regime. The proposal specifies in detail not only which reports must be submitted to which institutions (accounts from the Social Security System, accounts from the National Assembly, accounts from Justice, and so forth––all are to be integrated subsequently into the general State accounts), but also which format, content, scope, and deadlines are to be considered. As with the current law, the proposal provides discipline to the entire process of State budget preparation. It includes in detail the deadlines, schedule, and stages involved in budget preparation by the government, as well as the deadlines and level of responsibility according to which the Law should be discussed and submitted to votes in the National Assembly. The procedures and internal deadlines for budget preparation by the government are described extensively, which is not so common in other countries. To improve the efficiency of the investments and their successful implementation, the MFPA should monitor physically and financially the more relevant projects funded with external resources. Such monitoring would help the MFPA to make the sectoral allocations more efficiently and would prevent the underestimation of recurrent expenditures requirements that emerge from the investment projects. Furthermore, it could prevent misallocation of resources. For example, facing insufficient resources, a sector may allocate the funds to less priority projects or proceed with projects that will require additional central government resources. Steps were taken to unify budget preparation under the current legal framework.27 With the current law, recurrent and capital budgets may be prepared almost autonomously by different directorates at the MFPA. However, such duality compromises the global vision required when preparing the budget. MFAP is aware of that limitation and thus is pursuing internal coordination, so that ceilings are defined under the rationale of a unified budget. As part of this process, line ministries are unifying their planning and budgeting units, creating a new unit called the General Directorate of Planning, Budgeting, and Management (Direcção Geral de Planeamento, Orçamento, e Gestão, or DGPOG),28 responsible for all activities related to budget preparation and execution. The functional classification of public expenditure does not accord entirely with international standards. The functional classifier is not in line with the Classification of Government Functions (COFOG), initially proposed by the United Nations and adopted in the IMF’s Government Finance and Statistics Manual of 2001. This discrepancy hinders the direct international comparison of expenditures. It would be beneficial if Cape Verde would use the primary structure included in COFOG of 10 functions and 69 subfunctions and to make adjustments to the third level, below the subfunction.29 Some revenues and expenditures are not included in the budget. These omissions contravene the budgetary principles of universality and non-earmarking of revenues. Some autonomous institutes do not include in the budget their own revenues and the expenditures financed by them. Furthermore, oil-related subsidies have not been consistently recorded in the budget. Finally, part of the outlays related to salaries and remunerations of revenue collection institutions are directly deducted, causing an underestimation of the overall envelope of revenues and staff/remunerations expenditures. RecommendationsUpdate the functional classifier of expenditure according to COFOG. Implement the DGPOGs in the remaining line ministries. Provide a module in SIGOF to assist with budget preparation. Unify the coordination of budget preparation in the DGO. 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