The Organisation of Public Financial Management Architecture

MENA-SBO

Amal Larhlid Director in Policy and Governance

Agenda

• The Role of the Ministry of Finance within Government

• The Organisational Structure of the Ministry of Finance

• Governance of State-Owned Enterprises: a case study from Tunisia

• Conclusions

Organisational architecture

The Role of the Ministry of Finance within Government

Position of MoF within governmental institutions

Institution Relationship to MoF

Head of Executive Provides overall strategic direction for government, setting objectives and priorities. These inform the allocation of resources by the MOF during the budget process.

Other line ministries Liaise with MoF in budget-setting process. May provide more granular detail on requirements of particular projects or objectives, negotiate (either directly with MoF, or via Cabinet/Secretariat) for greater resource allocations. Responsible for budget execution, internal monitoring of expenditure and performance, and (under true-PBB) reallocation of resources within spending envelope to maximum effect.

SOEs May be net subsidised by MOF, or net revenue generators. In either case, financial position and forecasts will be incorporated into MOF’s multi-year budgeting. As with line ministries, SOEs will provide MOF with information regarding investment opportunities, funding needs, and performance.

Parliament Parliament scrutinises the budget and the government accounts (potentially by means of committees). A vote may be required to approve both the budget and the accounts.

Public Accounts Committee (PAC)

Select committee focused on scrutiny of budget execution (including value-for-money criteria). In Westminster model, tends to be chaired by senior Opposition MP, and examines both public accounts and ad hoc value-for-money reports produced by the SAI. In practice, this can mean a wide remit, ranging from tax avoidance to transportation infrastructure projects. The PAC can call on external experts to support its work, and request that ministers and civil servants appear before it to provide an account of spending and outcomes.

SAI Responsible for audit of government accounts created by individual line ministries, and by MOF for government as a whole. May also audit performance information, and investigate questions of value-for-money (either at own discretion, or in accordance with direction from executive or Parliament).

MOF

Other Ministries Line

Head of Executive

Parliament

PAC

SAI

SOEs

MOF/secretariat coordination and assignment of responsibilities

Strategic planning should be fully integrated with the budget, with the MTEF representing a combined medium-term government-wide strategic plan and budget.

In this context, the organizational integration of strategic planning and budgeting becomes very important.

There are basically two models for achieving this:

• MOF assumes responsibility for strategic planning

• Strategic planning remains the responsibility of the Secretariat, but MOF and Secretariat cooperate closely to prevent fragmentation.

It is important to avoid a situation in which major capital projects are handled exclusively by the Secretariat, with MOF playing no role in analysing them and advising on their affordability.

A number of MENA countries have government Secretariat-type organizations, which support the Cabinet and executive leadership.

If planning is the role of the Secretariat, and budgeting the role of MOF, this can institutionalize the lack of integration of budgeting and strategic planning.

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The lack of coordination between secretariat and MOF is a challenge for the integration between strategic planning and budgeting

The organisational integration and assignment of responsibilities model are critical

MOF should take central role in handling major capital projects proposals

Organisational architecture

The Organisational Structure of the Ministry of Finance

Organisational structure and key MOF functions (1 of 2) It is essential to ensure that the MOF organizational structure incorporates all of the key functions associated with the budget and financial management cycle. Below is an indicative structure incorporating these key functions within six divisions:

MOF

Macro-Fiscal Unit

Budget Preparation

Budget Execution

Treasury Accounting & Reporting

Tax Policy SOE Unit

Divisions Functions of the division

Macro-fiscal unit Policy on debt, the deficit and level of savings from resource revenues; estimation of aggregate expenditure ceiling; macroeconomic and fiscal projections.

Budget preparation Determination of budget allocations to each ministry; preparation of detailed budget for submission to political leadership, including all budget documents. In countries which have developed spending review systems, the Budget Preparation division will typically incorporate a Spending Review Unit.

Budget execution Release of budget funds to spending ministries; ensure that spending ministries implement the budget as planned; ensure compliance with financial management regulations; handle budget transfer (virement) requests.

Treasury Cash planning and management; management of government banking (e.g. Treasury Single Account); short-term borrowings and funds investment (if necessary) for liquidity purposes (i.e. to manage within-year mismatch of revenue and expenditure flows).

Accounting and reporting

Recording of government revenues, expenditures, liabilities and assets; provision to Budget Execution division of within-year reports on budget expenditures and revenues; preparation of financial reports. Accounting policy (see next page for further discussion on this).

Tax Policy Recommending tax policy and legislation to government. No responsibility for the assessment and collection of taxes (“tax administration”), which would be the responsibility of a separate Tax Authority .

State owned enterprise unit

Policy on, and analysis of, all state owned enterprise requests for budget funding; monitoring of financial position (including liabilities) of state owned enterprises and associated potential financial risk to government; general policy on state owned enterprises.

Organisational structure and key MOF functions (2 of 2)

Divisions Functions of the division

Accounting policy division

In addition to the Accounting and Reporting division – in which case the latter would restrict itself to accounting operations.

Intergovernmental financial relations

In federal systems, the national MOF would typically also have a division covering Intergovernmental Financial Relations, the prime responsibility of which would be the management of financial transfers from the national to sub-national governments.

Market regulation

While in many countries regulators sit outside MoF, market regulation (in particular, regulation of the finance sector) is highly relevant to macroeconomic stability and is commonly overseen by personnel within MoF,

International financial liaison

Responsible for ongoing financial relationships/ negotiations with other countries, and with supranational bodies such as IMF, World Bank, and the EU.

(Other) additional divisions

In addition to the above principle divisions of the MOF, it may sometimes be appropriate to create small additional units such as a Procurement Unit, which would set procurement policies and monitor the procurement practices of spending ministries.

Associated organisations

Functions of the associated organisations

Debt management agency

This agency would be responsible for issuing long-term government debt (defined as debt of more than one year maturity, and excluding short-term debt issued for liquidity management purposes, which is the responsibility of the MOF Treasury). It would also actively manage the debt portfolio. In many countries, the Debt Management Agency would also undertake any state owned enterprise borrowings on their behalf.

Sovereign wealth fund

The organization which manages the financial assets of countries with large investable resources, as is commonly the case in GCC countries.

Civil service pension authority

This agency managers the civil service pension system.

The Tax Authority

The primary responsibility of the Tax Authority is to administer the major taxes levied by the government (e.g. personal income taxes; corporate taxes and sales taxes). The Tax Authority would not have responsibility for tax policy, which is part of the MOF .

The indicative organizational structure may legitimately be varied in certain respects, depending upon national

circumstances. For example:

In addition to the core MOF functions which should be reflected in the divisions of the MOF itself, there are a number of associated

functions which are typically associated with, but not part of, MOF. Typically, the organizations which manage these functions report to the Minister of Finance or equivalent leader, even though they are

not part of MOF. The above listed are the most important such organizations.

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Real-world examples of MoF structure

US Treasury Department

The Office of Management and Budget (part of the Executive Office) plays a key role in budget preparation/execution.

Budget Preparation

Budget Execution

Treasury

Accounting & Reporting

Tax Policy

Macro-Fiscal Unit

Bureau of the

Fiscal Service

Unlike most other countries, the US legislature has considerable influence over the budgeting process.

Real-world examples of MoF structure

Swedish Ministry of Finance

Budget Preparation

Budget Execution

Treasury Accounting & Reporting

Tax Policy

SOE Unit

Macro-Fiscal Unit

MOF

Economic Affairs

Budget Tax and Customs

Financial Markets

International Municipalities and

State Ownership

Municipalities SOE

governance SOE

management

National Debt Office

National Financial

Management Authority

Budget Preparation

Budget Execution

Real-world examples of MoF structure

UK Treasury

HM Treasury

Corporate Centre Strategy, Planning

& Budget Ministerial &

Communications Treasury Legal

Advisors

International/ EU

Economics Fiscal Public

Spending Public

Services

Financial Stability

Financial Services

Financial Regulations &

Market Services

Business & International

Tax

Personal Tax, Welfare & Pensions

Enterprise & Growth

Tax Policy

Macro-Fiscal Unit

Accounting & Reporting

Treasury

Organisational architecture

Governance of State-Owned Enterprises and Public Bodies

Governance of State-Owned Enterprises and Public Bodies in Tunisia Background and Context

• 50% increase in government expenditures between 2010 and 2013

• In the context of subsequent spending restraint, there has been renewed focus on management of public finances, budgetary transparency, and performance budgeting

• IMF Technical Assistance was requested to evaluate the progress of these PFM reforms, identify deficiencies, and make recommendations

• The mission focused on:

• Budget framework and preparation

• Closure of accounts and financial reporting

• Oversight of state-owned enterprises and organisations, which constitute an increasing burden on state finances

Governance of State-Owned Enterprises and Public Bodies in Tunisia Types of State-Owned Enterprise and Public Bodies

State-Owned Enterprises

Public Bodies

Administrative Public Bodies

Public Health Bodies

Non-Administrative Public Bodies

Non-Administrative Public Bodies

Wholly State-Owned

Companies

Banks and insurance companies (directly and indirectly capitalised by

the State)

Companies majority-owned by the State,

local government, and/ or other public bodies

Governance of State-Owned Enterprises and Public Bodies in Tunisia Structure of Governance

Ministry of Economy and

Finance

President’s Office

Line Ministers

Technical Committee on Privatisation

Court of Auditors

Commission for the Restructuring of

Publicly-Supported Enterprises (CAREPP)

DG of Public Bodies

General Committee of

Budget Administration

DG of SOE Restructuring

SOE Productivity

Monitoring Unit

SOE Organisational

Unit

DG of Privatisation

DG of Public –Private

Partnerships

State-Owned Enterprises & Public Bodies

Governance of State-Owned Enterprises and Public Bodies in Tunisia State-Owned Enterprises: Trends in Salaries, Subsidies and Investment

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Salaires Subventions de l'Etat Aides pour l'investissement

2010 2011 2012

Source: MEF, Rapport sur la position financière de 28 entreprises publiques 2010-2012

Governance of State-Owned Enterprises and Public Bodies in Tunisia Problems and Recommendations

Lack of clear criteria for differentiating public enterprises from other administrative/ non-

administrative agencies

Legal Framework and Categories of State-Owned Enterprises and Public Bodies

Diverse categories and legal frameworks for SOEs and

Public Bodies

Consolidation and simplification of legal

framework

Simplify and standardise personnel grades/salaries

Regroup into two categories: administrative bodies and

commercial/industrial companies

Governance of State-Owned Enterprises and Public Bodies in Tunisia Problems and Recommendations

Multiple state bodies tasked with oversight of SOEs and public bodies

State-Owned Enterprises and Public Bodies: Institutional Landscape

Equip the DG of Public Bodies (MoF) with power to monitor entire sector, and responsibility for annual

financial analysis

Introduce requirement for information on SOEs and

other public bodies in MoF memos to rest of government

Improve coordination between existing actors involved in governance

Lack of coordination Overlapping duties and

increased costs

Prescriptive governance framework limits operational

independence of SOEs

Contractual formalisation of relationships between State and public bodies (particularly state-

supported banks)

Create a single entity responsible for oversight of public bodies within

MoF

Governance of State-Owned Enterprises and Public Bodies in Tunisia Problems and Recommendations

Financial Performance and Risk Management

Improved monitoring of SOEs’ financial performance (particularly

signs of financial distress)

Introduce macroeconomic and budgetary risk analysis into public bodies’ annual

reporting

Clarify spending and delivery responsibilities between State

and public bodies at a project-by-project level

Absence of reliable management information

Lack of visibility of overall level of government subsidy (including

implicit guarantees)

Failure to incorporate public bodies into budget forecasts

Develop multi-year strategy and budget for public bodies, which can

be integrated into medium-term expense planning at the State level

Produce report aggregating all forms of subsidy to public bodies

Failure to assess impact of macroeconomic factors on

financial position of public bodies

Governance of State-Owned Enterprises and Public Bodies: Lessons from around the world Challenges…

Scale and diversity of SOE sector

Conflicting imperatives: generate cash or deliver

social programs?

Overall level of government subsidy

(transfers, guarantees, equity) often unclear

Cash-generating parts of business/sector may

mask true scale of transfers

Inadequate appreciation of risk exposure by SOEs

and/or by MoF

Low visibility of contingent liabilities

Governance of State-Owned Enterprises and Public Bodies: Lessons from around the world Challenges… and solutions

Scale and diversity of SOE sector

Conflicting imperatives: generate cash or deliver

social programs?

Simplification of SOE legislation/

reduction in range of legal forms

Shared services for SOE sector to improve quality of information available

to MoF

Dedicated SOE Unit within MoF

Overall level of government subsidy

(transfers, guarantees, equity) often unclear

Cash-generating parts of business/sector may

mask true scale of transfers

Inadequate appreciation of risk exposure by SOEs

and/or by MoF

Privatisation

Low visibility of contingent liabilities

Align SOE planning, budgeting and reporting

calendar with MoF

Contractual basis for MoF subsidies/

guarantees – defining SOE obligations

Consolidation of SOEs/integration into departments

Governance of State-Owned Enterprises and Public Bodies: Lessons from around the world The Role of the SOE Unit

Dedicated SOE Unit within MoF

SOEs

• Monitor financial performance, budgets, business plans, sectoral trends

• Advise on investment, diversification, restructuring, divestment

• Provide information on level of subsidy, dividends payable, fiscal risks

• Identify and screen potential directors • Promote best practice corporate

governance

Monitoring and analysis, not control

MoF

• Financial performance: liquidity, profitability, leverage, market value, solvency

• Debt structure (including timing of payments) and contingent liabilities

• Delivery of social programs (social performance)

Reporting: for individual SOEs and sector as a whole

Organisational architecture

Conclusions

Critical Success Factors for Ministry of Finance reform

Section 2 – Executive Summary

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Set a clear and well articulated vision

Vision Commitment Stakeholders and Capacity

Timeline (Realistic)

Technology is an Enabler

Flexibility and

Adaptability

Absolute political commitment with

stick and carrot

Take all stakeholders with you and be

absolutely sure they have the capacity to

deliver

Be completely realistic in scope and timelines

this is a journey without an end with

continuous improvement

Technology is fundamental but alone

will fail

Learn and adapt – be ready to change your

plans to meet new challenges and

incorporate new ideas

Thank you Amal Larhlid Director Policy and Governance PwC London amal.larhlid@uk.pwc.com Office: +442078040339 | Mobile: +447725632499