The World Bank

Tracking Progress and Controlling Funds

Bill Dorotinsky, PREMBEFA Course

January 10-12, 2005

2The World Bank

Outline

• Concepts in Budget Execution Management

• Cash Management

• Analysis of budget execution– Exploring problems– Fun with data

3The World Bank

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

Concepts

4The World Bank

Financial commitment stages

• Encumbrance/pre-commitment/reservation

• Commitment/obligation

• Receipt of goods and services

• Invoice

• Verification

• Paid

• Cashed/cleared

Concepts

5The World Bank

Budget classifications

• Administrative

• Economic/object class/’inputs’

• Functional

• Program

• Fund

• Line Item

Concepts

6The World Bank

Control Approaches

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

Concepts

7The World Bank

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

Concepts

8The World Bank

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

9The World Bank

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

Cash management

10The World Bank

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

Cash management

11The World Bank

Cash Forecast and Balances:Rudiments of cash management

Revenues

1 2 3 4 5 6 7 8 9 10 11 12

Spending

Central Forecasts

Agency Financial Plans/Allotments

Balance

Seasonalrevenue

fluctuation, spending patterns

Structuralrevenue

fluctuation, spending patterns

Arrears

Over-commmitment

Random revenue shocks

Annual predictable pattern

12The World Bank

Corrective Measures:Smoothing cash flows

Cash Balance

Seasonal:1. Keep allotments or

commitments below revenue, build balances

2. Short-term debt3. Limit cash payments to

cash balances (arrears)

Structural:1. Budget retrenchment2. Long-term debt3. Allow commitment/spending

only if revenues actually received

4. Contingent liability management

5. Comprehensiveness6. Commitment controls

Who bears the risk of fiscal adjustment under each option?

13The World Bank

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

Cash management

14The World Bank

Applications

15The World Bank

100 clinics,but only 70 operating

10 built with donor funds, donor funds off-budget

Budget not comprehensive

10 built with domestic funds, capital budget

separate

Budget fragmented

10 funded in budget, but no cash allocated

to operate

Cash triage

Donor ring-fencing for “accountability”

Line ministry gets flexible resource pool

Local staff seek higher PIU pay

Above-the-waterline observation

WHY?

Weak budget law Too rigid budget execution Low public pay

WHY?

WHY?

And what can be done about it?

Exploringproblems

16The World Bank

Dominican RepublicBudget Deviation, 1996-2000

Identifying sources of weakness for further investigation

Identifying incentives at work

0%

100%

200%

300%

400%

500%

600%

Congreso

Nac

ional

Presi

denci

a

Fuerza

s Arm

adas

Relac

iones

Ext

erio

res

Finan

zas

Deporte

s

Trab

ajo

Agricultu

ra

Indust

ria y

Com

erci

o

Turis

mo

Poder J

udicia

l

Junta

Cen

tral E

lect

oral

Source: Dominican Republic PER 2003, background data

17The World Bank

Dominican Republic

1979-86 1987-96 1997-2000Partido del Presidente PRD PRSC PLDPresidencia de la República 2.09 7.35 2.53 Interior y Policía 1.06 1.00 1.06 Fuerzas Armadas 1.06 0.86 0.97 Finanzas 1.94 0.54 1.06 Secretaría de Estado de Educación y Cultura 0.96 0.86 0.95 Salud Pública 0.87 0.68 0.78 Agricultura 0.82 0.35 0.76 Obras Públicas 0.98 0.44 0.88 Otros 1.19 1.13 1.08

Budget Deviation (ratio of executed to approved budget)

Identifying trends for transparency

Source: Dominican Republic PER 2003, background data

18The World Bank

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

19The World Bank

Level 3 IssuesTechnical 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.

AveragePersonnel Expenses 7%Materials -2%Investments 3%Special Purpose -20%Economic Intervention 16%Grants and social benefits -1%Other 319%

Table 1. Average variation, approved versus executed budgets, by position,

1996-2000

Source: Ministry of Finance, Republic of Montenegro

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