Final draft PFMR Strategy Zambia 2019 -2022.pdf

Republic of Zambia

Public Finance Management Reform

Strategy

2019 to 2022

November 2018

Introduction

1. Integrated Planning and Budgeting

In an ideal world …

Current situation

Strategic Reform Priorities

2. Effective internal control for predictable budget execution

In an idea world …

Current Situation

Strategic Reform Priorities

3. Increasing effectiveness of Revenue Mobilisation

In an ideal world …

Current Situation

Strategic Reform Priorities

4. Transparent reporting of financial and service delivery performance

In an ideal World …

Current Situation

Strategic Reform Priorities

5. Effective external scrutiny of financial and service delivery performance

In an ideal world …

Current Situation

Strategic Reform Priorities

6. Moving toward Fiscal Decentralization

In an ideal world …

Current position

Strategic Reform Priorities

7. Fighting Corruption

In an ideal world …

Current situation

Strategic Priorities

Institutional and Implementation Arrangements

Change Management Framework

Strategic Risks and Risk Management

Monitoring and Evaluation

Attachment 1 - List of documents reviewed in drafting the PFMRS

Acronyms

ACL Audit Command Language

AFS Annual Financial Statements

BCC Budget Call Circular

BOZ Bank of Zambia

CO Controlling Officer e-GP Electronic Government Procurement

FAD Fiscal Affairs Division (of the IMF)

FD Fiscal Decentralization

FIC Financial Intelligence Centre

GAAP Generally Accepted Accounting Practices

GAI Grant Aided Organisation

GDP Gross Domestic Product

GRZ Government of the Republic of Zambia

IC Internal Control

IDC Industrial Development Corporation

IFA Intergovernmental Fiscal Architecture

IFMIS Integrated Financial Management System

IMF International Monetary Fund

IPSAS International Public Sector Accounting Standards

IT Information Technology

LG Local Government

LGA Local Government Authority

LGEF Local Government Equalisation Fund

MLGH Ministry of Local Government and Housing

MNDP Ministry of National Development Planning

MOF Ministry of Finance

MOLNR Ministry of Lands and Natural Resources

MPSA Ministry, Province, Spending Authority

NAPSA National Pension Scheme Authority

NDP National Development Plan

NGO Non-Government Organisation

OAG Office of the Auditor General

OBB Output Based Budgeting

OSR Own Source Revenue

OSSIS One Stop Shop Integration System

PAC Public Accounts Committee (of the National Assembly)

PACRA Payments and Companies Registrations Agency

PEFA Public Expenditure and Financial Accountability

PFM Public Financial Management

PFMRP Public Finance Management Reform Program (of the WB)

PFMRS Public Financial Management Reform Strategy

PI Performance Indicator

Acronyms

PMEC Payroll Management and Establishment Control

PMRC Policy Management and Research Centre

RTSA Road Transport and Safety Agency

SAC State Audit Commission

SI Statutory Instrument

SO Strategic Objective

SOE State Owned Enterprise

TA Technical Assistance

TADAT Tax Administration Diagnostic Assessment Tool

TSA Treasury Single Account

VAT Value Added Tax

WB World bank

ZPPA Zambian Public Procurement Authority

ZRA Zambia Revenue Authority

Introduction PFM refers to the set of laws, rules, systems and processes used by a sovereign nation, to mobilise revenue, allocate public funds, undertake public spending, account for funds and audit results. The broad objectives of public financial management are to achieve overall fiscal discipline, efficient collections of the revenues due to Government, allocation of resources to priority needs, and efficient and effective delivery of public services. A solid and strong PFM system, thus, provides a framework through which it’s possible to reduce and avoid wastage in the use of public resources, and ensure that public funds are used appropriately for the intended purpose.

Process for developing the PFM Reform Strategy

The PFM Reform Strategy has been drafted with the assistance of a PFM consultant; however, the reform priorities and related commentary have been taken from input from each of the Ministries and agencies that are responsible for the implementation of the reforms. Each relevant entity was asked to fill out a template that detailed the objectives of reform, their assessment of reform activities under the previous Public Financial Management Reform Strategy (PFMRS) and their priorities for further reforms in this reform strategy (including measures designed to complete any unfinished reforms). This has been the basis of the commentary and this approach should ensure that ownership of the strategy remains with the Government.

This information has been supplemented by reference to a range of government policies and publications and technical assistance (TA) reports prepared for and accepted by the Government (including reports by IMF, World Bank and others).

A full list of the documents sourced in developing the strategy is presented in Appendix 1.

Following preparation of the initial draft, consultation workshops were held with those that provided the initial input, and other relevant stakeholders to confirm that the draft was consistent with their inputs. Following these workshops, the draft was amended where necessary and prepared for the Government

Performance under the previous PFM Reform Strategy

Performance under the 2013-2015 Reform Strategy was mixed, with a result that some of the reform initiatives in the strategy still requiring attention in the new strategy. Strong leadership will be required to ensure that this strategy is more efficiently and effectively delivered.

However, many useful achievements were made and these provide a foundation upon which the new PFMRS is being constructed.

For example, significant progress has been made in rolling out an effective Integrated Financial Management and Information System (IFMIS). This will provide a central resource for effective management of government’s financial resources and is a key part of the internal control system. However, the system will be much more effective when it covers all government entities and is used as intended by all of those entities. The IFMIS is getting close to being rolled out to all entities in central government, with some key agencies still to be connected to

it. Also, with increasing de-concentration of service delivery, and an ambition to move to fiscal decentralisation, there is a need to ensure connectivity in provinces and districts in order to capture all government transactions at source.

There is also a critical need to ensure that the system is used as intended as a central plank of the government’s internal control system. The system must be used for the creation of purchase orders, and to record commitments of funds before payments are due in order to avoid payments arrears.

Approach to drafting the new PFM Reform Strategy

The new PFMRS will cover the period from 2019 to 2022, a four-year period. It adopts an approach that prioritises the creation or reinforcement of foundations, before moving on to more sophisticated reform measures.

An example of this is in the Planning and Budgeting processes. The Government has commenced piloting a new and more sophisticated approach to the annual budget – Output Based Budgeting – and has announced that it would like to roll-out the approach out to all MPSAs in the next budget. While this performance-based approach is a very useful reform, a pre-requisite for successful implementation is a solid track record of budget reliability.

Demonstrably, the required level of budget reliability has not yet been attained, and the low scores achieved on the 2017 Public Expenditure and Financial Accountability (PEFA) assessment provide evidence of this. As a result, the PFMRS prioritises those measures that are designed to improve budget reliability and integrity, alongside of measures to implement Output based Budgeting.

The reform strategy is built around a number of themes. These broadly follow the standard PFM cycle (see illustration on the next page).

The thematic areas are:

1. Integrated Planning and Budgeting (encompassing Planning and policy and budget elements of the PFM cycle)

2. Effective internal control for predictable budget execution (encompassing the expenditure elements of budget execution)

3. Increased effectiveness of Revenue Mobilisation (encompassing the revenue elements of budget execution)

4. Transparent reporting of financial and service delivery performance (encompassing the accounting and reporting element)

5. Effective external scrutiny of financial and service delivery performance (encompassing the external review element)

6. Moving toward Fiscal Decentralization (while not aligned with any particular element of the PFM cycle, FD is highlighted in a separate thematic area because it is government policy and a very substantial reform in its own right).

For each thematic area, the Reform Strategy document is written in three parts:

A description of what might be considered best practice in the thematic area, under the heading “In an ideal world …”;

This is contrasted with an assessment of current practice, based on data from the PEFA and other diagnostic tools, TA reports, etc., under the heading “Current situation”; and finally

An outline of priority strategic reforms that will assist to bring practice more closely into line with best practices – “Strategic reform priorities”.

It is important to note that the PFM Reform Strategy is not a comprehensive record of the reforms necessary to achieve international best practice. It does seek however, to indicate those reforms that are considered absolutely necessary to build a foundation for best practice.

1. Integrated Planning and Budgeting

In an ideal world ….

Planning

The National Development Plan (NDP) establishes the strategic priorities of Government in the medium term. It addresses:

the strategic priorities in relation to service delivery in all sectors;

revenue mobilisation and other medium-term financing strategies; and medium term institutional reform priorities in Government.

The NDP provides the rationale for each strategic priority, based on evidence based research, and this is influential in developing a common ownership of the priorities, both within the government (from the executive to agency staff) and the broader community.

Each sector’s strategic plan reflects the National Development Plan strategic priorities for which the sector has responsibility. The sector plans reflect each sector’s medium-term service delivery priorities, and identifies gaps in the Sector’s capacity to deliver the identified priorities in terms of: its staff and staff capabilities; its budget and other sources of funds available for service delivery;

and physical resources (buildings, equipment, etc.). The sector strategy provides evidence-based rationale for the selected priorities, and is influential in building common ownership of the priorities within the sector and amongst its stakeholders. The sector has well defined processes established and resourced, to monitor performance against its strategic priorities. The senior executive (sector Minister and senior Public servants) meets regularly to effectively manage the achievement of all priorities.

Public investments projects are consistent with the sector strategy, and are subjected to feasibility study, design and costing, and an economic appraisal, well in advance of the commencement of the annual budget process. The project undergoes design, costing and appraisal, only after the feasibility study has been completed and the Ministry of National Development Planning (MNDP) agrees with this assessment. If the economic appraisal is positive (i.e. the project is assessed as having a positive net value) the MNDP will approve the project for submission in the next annual budgeting process. No project is ever submitted for consideration in the budget process until it has been appraised. The project will only receive budget approval if it successfully competes with other priorities for available budget funding.

The Ministry of Finance prepares medium-term macro fiscal forecasts of revenues and expenditures. These provide an accurate estimate of: what levels of revenue will be collected over the next 3-5 years under the current tax and non-tax revenue policy settings; what levels of expenditure can be expected over the next 3-5 years under the current expenditure policies, including all forward commitments for approved capital projects. By subtracting expenditure from revenue estimates, the Government examines the outlook for the primary deficit over the 3-5 year period. Based on this, a review is undertaken of both revenue and expenditure policies. That is:

Where a primary deficit has been forecast for any of the forward years, the analysis will examine three possible policy responses: changing revenue policy to increase overall revenues; changing expenditure policy to reduce expenditures; and/or examining the potential to finance part of the forecast deficit with debt or grant receipts. In all cases, these options will be constrained by fiscal rules that have been adopted by the Parliament and the Government to ensure sustainable economic growth, including a debt sustainability targets.

Where a primary surplus has been forecast for any of the forward years, the analysis will examine three possible policy responses: changing revenue policy to provide relief to taxpayers; changing expenditure policy to expand or enhance the delivery of services to the public; and/or paying off some of the accumulated debt to strengthen the government’s balance sheet.

Policy options are developed by the MOF from the results of this analysis in consultation with sector ministries, and these are provided, with recommendations, for the Cabinet to decide the policy settings to be pursued in the Budget. Once decided, the macro fiscal forecasts are updated for the specific choices taken by the Cabinet.

Budget Envelopes are then developed for Each Ministry taking into account:

the available ‘fiscal space’ (i.e. macro fiscal forecast of the primary deficit or surplus);

each ministry’s forward estimate of expenditure (based on a ‘no change’ policy);

the capacity for debt financing of investment projects; and adjustments to account for any policy options approved by the Cabinet.

Budgeting

These budget envelopes, or planning ceilings, are then formulated and distributed to each Ministry in the Budget Call Circular (BCC). The BCC also contains the templates necessary for submitting the MPSA’s Budget to MOF in a standardised form, and instructions for completing the templates.

Prior to the receipt of the BCC, each MPSA will have formed a Budget Committee (usually headed by a senior executive) to oversee the conduct of an internal budget process, designed to ensure that all internal and external stakeholders are adequately consulted in the preparation of the budget.

The process begins by identifying and forecasting the cost of the on-going services provided by the Ministry, and all current capital investment projects, for the next three years. Stakeholders are then asked to identify any desired changes to current services delivered (including increasing and/or enhancing existing services; decreasing existing service levels, changing the services delivery approach in any particular area), and these changes are costed and prioritised.

Once budget templates and ceilings are received, a first draft of the MPSA budget is prepared ensuring that budget ceilings are complied with. Where there are urgent priorities that cannot be fitted within the ceiling, or that cannot be accommodated by making savings elsewhere in the MPSA’s budget, a separate request may be made for additional funding for this purpose. Government will consider this request, along with similar requests from other MPSAs, when framing the final budget.

Capital investment projects included in the budget draft will include all projects that have been funded in previous Budgets and which have commenced but not yet been completed. Any new projects to be included must have previously been subjected to feasibility assessment, design and an economic appraisal under the supervision of the MNDP.

The MPSA budget will be workshopped with all MPSA stakeholders prior to being finalised and submitted to the Ministry of Finance.

The Ministry of Finance reviews the MPSA submissions with particular attention to the following:

Are the service delivery plans detailed, and funded, in the submission consistent with the NDP and Sector strategic plans?

Do the estimates submitted comply with the budget ceilings?

Are the costs of service delivery consistent with good practice (i.e. efficient and effective) delivery of the required Government outcomes?

Are there different and better ways of delivering the government outcomes addressed in each submission (e.g. based on international best practice)?

Have all on-going capital investment projects been included?

Have any new investment projects included in the budget submission been subjected to feasibility, design, and economic appraisal and signed off on by the MNDP.

Based on the answers to these questions, further discussions may be held with each MPSA to further refine the submission (at the MPSA’s discretion) and/or to better inform MoF advice to Government on the submission. Policy hearings may be conducted to facilitate these discussions. The submission, and MNDP/MoF briefing and advice to government are then provided to the Cabinet for final budget decisions.

The final budget will:

Provide for all recurrent costs of Government to be within the limits of aggregate revenue estimates for the budget year and each of the outer-years;

Allow capital investment projects to be funded by borrowings only where the project has been appraised as having an overall economic value over their life.

The Budget documents are written in a manner, which will properly inform stakeholders (including parliament, the users of all government services, and the implementing budget agencies) in relation to:

the cost of Government policies over the medium term; how services will be financed over the medium term and what are the overall implications for the sustainability of debt; and what government services will be delivered, to what minimum standard, and how service delivery performance will be measured and reported.

The budget is tabled in the Parliament for approval at least two months before the commencement of the year to which the Budget relates. The Parliament has a well-developed and disciplined process for reviewing the details of the budget and ensuring its passage before the commencement of the Budget year. The legislature’s review covers fiscal policies, medium term fiscal framework and medium-term priorities, as well as details of expenditure and revenue. The legislature’s procedures for budget review are firmly established and respected.

They include internal organizational arrangements, such as specialized review committees, and negotiation procedures.

Current situation

National Development Planning: is currently undertaken comprehensively. A new Planning and Budgeting Bill sets out the legal and policy framework for planning, including the long-term development plan, a national development plan and requirements for the creation of ‘clusters’ which will aim to ensure that all sub-national planning is consistent with the NDP. The completion of the 7th NDP was achieved in mid-2017. This sets out development policies, priorities and strategies for the period 2017–2021, and provides guidance regarding the governance framework (including the establishment, role and responsibilities of Cluster Advisory Groups).

For the Government’s part, the NDP is delivered through the mechanism of the annual budget. The Budget planning process commences with the development of macro-economic and fiscal forecasts to inform budget decision-making by Government. The PEFA assessment completed in 2017 (refer PI-14), rates performance over the period 2013-2016 as being “fair”, and notes that transparency and confidence in the forecasts could be enhanced: through an independent review of the forecasts; by providing explanations of variations that have been made from previous forecasts; and by making the macro-fiscal sensitivity analysis, currently undertaken by Ministry of Finance, available to stakeholders.

The PEFA provides a favorable (“A”) assessment of performance in relation to the effective use of fiscal strategy in budget formulation (refer PI-15). The medium term fiscal strategy is developed early in the process (once the macro-economic forecasts have been prepared) and communicated to the Cabinet and key stakeholders through ‘Green Paper’. This sets the tone for the budget and guides the formulation of Budget planning ceilings. The strategy, including explicit and time-based targets, is also included in the budget speech, which provides an assessment of past performance as well as future targets.

While budget documentation contains estimates of medium term expenditures, there is little evidence that this information has a significant influence on the determination of annual budget estimates. The PEFA (PI-16) noted that medium term planning ceilings and budget estimates are both satisfactorily presented in budget documents, indicators of the successful alignment of the budget with strategic plans, and the consistency of medium term budget estimates over time, are both less than satisfactory, indicating a gap that needs to be addressed in the reform strategy.

Budget Calendar: The Budget preparation process is based on a Budget calendar that is published only in summary form. The process is required to lead-up to the tabling of Budget Estimates in the legislature at least 90 days prior to the end of the budget year. The process begins with processes to develop macro-fiscal forecasts and determine fiscal strategy. Once these are completed, a Budget Call Circular is released to MPSAs providing detailed instruction for the completion of Budget submissions. The PEFA notes (in PI-17) that the BCC is often released quite late in the process and, because the targeted date for submission to Legislature cannot be moved, this can result in inadequate time being allowed to MPSAs for the formulation of their budget submissions. On average, only 2-3 weeks have been allowed for this task over the last 4 years, compared with periods in excess of 6 weeks in good practice jurisdictions. The IMF has raised the same issue frequently in its TA reports.

The PEFA (in PI-18) found that Legislative scrutiny of Budgets is strong, and the Annual Budget has regularly been passed before the end of December. While medium term budget estimates are provided in the Green paper and Budget Speech, most focus is on the annual budget estimates. More attention should be given to medium-term issues and in-year control of budget variations.

Budget Credibility: The most important indicator of the quality of the planning and budgeting processes is the extent to which the government budget is able to be implemented “as passed” by the National Assembly. This is measured in the PEFA methodology by comparing actual revenue and expenditure with the original budget. The 2017 PEFA makes the following observations:

The aggregate revenue estimates were within 5 percent of the actual outturn, but revenue composition variances were high for each year, with VAT receipts consistently underestimated by more than 20 percent.

The expenditure outturn, at the aggregate level, was just within 15 percent of the budget for 2015 and within 10 percent for 2013 and 2014. However, when analyzed at the economic head level, variances of more than 20 percent are evident for each of the 3 years. Most expenditure Heads also had unacceptably high variances as shown in the following table.

Expenditure Composition Outturn Variances by Economic Type

% Deviation

Economic Head 2013 2014 2015

Compensation of employees −7.33 −13.70 −18.10

Use of goods and services −21.90 −26.29 −33.78

Consumption of fixed capital −29.24 −53.31 2.89

Interest −22.60 6.75 36.69

Subsidies 431.26 237.23 273.02

Grants −15.33 −23.42 −13.33

Social benefits −20.16 −39.33 −32.61

Other expenses 86.62 21.93 49.60 Source: Table 4.1, Report on the Evaluation of the Public Financial Management System of Zambia, 2017

In respect of allocating resources and delivering services, the variances between Budget and actual expenditure by ministry indicate poor performance. The variances were consistently lowest for the Ministries of Health and Education, while the highest over-expenditures were for the Ministry of Finance and Cabinet Office, and the highest percentage under-expenditures were for the Ministry of Ministry of Local Government and Housing (MLGH).

This unevenness directly, and substantially, alters the approved resource allocation and has significant effects on the achievement of service delivery objectives.

The reasons for this are not clear from the PEFA report, except for a note that there are “some consequential fiscal discipline issues regarding expenditure control as MPSAs override commitment and cash controls and incur excess expenditures through supplier credit to carry out their functions. This has resulted in expenditure arrears that are proving difficult to eradicate”.

International experience suggests a number of possible reasons for excessive variations in budget at the compositional level. These include:

The failure to comprehensively budget for all expenditures implied by expenditure policy, and/or inaccurate costing of all implied expenditures.

This leads to frequent requirements for budgeted amounts to be increased in-year with a consequent requirement for other expenditure lines to be decreased in order to preserve fiscal balance.

In-year commitments to additional expenditure proposals (often large infrastructure programs which were not included in the budget), which require budget supplementation. This often requires compensating savings to be made from within other budget lines and causes disruption to planned expenditures.

Inaccurate revenue forecasting resulting in lower than budgeted revenue receipts and requiring expenditure savings to be implemented in-year.

A failure to comprehensively budget and accurately cost activities at the MPSA level has been noted and needs to be addressed through: extending the period of time allowed for MPSAs to prepare their Budget submissions (to at least 6 weeks);

and continuing to build competence in the Financial Management areas of both MPSAs and central agencies.

Proposed reforms to evaluate and undertake more detailed costing of new capital development projects will also assist. The 2017 reinforcement of procedures, requiring the presentation to the National Assembly of a Supplementary Budget before any unplanned expenditure is undertaken, has increased transparency where this occurs and should encourage decision makers to plan more carefully and ensure the budget is more comprehensive.

Realignment of budgeting and cash management responsibilities: A key role of the Ministry of Finance is the management of a system for the preparation of the annual and medium-term budgets. In addition to establishing the system, and coordinating all budget stakeholder inputs, the Budget Department should provide a budget challenge role, which enforces discipline in the estimates process. Budget department must challenge all budget-funded activities in relation to:

the alignment of activities to national and sectoral planning objectives;

whether the particular activities for which funding is sought are the most effective way to achieve the defined objective and represent reasonable standards of efficiency;

the accuracy and reasonableness of the costing of the activity.

To succeed in this, Budget Department staff must clearly understand the national and sectoral objectives and the business model of the MPSA spending entities, research and maintain current knowledge of international best practice in the activities addressed by the MPSAs, and have a detailed knowledge of the cost base of each of the spending entities within the MPSA. This is a substantial requirement that demands the full-time attention of expert budget officers.

As noted by an AFRITAC South (IMF) technical assistance mission 1 in 2016, budget officers were heavily involved with implementing the cash rationing system to the exclusion of activities that would contribute to the credibility of resource allocation and the budget. However, in 2017 a new structure was approved for Budget Office that included the creation of a relatively large, 19-person, unit dedicated to the Budget formulation and monitoring process. In spite of this a smaller unit for budget execution was maintained.

This highlights another issue, that is, there appears to be a misalignment of roles as between the Budget Department and the office of the Accountant General. Good practice jurisdictions assign budget formulation to a Budget Department and budget execution (including cash management) to the Accountant General’s office.

The AFRITAC South report has recommended that all current Budget Department responsibilities for cash rationing be passed to the Treasury Services and Cash Management Department in the Office of the Accountant General, and the Budget department refocuss its effort on the budget formulation and challenge roles alone. Reform processes to increase the capacity of the Budget Department to successfully fulfil its “Budget Challenge” role and function should accompany this.

Work is already underway to build this capacity.

Capital Investment planning: Reforms are planned to the way in which capital investment projects are brought to the budget process. Previously, capital investment projects have been approved to implement without sufficient preparation. Many projects have been given the go-ahead to proceed outside of the budget process, leading to the cashflow and service delivery disruptions indicated above. Even where the projects have been approved within the context of the formal budget process, the projects have not been fully evaluated (to ensure a positive economic return on the investment) or fully designed and costed.

This has resulted in many projects that have cost many times more than originally estimated and which may not fulfil their intended purpose as well as expected.

These factors result in poor value for money being achieved. It is proposed to develop an improved process for development of the capital investment program.

This is to be built around the following conceptual model.

1 Mission report titled “Zambia - Macro-fiscal Management and Budget Formulation, February 2016”

Sustainable Debt Management: A recent WB and IMF debt sustainability analysis assessed Zambia to be at high risk of debt distress2. Both external and domestic debt grew significantly in 2015. Total debt to GDP grew from 35.6% of GDP in 2014 to 61.1% of GDP in 2015. A looming issue is the need to repay three large Eurobond loans over the next 4-6 years (US$750 million in 2022, US$1 billion in 2024, and US$ 1.75 billion in 2027). ). Both the WB and IMF have recommended a strategy of actively managing external debt, including refinancing the Eurobond loans (or parts of them) before the due date so as to spread the burden of repayment over a longer period.

The Government has published a Medium-Term Debt Strategy covering the period 2017-2019. The WB comments that, while this is a good start, the strategy “is not yet of the necessary quality to guide sustainable borrowing well”3. In the same report, the WB notes that the absence of reporting on debt since 2012 has made analysis difficult.

Going forward, it will be important that quarterly reports are reinstated and that some flexibility is maintained in relation to debt strategy options. Strategic management of the debt portfolio is of critical importance over the medium term, given the current high risk of debt distress. This is important, firstly to ensure that the Government is able to service its debt now and into the future without unnecessarily constraining the capacity to deliver essential services and development programs, and then to ensure sustainability into the future.

The maintenance of strong fiscal discipline will be critical so as to avoid pressures for debt that are beyond targets set in the Medium Term Debt Strategy. The Ministry of Finance must also continue to build its capacity for strategic management of the portfolio, while stricter rules related to debt commitments outside of the medium-term debt strategy must also be developed and enforced.

2 Source: Zambia Economic Brief - Issue 10, December 2017, World Bank Group 3 Zambia Economic Brief - Issue 10, December 2017, World Bank Group (page 29)

Feasibility Design and costiing Economic Evaluation

Procurement StrategyConcept

Identified by Government, MPSA, other stakeholders

Assessment undertaken by the responsible MPSA with quality assurance and stage approval by MNDP

Considered in Annual Budget process for financial approval

Sent by Cabinet to the National

Assembly as part of the Annual Budget

Cabinet decides which projects will continue

/commence next year

Performance Based Budgeting: Cabinet Office has directed that full implementation of Output Based Budgeting (OBB) begin in the 2019 national budget. The approach has been piloted for the last two budgets with the Ministry of General Education.

However, a precondition for the successful application of any performance-based budgeting approach is a credible budget. Only where budget credibility is assured can spending entities focus their attention on the delivery of quality services and the meeting of performance targets. Budget credibility implies:

Activities of government are comprehensively included in the annual budget;

Activities are carefully costed and adequately funded in the budget, having regard of the standards of service the government intends to deliver; and

The funds appropriated to particular spending entity activities are routinely available for payment to suppliers in accordance with the approved annual Budget.

These conditions do not currently exist. While the early adoption of OBB is seen as desirable, it is important that priority is also given to those measures that are aimed at restoring budget credibility, in order for the wider implementation of OBB to be effective. In this regard, the Government has signalled its intention to move towards a warrant-based budget execution system among the other reform measures intended to restore budget credibility.

Strategic Reform Priorities

Reform Objective: To restore credibility to the budget, and ensure that every expenditure from the budget achieves sound value for money

In keeping with the Objective, the priorities for reform focus first on creating a solid foundation of policy, practice and capability, including reforming institutional arrangements, while undertaking other reforms (e.g. performance based budgeting reforms) that benefit from this foundation.

A. Restore Budget credibility

The first priority will be to restore budget credibility. Key activities required will be:

Continue to build capacity for medium term macro-economic and fiscal forecasting to better inform the strategic phase of the budget process. This will include:

- Capacity building for staff in: the Zambia MicroMacro Model

(ZAMMOD) and macroeconomic simulations; macro and fiscal risk assessment to improve the quality of forecasting; and in advanced modelling and forecasting using e-views and stata.

- Providing support towards modelling software and hardware Developing Legislation to ensure that in-year changes to revenue projections are subject to Parliamentary scrutiny and approval in a similar manner to supplementary expenditures.

Linking of the ZRA data capture systems with the Ministry of Finance for better oversight and more responsive policy formulation strengthening the cash planning and release processes and aligning these with reporting and accounting for expenditure. This will entail:

- Merging the responsibility for budget cash releases, forecasting and planning currently in the Budget Department with the Treasury and Cash Management Department under a Treasury Management Department.

- Training staff in the Budget Department to develop expertise in strategic budgeting and the Budget Challenge Function.

- Reviewing and revising the Budget Calendar to retain the two phased budgeting process and to ensure that MPSA’s are given at least 6 weeks to prepare their detailed budget submissions after the budget ceilings are advised.

- Training MPSA management and budgeting staff in the accurate costing of budgeted activities.

Revise the process for development and approval of capital investment projects to ensure that a project is submitted for financial approval in the annual budget, only after it has been tested for its feasibility, designed and costed, and its economic benefit evaluated. This will require:

- Capacity strengthening in the MNDP so that it is capable of providing the leadership necessary for the new arrangements to be conducted across Government, and to ensure that the required technical skills are in place to guide and quality assure the processes of feasibility testing and economic evaluation.

- The development in MNDP of a database and workflow system that ensures that all projects in development and all projects in implementation are tracked and monitored centrally for the purpose of feeding these when appropriate into the annual budget process. The database should be interfaced with the Budget development systems to enhance information sharing for budget planning and forecasting.

- Ongoing capacity building for MPSA staff who are developing projects and managing capital investment projects.

Strengthen the Government’s capacity for sustainable debt management, so as to reduce extent of the drain on fiscal resources represented by debt service costs and to effectively manage the maturity of the Eurobond loans.

This should include:

- Ongoing training and capacity building for the staff of the Debt

Management Unit;

- Review and revision of Medium Term Debt Management Strategy to strengthen areas of current weakness. The strategy should be approved by government and publicly available and updated annually with any changes in strategy well explained.

- Active management of the debt portfolio to mitigate the stress potentially associated with the maturity of current Eurobond issues (in 2022, 2024 and 2027).

- Ensure all debt is comprehensively recorded and reported on a quarterly basis, so stakeholders can monitor progress with the

MTDMS.

- Maintenance of a prudent approach to the fiscal deficit to ensure that pressure to increase debt, other than for economically viable investment projects, is eliminated.

B. Introduce Performance based budgeting to drive improved provision of public services.

Some MPSAs have been piloting Output Based Budgeting, and the pilots have been evaluated as successful enough to proceed to roll the technique out to other MPSAs. However, it is recognised that attempting broad implementation of any performance-based budgeting approach in an environment characterised by low levels of budget integrity, will probably guarantee a failed implementation effort.

This is why implementation of the Output Based Budgeting System, in line with

Governments Directives, must be accompanied by all the measures (stated above) that are intended to ensure budget credibility as well as the following activities:

- Consistent monitoring and evaluation of progress and challenges made by

MPSAs recently introduced to the system; and

- Development of a system, such as quarterly warrant system, that can provide

MPSA Managers with greater control of financial inputs governing their outputs.

2. Effective internal control for predictable budget execution In an idea world …..

In-year budget changes

Expenditures are undertaken strictly in accordance with Budget.

Where an expenditure need arises during the year, which was not foreseen in the budget, the Ministry of Finance firstly asks, “is the expenditure unavoidable?”

If the answer to this is, “No”, the request is denied and may be reconsidered in the budget process for the next year.

If the answer is, “Yes”, the Ministry will ask, “is the expenditure urgent … must it therefore be undertaken this year?”. If the answer is, “No”, the request is denied and may be reconsidered in the budget process for the next year.

If the request is considered both unavoidable and urgent, then the Ministry of Finance will consider ways to finance the expenditure by: raising additional revenue; reducing expenditure from funding approved in the budget for some other purpose; by raising a loan to fund the expenditure; or identify some other source of funding (e.g. grant). Once options have been identified, these are carefully documented in a paper to Cabinet, along with MOF recommendations, for decision as to how to proceed.

The Government will then prepare a supplementary Budget for submission to the Parliament. The supporting documentation to this will explain: why the expenditure is considered to have been unforeseen at the time of the Budget, as well as unavoidable and urgent; what revenue increase, expenditure reduction, and/or other financing vehicle will be implemented to fund the expenditure; and what risks this may impose for the integrity of the budget, or the delivery of services to citizens.

Once the Parliament is convinced that the expenditure is essential and consequent risks are being adequately managed, they will authorise the supplementary budget and the government will commence execution of the expenditure and actions required to fund the expenditure.

Budget execution

The Treasury prepares a cash flow forecast for the fiscal year. This takes into account estimated cash receipts from taxes, non-tax revenues, grants and loan financing. It also takes into account the cash flow projections of Spending Entities.

This cash flow forecast is updated monthly on the basis of actual cash inflows and outflows.

The budget is executed by Spending Entities, in accordance with the authority given through the Budget. Significant in-year adjustments to budget allocations take place only once or twice in a year, and are done in a transparent and predictable way.

Spending agencies are able to plan and commit expenditure for at least six month in advance in accordance with the budgeted appropriations. Spending agencies will plan the execution of their budget to ensure that authorised expenditure is spread throughout the year in accordance with a work plan and a cash plan, and ensure that the authorised expenditure amounts are not exceeded.

Where, due to unforeseen changes in demand for services, it is determined that the budget amounts for a particular purpose will not be sufficient, the spending agency will attempt to identify savings in other expenditure items sufficient to fund the unforeseen expenditures. The agency will then seek approval to transfer these amounts from one purpose to another (virement).

Internal Control Environment

A strong control environment is developed and maintained in order to provide confidence to the Controlling Officer, and external audit authority, that all expenditures are made for authorised purposes, within budget limits, and efficiently spent. This includes:

Comprehensive expenditure commitment controls are in place to effectively limit commitments to no more than the approved budget allocations, and to actual cash availability. All purchase requests and purchase orders are processed through the IFMIS system, which automatically checks expenditure authority for the purpose and cash availability. No commitments can be entered into without a purchase order.

A well-functioning procurement system is in place and routinely used to ensure that money is used effectively and efficiently. The procurement system maximises open competition in the purchase of goods and services and is highly transparent. Only where significant justification exists (with regard to value for money, or other national interests) is limited or sole-sourcing used in the procurement process.

Strict procedures are in place and enforced, to limit the incidence of mistake or fraud when processing payments. Payments are made against invoices that are verified against the purchase order and the goods/service delivery/receipt documentation, and payment is separately authorised on the basis of this verification.

The Government’s personnel database and payroll systems are directly linked to ensure data consistency and enable monthly reconciliation. Changes to the personnel records and payroll (to reflect recruitment and retirement, and changes in salary or conditions of service) are routinely entered monthly, in time for the following month’s payments. Retroactive adjustments are rare.

Authority to change records and payroll is restricted and results in an audit trail. A strong system of annual payroll audits exists to identify control weaknesses and/or ghost workers

Internal Audit

The Controlling Officer (CO) of each spending entity accepts responsibility and accountability for ensuring that all expenditure is undertaken in accordance with the authorized budget, in an orderly and planned manner, and that internal control systems are in place to prevent fraud, error and waste in spending.

A prerequisite for fulfilling this responsibility is the creation, maintenance and, monitoring of the system of internal controls. Each CO relies on a professional internal audit unit to provide assurance to him/her that the controls are appropriate and in place, and are effective (that is, all transactions undertaken by the entity pass through these controls and the controls cannot be avoided).

The Internal Audit Unit is structured to ensure its professional independence and reports directly to the CO. It has a broad mandate, has guaranteed access to information, and uses professional audit methods, including risk assessment techniques. The Unit reports to the CO on significant systemic issues in relation to:

reliability and integrity of financial and operational information; effectiveness and efficiency of operations; safeguarding of assets; and compliance with laws, regulations, and contracts.

The external auditor (OAG) uses the internal audit reports as part of its audit planning process, and the CO ensures that action is taken promptly to address all internal audit findings.

Current Situation

In-year budget changes/ Budget execution

As outlined in the previous chapter, budget reliability (that is, the closeness of actual expenditures to the approved budget) is very poor, when considered at a component level. PEFA PI-1 deals with the aggregate level, and a rating of “B” was assessed as overall budget expenditure was within +/-10% for two of the three years assessed. While this is acceptable, significant improvement is required to reach a good practice rating of “A”, which would require a variation of +/-5% in two of the last three years.

However, PI-2 assesses performance at a compositional level and was assessed at an unacceptable “D+”. Three dimensions make up this rating, as follows:

Indicator/Dimension Score Brief Explanation

PI-2 Expenditure composition outturn (M1) D+

Although contingency expenditures were very low, composition variances for both administrative and economic classifications were high.

2.1 Expenditure

composition outturn by function

C

The deviation was more than 15% percent in 1 of the 3 years; 2013, 2014, and 2015 - 21.7%, 12.4%, and 14.4%, respectively.

2.2 Expenditure

composition outturn by economic type

D

The deviation was more than 15% percent in all 3 years;

2013, 2014, and 2015 - 22.9%, 25.8%, and 22.9%, respectively.

2.3 Expenditure from

contingency reserves A

Expenditure from contingency was less than 3 percent in all the years - 0.1% in all the years 2013, 2014, and 2015.

Source: Report on the Evaluation of the Public Financial Management System of Zambia, 2017

Expenditure variations can occur for a range of reasons. A failure to comprehensively budget can lead to demand for new and/or increased allocations in the budget year and will require consequential changes from other budgeted items. Improving the budget preparation processes can result in more comprehensive budgeting, and therefore avoid some of these consequences.

The reinforcement, during 2017, of the requirement for Supplementary Budgets to be placed before the National Assembly, before additional (non-budgeted) expenditure is incurred, will increase transparency around these transactions, and should effectively limit them to those that are genuinely urgent and unforeseen matters.

Internal Control Environment

It is critically important to ensure the strongest possible internal control environment is in place, to reduce the incidence of loss due to error and/or fraud, and to ensure compliance with the law – including the approved budget law.

However, a wide range of internal control breaches and issues exist, as is highlighted by the following list from the Auditor General’s Report for 2016:

“There were weak internal controls observed in MPSAs which included:

i. Failure and delays in the collection of Government revenue;

ii. Failure by the commercial banks doing business with Government to adhere to the instructions issued by the Government on the opening, renewing and closing of all Government Accounts;

iii. Making full payments to suppliers of equipment and other goods and services and contractors in advance;

iv. Failure to follow up on all suppliers and contractors who were paid huge amounts of money in advance but have not met the contractual obligations;

v. Delays in the integration of the infrastructure development projects into the

Ministry of National Housing and Infrastructure Development;

vi. Poor monitoring and supervision of infrastructure projects;

vii. Non-reconciliation of Government accounts held by MPSAs on a monthly basis;

viii. Weaknesses in the management of the Government payroll;

ix. Weaknesses in the adherence of commitment control system;

x.…