Public Financial Management:

Good Practices

Bill Dorotinsky
Halong Bay, Vietnam
The World Bank
October 9, 2003
 Outline
I. Framework
a. Expenditure Management Cycle 3
b. Three Objectives 4
c. Five Principles 5
II. Good Practices 6
a. Basic Institutions 7
b. Core processes 8
III. Budget Execution – Objectives 9
a. Core treasury functions 10
b. Contingent liabilities 11
c. Expenditure Control Approaches 12
1. Central versus Delegated Control 13
2. General Tensions 14
d. Managing Well 15
e. FMIS 16
f. Essential of Good Financial Management 20

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 Expenditure Management Cycle
Financial management system boundaries

Project Resource Annual budgets

appraisal Medium term allocation
Planning Development,
plans, e.g. three
system recurrent and
year rolling plans
revenue

Expenditure
review

Public expenditure
review Institutions Fund release
procedure, e.g...
warranting
Accountability

Audit system

Accounting for
revenue and
Reports and expenditure
financial statements

Source: Adapted from Integrated Financial Management. Michael Parry, International Management Consultants Limited.
Training Workshop on Government Budgeting in Developing Countries. THE UNITED NATIONS. December 1997.
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 Three Objectives of Public Expenditure
Management Systems

• Macrofiscal discipline and stability

– Avoid public finance crises
– Support economic growth and stability
• Strategic allocation of resources
– Match government policy with programs,
objectives
• Technical efficiency
– Getting the most from spending

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 Basic principles of PEM
• Comprehensiveness
– include all revenue and expenditure, all agencies
• Accuracy
– record actual transactions and flows
• Annuality
– cover a defined period of time (e.g. one year budget, multi-year
forecasts)
• Authoritativeness
– only spend as authorized by law
• Transparency
– information on spending is public, timely, understandable

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 What are Good Practices?
• Attaining and Maintaining Good Basic
Institutions
– Basic public finance institutions must work
well for good policy and program outcomes
– Too often countries reach for advanced OECD
reforms, neglecting basic institutions
• Dedication to continuous system
examination, learning and improvement
– institutional development is long term
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 What are the basic institutions?
I
n
t M
I e u C
C D r l o
n a R
e n t m
f s pr e
bt a i-
o. h Laws
l
y E p
S e h o
y M
M Practices
a e r
s g A n t
m Organizations
g r
t u s in
m nt d I
e Pl g
nt i a v
m
t n e

Control Environment
Accounting and Record Keeping
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External Audit
 Core Processes
- Budget Allocations - asset management
- Supplemental Budgets Ministry of Finance - procurement, contracting
- Virements
- In-year monitoring and correction
- payroll/personnel mngmnt

- Warrants (cash allocations)

- Cash Flow Management Treasury
(forecasting, planning,
sequestration)
- debt management
- financial asset management
- accounting (policy, system Spending - internal control
management, chart of accounts) Ministry - program management
- make payments - spending (commitments)
- collect revenues - recording & reporting
- account management and - payment orders
reconciliation - verification of receipt of
Spending Unit
- Central Bank relations goods/services
- program/cash plans

Financial Management is Everyone’s Responsibility

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And Service Delivery is also MoF’s Responsibility
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 Objectives of budget execution
• Manage Spending and Revenues to budget
– support choices of elected officials
– allow budget to be planning and steering tool
– promote macrofiscal discipline
– Reduce opportunities for corruption
• Enable program implementation (service delivery)
– Assure resources flow to programs
– allow budget to be aid to operational efficiency through
spending unit advance planning, efficient
administration
– enable program managers to achieve objective

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 Core Treasury Functions
• Cash management (flow and stock)
• Financial asset management
• Debt management, servicing;
– Guarantee and contingent liability management
• Accounting (policy, chart of accounts, general
ledger) and reporting
• Revenue collection, forecasting
• Account management (payment, collection,
reconciliation)
• Central Bank relations
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 Contingent liabilities
• Government acts as a guarantor of debt repayment
in the event that the borrower cannot make
repayment, or of payment under certain conditions
– Loan, pension benefit, bank deposit, agricultural price
• Contingent debt must be managed with the same
detail as direct debt.
• As with direct debt these contingent debts must be
inventoried and monitored in a central location
• Active identification, monitoring, management of
risk important

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 Expenditure Control Approaches

Ex Ante Ex Poste
(to commitment)
External  Centralized commitment control  Central internal audit,
(to spending (transaction approval) external audit
unit)  Allocations (commitment limits)  Regular reporting
 Warrants (cash limits)  Quarterly close-outs
 Procurement rules
 Personnel/pay rules
Internal  Ministry or spending unit  Ministry internal audit
transaction approval  Performance
 Procedures to minimize risk Management
(internal controls)

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 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

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 General Tensions
Agent “accountability”
- for results +

Central +
Management authority

control
Agent
Incentive
Financial

for off-
budget
activity

Delegation -

- Efficiency, economy +
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 To manage well requires:
• Monitoring/managing
– Cash balances
– Cash flow
• Inflow
• outflow
– Commitments
– Arrears
– Contingent liabilities
– New legislation/mandates
– Off-budget activity
– Understanding future impact of current decisions

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Definitions

What is an FMIS?
• Financial management system:
– Information system that tracks financial events and
summarizes information
– supports adequate management reporting, policy
decisions, fiduciary responsibilities, and preparation of
auditable financial statements
– Should be designed with good relationships between
software, hardware, personnel, procedures, controls and
data
• Generally, FMIS refers to automating financial
operations

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Definitions

What are core and non-core

FMIS systems?
• Core systems
– General ledger, accounts payable and
receivable. May include financial reporting,
fund management and cost management.
• Non-core systems
– HR/payroll, budget formulation, revenue (tax &
customs), procurement, inventory, property
management, performance, management
information
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Definitions

What is “integrated” FMIS?

• Can refer to core and non-core integration
• But, generally, four characteristics*
– Standard data classification for recording
events
– Common processes for similar transactions
– Internal controls over data entry, transaction
processing, and reporting applied consistently
– Design that eliminates unnecessary duplication
of transaction entry
*from Core Financial System Requirement. JFMIP-SR-02-01. Joint Financial Management 18
The World Bank Improvement Program. Washington, D.C., November 2001.
 What constitutes a good FMIS
system?
• Ability to*
– Collect accurate, timely, complete, reliable, consistent
information
– Provide adequate management reporting
– Support government-wide and agency policy decisions
– Support budget preparation and execution
– Facilitate financial statement preparation
– Provide information for central agency budgeting,
analysis and government-wide reporting
– Provide complete audit trail to facilitate audits

*from Core Financial System Requirement. JFMIP-SR-02-01. Joint Financial Management 19

The World Bank Improvement Program. Washington, D.C., November 2001.
 Essentials of Good Financial
Execution
• Timely, accurate in-year reporting
– Internal controls, audit
– External audit
• Sufficient detail to identify sources of
overspending
• Sufficiently regular reporting to allow timely
management intervention
• Comprehensive system
• Accountability framework, control environment

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 Criteria for Assessing Budget Execution System
Element Budget Execution Features
Aggregate  Commitment control system limits commitments to available resources, supporting avoidance
Fiscal of arrears during retrenchment.
Discipline  Treasury cash management further supports matching of expenditures to revenues.
 Treasury payment system and internal controls support proper payments.
 Accounting system and Financial Management Information System (FMIS) support
comprehensive, timely and accurate information on spending and revenues for government and
line ministry management.
 Fiscal and banking accounts regularly reconciled.
 Annual accounts closed in timely manner.
 Debt management assures sustainable debt policy, timely issuance of debt for cash flow
management and reaching the spending target.
 Internal audit detects and corrects fraud, waste, and abuse; assures integrity of financial
information.
 External audit assures fairness and accuracy of financial reporting, effectiveness of internal
audit and control systems.
Allocative  Commitment and Treasury controls execute the budget as approved.
Efficiency  Formal, transparent procedures used to amend budget if necessary.
 Frequency of FMIS reporting allows management action to correct deviations from approved
budget.
Technical  Budget execution (commitment and cash controls) limits critical expenditures, but supports
efficiency flexible resource use at program level (e.g. across non-personnel economic classifications, with
respect to seasonal spending patterns) for efficiency (controls are not excessively detailed to
prevent management of program).
 FMIS supports program managers.
 Civil service system supports quality public staff, flexibility in reallocating staff resources,
restructuring workforce.
 Procurement system supports competitive, efficient, timely contracting.
 Internal audit may identify options for improved economy and efficiency.
Source: Draft Federal Republic of Yugoslavia PEIR, May 2002
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