Joint Africa Institute Seminar on the Role of Parliamentarians in Promoting Good Public Financial Management and Accountability in Africa Tunis, November 19-23, 2007 Public Financial Management and Corruption1

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Joint Africa Institute

Seminar on the Role of Parliamentarians in Promoting Good Public Financial Management and Accountability in Africa

Tunis, November 19-23, 2007
Public Financial Management and Corruption1
Public Financial Management (PFM) ordinarily covers the management of government revenue, expenditure and cash. Corruption defined as the diversion of public resources for private use can affect any of these operations, at the level of the national and sub-national administrations. This paper focuses on circumstances that are prone to corruptive practices in managing expenditure and cash at the national level. It does not discuss revenue.
The outline of the paper is as follows: Sections I and II provide an overview of PFM and corruption, respectively. They are followed in Section III by a brief analysis of the relationship between corruption and the budget process and the requirements for reducing this malfeasance.
I. An overview of PFM
What is PFM?
PFM can be defined as framework of laws, regulations, traditions and practices for managing government finances in order to achieve macro-fiscal stability (real growth with low inflation, no payment arrears, sustainable debt, etc.), an optimal allocation of resources (increased social welfare), efficiency of public spending (more public goods and services at lowest market prices), and good governance (transparency and accountability). PFM regulates procedures that apply in four broad areas: budget, treasury, accounting, and control.

The budget is prepared by the executive branch which, in turn, sends it to the legislature for debate and adoption. A good budget is timely, comprehensive and presented using a simple and easily understandable terminology. After approval, it is implemented by the government which is responsible for providing timely budget execution reports. The budget is executed at four key stages: commitment, verification, payment order, and payment.

Treasury procedures and operations involve the management of government cash to meet its payment needs. The conduct of treasury operations can be facilitated by the existence of a TSA, a framework for managing the government financial assets in order to minimize borrowing requirements and interest charges, the regular reconciliation of government accounts, and the existence of transparent disbursement rules and procedures of money to enable the tracking, compilation and analysis of the government financial transactions.
The accounting system is organized to store and compile transactions information for the purpose of producing accounting documents, notably annual and semi-annual ledgers that are needed to report on the execution of government financial operations. Modern accounting uses double as opposed to single entry accounting rules. While most countries operate on a cash accounting basis, some are adopting accrual accounting that better reflects the government’s assets and liabilities, and financial position.

Two types of control are exercised in connection with the budget and more generally government financial operations: an internal and an external control. The internal control office, tasked mainly with management control and audit reports to the executive branch whereas the external control office (audit and oversight) reports to parliament. Management control (the first and main line of preventive abuse of public trust) is in effect, a set of ex ante verifications undertaken during budget execution to ensure that: (i) public resources are committed and expended in accordance with the budget law, other financial laws and regulations, and government priorities; and (ii) the principles of fair market pricing of government purchases and uniform application of rules are observed in the use of public resources. The external oversight is an ex post control.

How then does one measure the quality of the PFM system?
In an effort to promote reforms in the PFM, the World Bank and the Fund developed in the early 2000s, a set of 16 indicators to measure the quality of PFM systems of HIPC relief recipients. These indicators, denoted HIPC-AAP, covering budget preparation, execution reporting and procurement, were used to assess the initial state of PFM of 22 countries in 2001-02. Governments were expected to take measures to address the weaknesses identified by the assessment. A reassessment of the PFM systems in 2003-04 indicates that overall, progress has been achieved: total benchmarks met increased by some 10%. Budget reporting showed the largest improvement with 42% of benchmarks met in 2004 compared to 33% in 2002. Budget formulation remained virtually flat at 44% in 2004 against 45% earlier whereas budget execution deteriorated from 39% in 2002 to 35%. In terms of countries, two countries improved very significantly and five countries made noticeable progress. The 15 remaining countries needed substantial upgrading of their PFM. Though the HIPC-AAP framework provided useful signals about the PFM performance of countries, it nevertheless harbored weaknesses: (i) narrow coverage ; (ii) no involvement of donors, the HIPC-AAP being mainly a joint IMF-World Bank undertaking; (iii) persistence of several PFM diagnostic tools; and (iv) application of the HIPC-AAP framework only to HIPC relief recipients.

Consequently, donors agreed to propose a new framework to assess PFM systems, namely PEFA. The new instrument has 28 indicators to measure the quality of the PFM and three indicators to assess the performance of donors. In principle, the evaluation is to be carried out by the PEFA countries themselves with a vetting by donors. However, in practice, with a few exceptions, the PEFA diagnostics have been led by donors. While the HIPC-AAP contains a bare-bone action plan of reforms, the PEFA does not propose a reform program. The completed PEFA diagnostic is expected to serve as a basis for a multi-donor dialogue with the government in order to craft such a program.

What are the basic features of a good PFM system for developing countries?
The management of public finance in developing countries is generally hampered by deep-seated deficiencies in several areas, including budget, treasury and accounting. The focus on budget is important because fiscal policy, a key component of macroeconomic policy, is cast in annual frameworks of revenue and expenses. The treasury manages government cash in order to meet its disbursement needs, whereas accountants report on the actual use of government financial and real assets. Taken together, activities in these three areas enable to assess the impact of government decisions on economic activity and social welfare. Well-managed public financial systems have some good features in common (Box1).
Budget. In well-functioning PFM systems, government financial operations are classified according to logical and simple criteria that are consistent with international standards. Clarity

and simplicity are essential to facilitate understanding of government policy, legislative debate, implementation of the budget and fiscal reporting.

Budget proposals ought to be realistic, reflecting a convergent iteration between aggregate amounts derived from an MTEF and the sums of actual dis-aggregated outturns of execution from previous years. To ensure coherence and comprehensiveness, government budget should cover all government operations (current and capital, quasi-fiscal operations, extra-budgetary operations, all receipts, etc.). All contingent liabilities should be described in the budget. The budget should be prepared and enacted in a timely fashion before the start of the fiscal year, and published in order to provide visibility to the private sector and the general public.

Treasury. Government cash is to be managed to provide short-term liquidity and enable the acquisition of long-term assets. Typical weaknesses in cash management in several developing countries are lack of control of the accountant general or treasurer on all government accounts, illegal disbursement practices of cash, failure to reconcile government accounts, and failure to link prospective liquidity with commitment plans, leading to payment arrears.

In a well-functioning treasury system, the treasurer has complete knowledge and authority to manage all government monies. These funds are deposited in a TSA or in a small number of bank accounts, all of which are under the control of the treasurer. This enables the government to know its liquidity position at all times and manage funds to meet payment needs in order to avoid costly borrowings. Governments that are prone to corruption and waste often introduce a variety of exceptional expenditure execution procedures that circumvent financial control and blur the trail of cash disbursement. In good PFM systems,

government expenditure is undertaken using transparent standard expenditure procedures that ensure accountability through ex-ante control and facilitate the monitoring of government spending. Moreover, cash is disbursed only to pay for expenditure approved in the budget. Extra budgetary and off-budget operations cannot be undertaken without legislative approval. The treasury keeps track of its inflows and outflows and reconciles these operations regularly internally (i.e. in its own books) and externally (i.e. with bank statements).

In general, the ability of governments to pay their bills when due is a strong indicator of their level of fiscal discipline and the credibility of their policies.

Accounting. Accounting, like budget classification, is based on rules and practices. Double entry accounting facilitates the reconciliation of government operations and prepares the ground for tracking of government assets and liabilities. Accounts that are based on this rule are more reliable and accurate. To enable macroeconomic policy-makers to make timely decisions, it is essential to track through proper accounting, the flow of expenditure at each stage of the spending chain, including payments. Vote books, account ledgers, administrative and operating accounts are to be maintained regularly and routinely.

Another common feature of well-managed public finances is availability of manuals that contain the rules and practices for undertaking different government operations. Manuals are important because they eliminate guess-work and instill consistency in managing government finance in time and space. The rules and procedures are to be applied in the same uniform manner over the whole country, thereby enhancing the confidence of the private sector in transacting with the government.
II An overview of the notion of corruption
The legal and operational definition of corruption varies with countries. Transparency International (TI) defines corruption as “an abuse of entrusted power for private gains.” Hence, this definition could also cover corruption in the private sector. In this note, corruption in PFM is defined as the use of public office for private gains.2

Box 1. PFM Fundamentals in Developing Countries
The PFM systems of developing countries have several weaknesses to be eliminated. Three areas stand out for improvement: budget, treasury and accounting.
Classification (administrative, economic and functional)

  • Comprehensive coverage with no extra-budgetary or off-budget operations;

  • Based on medium term expenditure framework;

  • Single up-to-date list of government personnel for payroll;

  • Integrated (i.e. single ) recurrent and capital expenditure;

  • Government-approved price list for preparing budget estimates;

  • Upheld universality principle;
  • Timely enactment of the budget (i.e. ready to start at beginning of the fiscal year); and

  • Basic law and of manuals of procedures.


  • Existence of treasury single account (TSA);

  • Use of timely and updated commitment plan;

  • Use of timely and updated cash flow plan linked with the commitment plan;

  • Existence of an effective ex-ante commitment control;

  • Monthly reconciliation of government accounts;

  • No unregulated expenditure procedures; and

  • Basic law and of manuals of procedures.


  • Based on double entry accounting;

  • Preparation of monthly reliable budget execution reports (treasury general ledgers, flash reports, etc.);

  • Publication of budget execution information on the same basis as the original budget;

  • No significant deviations of budget outturns from the original budget;

  • No significant amount of payment arrears;

  • Publication of administrative accounts 6 months after end-FY;

  • Publication of operating accounts 6 months after end-FY;

  • Transmission of audited accounts to the legislators 6 months from the end of FY; and

  • Basic law and of manuals of procedures.

The PFM rules and regulations enacted by the executive branch of government for the conduct of government operations in these three areas should be based on laws. The problem of insufficient human and physical capacity also needs to be addressed.

Different types of corruptive practices

Corruption can be distinguished by the amount involved (petty or grand), the function or responsibilities of the persons involved (politicians, civil servants), or the institutions (executive, parliament, judiciary). The negotiation and implementation of large scale investment projects provide a fertile ground for political corruption whereas administrative corruption takes the form of petty corruption (small bribery, theft of cash, goods and services, etc.); direct abuse of public office (misuse of public financial and real assets, illegal fines, taxes, contract-steering, twisting of rules, cronyism and nepotism, etc.); and indirect abuse of public office (bribe for favorable treatment or ruling). Administrative corruption generally takes place at the tail end of politics where public officials come in contact with the public at large.

Why is it important to seek to eliminate corruption in PFM?
Corruption affects adversely the efficiency and effectiveness of delivering public goods and services. It diverts resources, weakens planning of public goods and services and undermines the confidence in the public sector. It leads to a sub-optimal allocation of resources and a lower level of social welfare.
Misallocation of resources. By diverting resources away from public coffers, it forces the delivery of fewer goods and services, of lower quality and in some cases, with delays. Often, resources are allocated away from priority social sectors in favor of sectors that benefit few people.
Ineffective planning. The preemption of public goods for private gains causes actual spending to differ significantly from the initial expenditure plans. The planning objectives are therefore not achieved, making budgeting of public goods and services ineffective.
Public confidence. Corruption decreases the trust of private sector operators in transacting with the government. In addition, it diminishes people’s confidence in the government’s ability to deliver quality goods and services, at fair market prices, in sufficient quantity, quality on time. Corruption : (i) leads suppliers to overprice their goods and services; (ii) provokes distortions in PFM procedures, for instance by prompting suppliers to obtain payments before delivering the goods; (iii) discourages private investment and donors assistance, thereby retarding economic growth, the capacity to reduce poverty and to increase social welfare, and (iv) de-motivates taxpayers.
Vulnerability for corruption in PFM systems

There appears to be a negative correlation between the quality of PFM systems and perceptions of corruption. Reporting on work done by TI and the World Bank, Dorotinsky and Pradhan (2007) consider that “countries with better-performing PFM systems have lower corruption perception indexes (Figure 1).” This is because robust PFM systems raise the risk of detection and the cost for bad behavior.

III Corruption in the budget process
Corruption in the PFM system
Legal framework for PFM
Modern budget processes straddle between two endpoints: a detailed codification of these processes into laws of budgetary procedures and practices (France and continental Europe), and the enactment in the form of law of general principles for managing public funds with the details left to be set by executive rules (UK). Generally, the constitution defines the roles and responsibilities of each state power in the budgetary process. More specific aspects of the

Figure 1. Correlation Between Corruption and PFM

Source: Dorotinsky, William and Shilpa Pradhan, 2007, “Exploring Corruption in Public Financial Management” in “The Many Faces of Corruption, Tracking Vulnerabilities at the Sector Level,” Edited by J. Edgardo Campos and Sanjay Pradhan, The World Bank, 2007, p. 269.

budget process are spelled out in budget laws, public finance acts and code of ethics modeled on the IMF Transparency Code (Box 2). Incomplete and fragmented legal frameworks provide opportunities for malfeasance.

Core budget stages are planning, preparation, adoption and execution. Vulnerability for corruption is considered to be low at the stages of planning and preparation and high at the adoption and execution stages.

Budget planning. Ideally, annual budget should be cast from a multi-year budgetary framework for supplying public goods and services that reflect policies and strategies of the authorities. This plan, prepared by the government, could incorporate inputs from the legislature. In the process, politicians and bureaucrats could tilt the projections of public goods and services toward their geographical constituencies or areas, and/or ethnic groups. The changes to the government’s proposed budget could aim at correcting imbalances in order to ensure equity, enhance efficiency or preserve social peace or national unity. However, in neopatrimonial systems of government (see below), powerful politicians could disregard these objectives and make significant a sub-optimal allocation of resources in favor of their constituencies.

Budget preparation. In some countries, it has three components: a macroeconomic framework, a policy outline and expenditure ceilings.
The macroeconomic framework lays out, inter alia, the revenue and financing expectations from which the aggregate current and capital expenditure targets are derived. The risk of corruption is not significant at this stage because money exchange is not involved. However, favorable conditions could be created for embezzlement, for instance by understating significantly tax revenue or showing favoritism to certain taxpayers in projecting budgetary revenue.
The policy outline articulates policies and strategies underlining the multi-year plan of public activities. It serves as a bridge between the aggregate expenditure targets contained in the multi-year plan and those generated by the macroeconomic framework. A lack of consistency between the two sets of aggregates would normally call for the adjustment of the targets and/or policies to achieve them. The risk of corruption is moderate because only the ministry of finance can influence budget preparation at this stage.
Expenditure ceilings are assigned to spending units at this stage. The total amount of these limits should be equal to the aggregate levels set in the multi-year plan and the macro framework, both of which should be backed by the policy outline. This textbook approach is far from reality. In practice, allocations are increased or decreased or left unchanged, not only on the basis of policies, but of influences from politicians and bureaucrats in all branches of state power. The initial budget allocations could be altered at any stage of the
clearance process of the expenditure ceilings (budget conference, minister of finance, cabinet, parliament). The deal mentality that prevails at this stage makes setting expenditure ceilings an excellent ground for political corruption.

Box 2: Reducing vulnerability to corruption in PFM
The IMF Transparency Code identifies some factors that would minimize the risks of corruption in public finance. These include:

  • The transparent definition of the role and responsibilities of public sector institutions involved in the budget process, the relationships between them, their accounting and reporting systems, etc. Overlaps and omissions in these definitions could open the way for corruptive practices;

  • The regular release of budgetary information to the public (original budget and final outturns, annual and semi annual accounts showing also government indebtedness and assets, etc.). In the absence of this information, it would be difficult for the public to hold government accountable;

  • The budget should be comprehensive and based on a macroeconomic framework. It should show all revenue, expenditure and financing operations, with spending classified according to international standards to facilitate understanding and comparison. Extra budgetary operations should be reported on the same basis and classified according to the same criteria (administrative, economic and functional). The accounting system should enable to report comprehensively, accurately and in a timely fashion both budgetary and extra budgetary operations. Mid-year reports on budgetary and extra budgetary activities should be published. Government should be required by law to send the final accounts to the Supreme Audit Institutions (SAI) for review and onto parliament within one year from end-of-FY. Deviations from these principles, particularly on comprehensiveness, clarity, timeliness and reporting could mask corruptive practices.

New PFM tools such as performance budgeting are also being experimented to promote, inter alia, good governance. This instrument links budgetary resources to budget outcomes. Budgets are presented in terms of programs to which are attached outcomes that are measured by performance indicators. If the tracking of the output-focus budget shows drops in outputs, ceteris paribus, notably for the same level of inputs, then an investigation can be undertaken to determine if malfeasance has occurred.

Adoption of the budget. The risk of corruption during this process depends on several factors: the constitutional regime of the country, the budget schedule, the power of the legislature to amend or veto the budget, etc. In strongly presidential regimes, parliament has limited budgetary power and opportunity to engage in corruption during the adoption process. On the other hand, in countries where legislative authority is strong, parliament can modify the aggregate or individual spending limits , with a high risk of engaging in corruption. It can change the tax rates or regimes with a view to raising revenue and increasing expenditure commensurately, including its own spending (higher salaries and benefits or travel allowances).
Given the complexity of budget documents, the government can hide corruptive items in the budget or submit it late to parliament, thereby shortening the time for legislative scrutiny and creating conditions for private gains at the public expense.
Budget execution. In PFM systems that uphold fiscal discipline, budget execution focuses on the implementation of government expenditure as appropriated in the annual budget approved by parliament. The expenditure chain comprises four stages: commitment, verification, payment order and payments. This chain constitutes a fertile ground for corruption because it provides opportunities to undertake transactions and for money to exchange hands. In several countries, the commitment stage is preceded by a warrant stage.

The minister of finance releases warrants (i.e. budget allocations) to spending units, based on needs and the liquidity situation of the treasury. Uncertainties about resources inflows gives room for some discretion in making the allocations that can favor ultimately special private interests. For instance, large warrants could be granted to defense, security or public works in return for kickback to facilitate the signature of procurement contracts.

At the commitment stage, spending units can place orders for the delivery of goods and services in amounts not exceeding the budgetary ceilings. Once the expenditure commitment is approved, funds are reserved for the payment of the items ordered and are no longer available for any other payments. Corruption activities can take several forms here: violation of procurement laws and regulations, ordering of unauthorized goods and services, exceeding budget ceilings, bid-riggings, orders addressed to fictitious companies, acceptance of inflated prices, etc. The diversion of public funds can be facilitated by a weak internal control system, manual commitment procedures, and de-motivated and untrained staff. The monetary gains can take the form of cash transfers, free interest loans and/or grants, transferts of objects such as vehicles, household appliances, and free service or travel tickets.
At the verification stage, the financial comptroller is to: (i) ascertain that the delivery of the goods and services is effective and conforms to the terms of the contract (quantity, quality, schedule, location, etc.); and (ii) determine that the prices charged to government reflect fair market costs. He also checks for proper respect of rules and regulations at the commitment level. Therefore, in the absence of collusion, the verificator will uncover corruption at the commitment level if it exists (lack of budget cover, excessive cost estimates, lack of proper clearances, fraudulent invoices, etc.). However, the comptroller could be in collusion with the commitment officer, not only by overlooking acts of corruption, at the previous stage of the expenditure chain, but by compounding them with his own, for instance by recommending payments at inflated prices for substandard products in amounts smaller than ordered or payments for fictitious goods.

Corruption is also common here particularly in the presence of collusion along the expenditure chain. Payments orders could be issued knowing that there were serious irregularities during the processing at preceding stages. Even in the absence of such irregularities, the authorizing officer may withhold the issuance of a payment order on account of cash flow shortage while in effect, his real reason is expectation of a bribe.

At the payment stage, in addition to checking that laws and regulations have been observed at previous levels, the accountant is to ensure that the claim presented for payment has not been already paid. This stage provides significant risks for corruption because money changes hands. The corruption can take the form of payments to ghost companies or workers, for the delivery of no goods or services, queue jumping, retention of payment in return for quick backs, transfer of less than the stated amounts and pocketing the balance, and favoritism in approving eligibility. The failure to establish clear, transparent and effective rules for setting payment priorities give discretion to payment managers and provide opportunity for corruption. Failure to apply sanctions also encourages the diversion of public money for private use.

The management of government cash is the prime responsibility of the treasury. Cash management seeks to ensure that the treasury has enough money to make payments when they are due. This involves ensuring that government resources are deposited in treasury-controlled accounts and managed efficiently. In particular, loans are contracted on the best possible terms. One of the main weaknesses for many treasury systems is the proliferation of government bank accounts, many of which are managed outside of treasury control and disbursed according to nontransparent rules and with no accountability. In some cases, deposits in government bank accounts serve as basis for making interest free loans to the managers of these accounts. Other fraudulent schemes include the outright transfers of money from government accounts into private bank accounts belonging to the President, the Prime minister and/or cabinet ministers and/or senior government officials. This is often the case in countries where the treasury system is weak and the central bank acts as the cashier and accountant for the state with virtually no framework for cross control.

Accounting and reporting
Budget accounting and reporting do not provide direct opportunities for corruption because they do not involve cash transactions. However, they can obscure the ability to track corruption. In effect, “accurate, timely and transparent record keeping, accounting and reporting of revenue, expenditure and financial information is essential for enforcing accountability in the budget process (Dorotinsky and Pradhan, in Edgardo and Pradhan, 2007, p. 275).” Major weaknesses that raise the risk of corruption at this stage include the decentralization of expenditure responsibilities without adequate safeguards for record keeping, lack of communication of information to a central office for consolidation, poor accounting regulation and practices, absence of a modern chart of accounts, unclear institutional definitions of accounting and reporting responsibilities; absence of IFMIS and insufficient human capacity. Inaccurate, incomplete and untimely recording of transactions, complex and fragmented accounting systems, a failure to reconcile regularly government accounts and clearing of suspense accounts can mask fraud and impede audit.
Budget control

Budget control offers a good opportunity to uncover corruption. However, its effectiveness could be limited by a flawed legal and regulatory framework, and insufficiently competent staff and scarce financial resources. Budget control has two components: internal and external controls.

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