Tracking Progress and Controlling Funds Bill Dorotinsky, PRMPS Budget Execution Course January 16-17, 2003

Post Budget Stages Release of Funds In-year modifications Notification of budget Commitment authority issued (if done) Financial plans Warrants issued (cash draw) Cash transfer (if done) In-year modifications Transfer authority – across accounts Virements – across ministries Supplemental Budgets

Financial commitment stages Encumbrance/pre-commitment/reservation Commitment/obligation Receipt of goods and services Invoice Verification Paid Cashed/cleared

Commitments, agency activity, and cash outflow: time lags New agency activity in currency units Commitments seek to control agency activity (new commitments) to control arrears Absent any other factor, lower new activity does not immediately reduce cash outflow because of prior balances of commitments (b) In cash control, what happens when agency cash allowances are cut? There may be a lag between reduction in new agency activity, and even greater lag to adjustment (c) Commitment control seeks to target new agency activity, and reduce these lags.

Budget classifications Administrative Economic/object class/’inputs’ Functional Program Fund Line Item

Budget classification - program Program/organizational objectives Ministry of Health Children’s Health Women’s Health HIV/AIDS Vaccination

Budget classification -administrative Organization/administrative Ministry of Culture Ministry of Health Ministry of Social Welfare Ministry of Defense Ministry of Justice Parliament/legislature Chancellory/Prime Minister….

Budget classification - functional Health Education Public Order and Safety Defense Foreign Affairs …………

Budget classification - economic Economic/object class/’inputs’ Personnel/personal services Salaries Benefits Non-personal services Supplies Contracts Utilities Equipment Printing Travel Capital

Classification Matrices Payroll Utilities Rent Etc…. Ministry 100 20 10 Program 4 2 Activity 1 0.2 0.1 …… Classifications can be combined to cut the budget different ways -- add to this a time dimension (annual, monthly) Control can occur at any level of detail. What is the control point? What is the optimal control point? For whom? Budget/policy control and accountability Cash control and accountability Meeting the service delivery financing needs of agencies in terms of financing, flexibility

Dimensions of Control Time Detail – classification matrix Control (allocations) versus Reporting & monitoring Detail – classification matrix Policy – time, detail Executive Legislative Civil society

Control Approaches Ex ante Ex Poste External Internal (to commitment) (to spending unit) 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 Internal Ministry or spending unit transaction approval Procedures to minimize risk (internal controls) Transparency Ministry internal audit Performance management Ex ante (before) making financial commitment French System New Public Management

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

General Tensions

Essentials of Good FM 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

To manage well requires: Monitoring/managing Cash balances Cash flow Inflow outflow Commitments Arrears Contingent liabilities New legislation/mandates Off-budget activity

Core Functions Financial Management is Everyone’s Responsibility - internal control - program management - spending (commitments) - recording & reporting - payment orders - verification of receipt of goods/services - program/cash plans Financial Management is Everyone’s Responsibility