EXECUTING THE BUDGET:
ASSURE INTEGRITY,
FOSTER PERFORMANCE,
ENCOURAGE OPERATIONAL
EFFICIENCY
S. Schiavo-Campo
September 2007
OBJECTIVES AND
REQUIREMENTS OF BUDGET
EXECUTION
The objectives of budget execution are mainly control and
operational efficiency, as strategic allocation should be
covered at budget preparation stage.
The focus of budget execution is on minimizing “fiduciary
risk”:”
„ Narrow definition: the risk that government expenditures
diverge from those authorized in the budget
(misappropriations or misallocations)
„ Broad definition: the above risk, plus the risk that the
budgeted resources are wasted or spent ineffectively.
The requirements of budget
execution are:
„ Compliance: Assure that the budget is
implemented in conformity with the approved
budget – key for legitimacy
„ Adaptation: Capacity to respond to major
macroeconomic changes
„ Sound management: providing systems to
enable operational efficiency.
The three main causes of overspending:
1. An unrealistic budget
2. An unrealistic budget, and
3. AN UNREALISTIC BUDGET
CAUSES OF NON-COMPLIANCE
Overt non-compliance comes from, and demonstrates, lack of
expenditure control
Indirect non-compliance comes from accumulation of payment
arrears.
Payment arrears
„ The problem: in a cash-based budget, monitoring and
control are geared to actual payments—producing a
temptation to incur commitments without the annual budget
to pay for them. The underlying liability saddles future
budgets and destroys government credibility
A solution: monitor commitments separately and regularly
THE CYCLE OF EXPENDITURE
Appropriation (as
approved by parliament)
\/
Allocation to subordinate units,
cash plan, and release of
spending authority
\/
Commitment (contract signed)Æ Order
\/
Supplier
\/
Verification of delivery ÅÅ-----Delivery
\/
Instruction to treasury
\/
Actual payment (normally by check, for ease of accounting and reporting, and
to prevent irregularities.)
COMPLIANCE CONTROLS
Before commitment: financial control, to verify that:
„ the money is available in the budget
„ expenditure is in the correct category
„ a duly-authorized person has approved.
This regular financial verification and control is
different from “ex ante audit”, which also
questions the purpose and efficiency of the
expenditure. Normally, ex ante audit is
undesirable, but should not be eliminated before
accountability systems are sufficiently
strengthened.
[Compliance controls, continued]
Before payment: Accounting control, to verify that:
„ a valid commitment exists
„ a competent/authorized person has certified that
the goods were received or services performed
„ invoice and payment request are correct
„ the payee is correctly identified
After payment: Audit control, on all above.
Balance the necessary control with cutting
red tape and encouraging expenditure
efficiency
THE TREASURY FUNCTION
“Remember Willie Sutton”
Key activities of the state treasury:
„ cash management and planning
„ borrowing forecasts
„ management of debt, aid flows and government
financial assets
„ supervision of all government bank accounts
It is important to centralize all government
cash
TREASURY “SINGLE
ACCOUNT”
To centralize cash, all government cash transactions should
go through a “Treasury single account” (or set of linked
accounts). Under the system:
„ spending agencies have bank accounts, subsidiary of
Treasury single account;
„ these are “conduit”, zero-balance accounts, with money
transferred into them as the payments are approved
„ agencies’ accounts are automatically “swept” daily (or
weekly) for cash consolidation into the treasury.
Don’t confuse centralizing cash with centralizing payments
DEBT MANAGEMENT: KEY
PRINCIPLES
„ Only one government authority should be
„
„
„
„
„
authorized to borrow – by law
Outline in the budget the borrowing plan,
consistent with fiscal targets
Government should publish regular reports on
debt, in standard format
Every loan transaction should be recorded
(lenders’ cooperation is needed)
Debt is the only budget category that requires
accrual accounting–cash-based recording is
insufficient and risky
Give debt management responsibility to MoF
(except for CB open-market op.s)
AID MANAGEMENT
(“DO look a gift horse in the mouth”)
Budgetary principles:
„ Integrate aid with other resources: show in the
budget all aid and counterpart funds--whether
loans or grants, monetary or in kind
„ Submit grant-financed expenditures to the same
scrutiny as any other expenditure: Don’t confuse
the nature of the activity with the terms of
financing
„ Control and audit counterpart funds from aid in
the same manner as other government accounts
– if possible, place their management in the
Treasury.
[aid management, continued]
Organizational principles:
„ Responsibility belongs to the government
„ One aid management office (best in MoF)
„ Office organized along donor lines, not sectors,
to develop information on donor procedures and
good contacts; but,
„ Aid management office should interact closely
with sectors; and
„ The office should “function to facilitate”, and not
interfere in project selection decisions (for which
the sectoral line ministries and agencies are
responsible)
WHAT’S THE MONEY FOR?
A WORD ABOUT “PERFORMANCE”
Performance is not a simple concept
("Achievement”,"realization","fulfillment')
“Performance” can be subjective (for effort) or objective (for
results). Choose results-orientation, but don’t forget the
effort dimension.
Also, the "results" must be appropriately defined, and an
exclusive focus on results without respecting process will
weaken process and eventually produce bad results
“Performance” is the achievement of agreed results within
resources and time provided, without diluting quality and
respecting the prevailing norms of due process.
THE FOUR "P'S" OF
BUDGETING PERFORMANCE
„ Traditional paradigm: Probity and
Propriety
„ New paradigm: Policy and Performance
„ Beware of dichotomies – All Four P’s are
essential to execute well the budget, and
foster both integrity and operational
efficiency.
MEASURING PERFORMANCE
“What gets measured gets managed"
(Really?)
Conditions:
„ The right thing must be measured
„ The thing must be measured right
„ Corollary: "What doesn't get
„ measured doesn't get managed"
ACCOUNTABILITY FOR WHAT?
Types of performance indicators:
„
„
„
„
„
Input: resource use
Output: immediate result
Outcome: ultimate result
Impact: net outcome
Process: procedures
When performance measurement is both
appropriate and cost-effective, performance
should be assessed according to that
combination of input, output, outcome and
process indicators
which is realistic and suitable for the specific
activity, sector and country
MEASURES OF PERFORMANCE
“From 3 to 4 E’s”
Indicator
Inputs
Outputs
Social Value
Criterion
Cost
Economy
Price of close
Efficiency
substitute
Outcomes
Undetermined
Effectiveness
Process
Undetermined
Equity/fairness
______________________________________
__
THE “CREAM” OF GOOD
PERFORMANCE
A performance indicator must be:
Clear
Relevant
Economic
Adequate
Monitorable
Never use either one single indicator or too
many indicators
INTRODUCING
PERFORMANCE:
INDICATORS IN THE BUDGET
„ Introduce a few, simple, key indicators,
with direct participation of from frontline
staff and service users
„ Monitor developments closely, and adjust
continuously based on the fullest/widest
possible feedback (“report cards”?)
„ Expand gradually
„ When in doubt, DON’T do it.
„ Avoid too much monitoring, too little
evaluation
SOME OPERATIONAL ISSUES
„ Compare “Peter” to “Paul” or today’s “Paul” with
„
„
„
„
yesterday's “Paul?
Can the performance management system create
emulation and incentives for greater efficiency?
“Quality” is the. Achilles' Heel of all performance
measurement. How can the quality of basic
services be protected in a result-oriented
system?
Assure independent external scrutiny
How and by whom is the change from inertial
budgeting to result-orientation to be managed?
THE BOTTOM LINE
It is possible to execute badly a good and
realistic budget; it is not possible to execute
well a bad and unrealistic budget.
2. International experience demonstrates that
strengthening efficiency and effectiveness in
budget execution cannot be accomplished by
excessive controls,but by introducing into the
budget management system:
1.
A systematic, robust, and transparent
dialogue on results