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The Organisation of Public Financial Management Architecture
MENA-SBO
Amal Larhlid Director in Policy and Governance
Agenda
• The Role of the Ministry of Finance within Government
• The Organisational Structure of the Ministry of Finance
• Governance of State-Owned Enterprises: a case study from Tunisia
• Conclusions
Organisational architecture
The Role of the Ministry of Finance within Government
Position of MoF within governmental institutions
Institution Relationship to MoF
Head of Executive Provides overall strategic direction for government, setting objectives and priorities. These inform the allocation of resources by the MOF during the budget process.
Other line ministries Liaise with MoF in budget-setting process. May provide more granular detail on requirements of particular projects or objectives, negotiate (either directly with MoF, or via Cabinet/Secretariat) for greater resource allocations. Responsible for budget execution, internal monitoring of expenditure and performance, and (under true-PBB) reallocation of resources within spending envelope to maximum effect.
SOEs May be net subsidised by MOF, or net revenue generators. In either case, financial position and forecasts will be incorporated into MOF’s multi-year budgeting. As with line ministries, SOEs will provide MOF with information regarding investment opportunities, funding needs, and performance.
Parliament Parliament scrutinises the budget and the government accounts (potentially by means of committees). A vote may be required to approve both the budget and the accounts.
Public Accounts Committee (PAC)
Select committee focused on scrutiny of budget execution (including value-for-money criteria). In Westminster model, tends to be chaired by senior Opposition MP, and examines both public accounts and ad hoc value-for-money reports produced by the SAI. In practice, this can mean a wide remit, ranging from tax avoidance to transportation infrastructure projects. The PAC can call on external experts to support its work, and request that ministers and civil servants appear before it to provide an account of spending and outcomes.
SAI Responsible for audit of government accounts created by individual line ministries, and by MOF for government as a whole. May also audit performance information, and investigate questions of value-for-money (either at own discretion, or in accordance with direction from executive or Parliament).
MOF
Other Ministries Line
Head of Executive
Parliament
PAC
SAI
SOEs
MOF/secretariat coordination and assignment of responsibilities
Strategic planning should be fully integrated with the budget, with the MTEF representing a combined medium-term government-wide strategic plan and budget.
In this context, the organizational integration of strategic planning and budgeting becomes very important.
There are basically two models for achieving this:
• MOF assumes responsibility for strategic planning
• Strategic planning remains the responsibility of the Secretariat, but MOF and Secretariat cooperate closely to prevent fragmentation.
It is important to avoid a situation in which major capital projects are handled exclusively by the Secretariat, with MOF playing no role in analysing them and advising on their affordability.
A number of MENA countries have government Secretariat-type organizations, which support the Cabinet and executive leadership.
If planning is the role of the Secretariat, and budgeting the role of MOF, this can institutionalize the lack of integration of budgeting and strategic planning.
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02
03
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02
03
The lack of coordination between secretariat and MOF is a challenge for the integration between strategic planning and budgeting
The organisational integration and assignment of responsibilities model are critical
MOF should take central role in handling major capital projects proposals
Organisational architecture
The Organisational Structure of the Ministry of Finance
Organisational structure and key MOF functions (1 of 2) It is essential to ensure that the MOF organizational structure incorporates all of the key functions associated with the budget and financial management cycle. Below is an indicative structure incorporating these key functions within six divisions:
MOF
Macro-Fiscal Unit
Budget Preparation
Budget Execution
Treasury Accounting & Reporting
Tax Policy SOE Unit
Divisions Functions of the division
Macro-fiscal unit Policy on debt, the deficit and level of savings from resource revenues; estimation of aggregate expenditure ceiling; macroeconomic and fiscal projections.
Budget preparation Determination of budget allocations to each ministry; preparation of detailed budget for submission to political leadership, including all budget documents. In countries which have developed spending review systems, the Budget Preparation division will typically incorporate a Spending Review Unit.
Budget execution Release of budget funds to spending ministries; ensure that spending ministries implement the budget as planned; ensure compliance with financial management regulations; handle budget transfer (virement) requests.
Treasury Cash planning and management; management of government banking (e.g. Treasury Single Account); short-term borrowings and funds investment (if necessary) for liquidity purposes (i.e. to manage within-year mismatch of revenue and expenditure flows).
Accounting and reporting
Recording of government revenues, expenditures, liabilities and assets; provision to Budget Execution division of within-year reports on budget expenditures and revenues; preparation of financial reports. Accounting policy (see next page for further discussion on this).
Tax Policy Recommending tax policy and legislation to government. No responsibility for the assessment and collection of taxes (“tax administration”), which would be the responsibility of a separate Tax Authority .
State owned enterprise unit
Policy on, and analysis of, all state owned enterprise requests for budget funding; monitoring of financial position (including liabilities) of state owned enterprises and associated potential financial risk to government; general policy on state owned enterprises.
Organisational structure and key MOF functions (2 of 2)
Divisions Functions of the division
Accounting policy division
In addition to the Accounting and Reporting division – in which case the latter would restrict itself to accounting operations.
Intergovernmental financial relations
In federal systems, the national MOF would typically also have a division covering Intergovernmental Financial Relations, the prime responsibility of which would be the management of financial transfers from the national to sub-national governments.
Market regulation
While in many countries regulators sit outside MoF, market regulation (in particular, regulation of the finance sector) is highly relevant to macroeconomic stability and is commonly overseen by personnel within MoF,
International financial liaison
Responsible for ongoing financial relationships/ negotiations with other countries, and with supranational bodies such as IMF, World Bank, and the EU.
(Other) additional divisions
In addition to the above principle divisions of the MOF, it may sometimes be appropriate to create small additional units such as a Procurement Unit, which would set procurement policies and monitor the procurement practices of spending ministries.
Associated organisations
Functions of the associated organisations
Debt management agency
This agency would be responsible for issuing long-term government debt (defined as debt of more than one year maturity, and excluding short-term debt issued for liquidity management purposes, which is the responsibility of the MOF Treasury). It would also actively manage the debt portfolio. In many countries, the Debt Management Agency would also undertake any state owned enterprise borrowings on their behalf.
Sovereign wealth fund
The organization which manages the financial assets of countries with large investable resources, as is commonly the case in GCC countries.
Civil service pension authority
This agency managers the civil service pension system.
The Tax Authority
The primary responsibility of the Tax Authority is to administer the major taxes levied by the government (e.g. personal income taxes; corporate taxes and sales taxes). The Tax Authority would not have responsibility for tax policy, which is part of the MOF .
The indicative organizational structure may legitimately be varied in certain respects, depending upon national
circumstances. For example:
In addition to the core MOF functions which should be reflected in the divisions of the MOF itself, there are a number of associated
functions which are typically associated with, but not part of, MOF. Typically, the organizations which manage these functions report to the Minister of Finance or equivalent leader, even though they are
not part of MOF. The above listed are the most important such organizations.
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Real-world examples of MoF structure
US Treasury Department
The Office of Management and Budget (part of the Executive Office) plays a key role in budget preparation/execution.
Budget Preparation
Budget Execution
Treasury
Accounting & Reporting
Tax Policy
Macro-Fiscal Unit
Bureau of the
Fiscal Service
Unlike most other countries, the US legislature has considerable influence over the budgeting process.
Real-world examples of MoF structure
Swedish Ministry of Finance
Budget Preparation
Budget Execution
Treasury Accounting & Reporting
Tax Policy
SOE Unit
Macro-Fiscal Unit
MOF
Economic Affairs
Budget Tax and Customs
Financial Markets
International Municipalities and
State Ownership
Municipalities SOE
governance SOE
management
National Debt Office
National Financial
Management Authority
Budget Preparation
Budget Execution
Real-world examples of MoF structure
UK Treasury
HM Treasury
Corporate Centre Strategy, Planning
& Budget Ministerial &
Communications Treasury Legal
Advisors
International/ EU
Economics Fiscal Public
Spending Public
Services
Financial Stability
Financial Services
Financial Regulations &
Market Services
Business & International
Tax
Personal Tax, Welfare & Pensions
Enterprise & Growth
Tax Policy
Macro-Fiscal Unit
Accounting & Reporting
Treasury
Organisational architecture
Governance of State-Owned Enterprises and Public Bodies
Governance of State-Owned Enterprises and Public Bodies in Tunisia Background and Context
• 50% increase in government expenditures between 2010 and 2013
• In the context of subsequent spending restraint, there has been renewed focus on management of public finances, budgetary transparency, and performance budgeting
• IMF Technical Assistance was requested to evaluate the progress of these PFM reforms, identify deficiencies, and make recommendations
• The mission focused on:
• Budget framework and preparation
• Closure of accounts and financial reporting
• Oversight of state-owned enterprises and organisations, which constitute an increasing burden on state finances
Governance of State-Owned Enterprises and Public Bodies in Tunisia Types of State-Owned Enterprise and Public Bodies
State-Owned Enterprises
Public Bodies
Administrative Public Bodies
Public Health Bodies
Non-Administrative Public Bodies
Non-Administrative Public Bodies
Wholly State-Owned
Companies
Banks and insurance companies (directly and indirectly capitalised by
the State)
Companies majority-owned by the State,
local government, and/ or other public bodies
Governance of State-Owned Enterprises and Public Bodies in Tunisia Structure of Governance
Ministry of Economy and
Finance
President’s Office
Line Ministers
Technical Committee on Privatisation
Court of Auditors
Commission for the Restructuring of
Publicly-Supported Enterprises (CAREPP)
DG of Public Bodies
General Committee of
Budget Administration
DG of SOE Restructuring
SOE Productivity
Monitoring Unit
SOE Organisational
Unit
DG of Privatisation
DG of Public –Private
Partnerships
State-Owned Enterprises & Public Bodies
Governance of State-Owned Enterprises and Public Bodies in Tunisia State-Owned Enterprises: Trends in Salaries, Subsidies and Investment
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2000
3000
4000
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6000
7000
Salaires Subventions de l'Etat Aides pour l'investissement
2010 2011 2012
Source: MEF, Rapport sur la position financière de 28 entreprises publiques 2010-2012
Governance of State-Owned Enterprises and Public Bodies in Tunisia Problems and Recommendations
Lack of clear criteria for differentiating public enterprises from other administrative/ non-
administrative agencies
Legal Framework and Categories of State-Owned Enterprises and Public Bodies
Diverse categories and legal frameworks for SOEs and
Public Bodies
Consolidation and simplification of legal
framework
Simplify and standardise personnel grades/salaries
Regroup into two categories: administrative bodies and
commercial/industrial companies
Governance of State-Owned Enterprises and Public Bodies in Tunisia Problems and Recommendations
Multiple state bodies tasked with oversight of SOEs and public bodies
State-Owned Enterprises and Public Bodies: Institutional Landscape
Equip the DG of Public Bodies (MoF) with power to monitor entire sector, and responsibility for annual
financial analysis
Introduce requirement for information on SOEs and
other public bodies in MoF memos to rest of government
Improve coordination between existing actors involved in governance
Lack of coordination Overlapping duties and
increased costs
Prescriptive governance framework limits operational
independence of SOEs
Contractual formalisation of relationships between State and public bodies (particularly state-
supported banks)
Create a single entity responsible for oversight of public bodies within
MoF
Governance of State-Owned Enterprises and Public Bodies in Tunisia Problems and Recommendations
Financial Performance and Risk Management
Improved monitoring of SOEs’ financial performance (particularly
signs of financial distress)
Introduce macroeconomic and budgetary risk analysis into public bodies’ annual
reporting
Clarify spending and delivery responsibilities between State
and public bodies at a project-by-project level
Absence of reliable management information
Lack of visibility of overall level of government subsidy (including
implicit guarantees)
Failure to incorporate public bodies into budget forecasts
Develop multi-year strategy and budget for public bodies, which can
be integrated into medium-term expense planning at the State level
Produce report aggregating all forms of subsidy to public bodies
Failure to assess impact of macroeconomic factors on
financial position of public bodies
Governance of State-Owned Enterprises and Public Bodies: Lessons from around the world Challenges…
Scale and diversity of SOE sector
Conflicting imperatives: generate cash or deliver
social programs?
Overall level of government subsidy
(transfers, guarantees, equity) often unclear
Cash-generating parts of business/sector may
mask true scale of transfers
Inadequate appreciation of risk exposure by SOEs
and/or by MoF
Low visibility of contingent liabilities
Governance of State-Owned Enterprises and Public Bodies: Lessons from around the world Challenges… and solutions
Scale and diversity of SOE sector
Conflicting imperatives: generate cash or deliver
social programs?
Simplification of SOE legislation/
reduction in range of legal forms
Shared services for SOE sector to improve quality of information available
to MoF
Dedicated SOE Unit within MoF
Overall level of government subsidy
(transfers, guarantees, equity) often unclear
Cash-generating parts of business/sector may
mask true scale of transfers
Inadequate appreciation of risk exposure by SOEs
and/or by MoF
Privatisation
Low visibility of contingent liabilities
Align SOE planning, budgeting and reporting
calendar with MoF
Contractual basis for MoF subsidies/
guarantees – defining SOE obligations
Consolidation of SOEs/integration into departments
Governance of State-Owned Enterprises and Public Bodies: Lessons from around the world The Role of the SOE Unit
Dedicated SOE Unit within MoF
SOEs
• Monitor financial performance, budgets, business plans, sectoral trends
• Advise on investment, diversification, restructuring, divestment
• Provide information on level of subsidy, dividends payable, fiscal risks
• Identify and screen potential directors • Promote best practice corporate
governance
Monitoring and analysis, not control
MoF
• Financial performance: liquidity, profitability, leverage, market value, solvency
• Debt structure (including timing of payments) and contingent liabilities
• Delivery of social programs (social performance)
Reporting: for individual SOEs and sector as a whole
Organisational architecture
Conclusions
Critical Success Factors for Ministry of Finance reform
Section 2 – Executive Summary
1 2 3 4 5 6
Set a clear and well articulated vision
Vision Commitment Stakeholders and Capacity
Timeline (Realistic)
Technology is an Enabler
Flexibility and
Adaptability
Absolute political commitment with
stick and carrot
Take all stakeholders with you and be
absolutely sure they have the capacity to
deliver
Be completely realistic in scope and timelines
this is a journey without an end with
continuous improvement
Technology is fundamental but alone
will fail
Learn and adapt – be ready to change your
plans to meet new challenges and
incorporate new ideas
Thank you Amal Larhlid Director Policy and Governance PwC London [email protected] Office: +442078040339 | Mobile: +447725632499