Strategic Development Plan for Public Financial Management Reform 2005-2007
...he structural tools. 3.8. The capacity to local co-financing represents a major concern because of the reduced fiscal capacity of some administrative units thus limiting their possibility of co-financing related to non-reimbursable EU funds. There should be reconsidered the possibility to ensure within the amounts and the quotas distributed form the State budget the local budgets balance with the priority of the local co-financing funds. Budget Preparation 3.9 The Ministry of Public Finance is developing: 1. The objectives of the fiscal and budgetary policy for the budget year and 3 out-years that are submitted to the Government for approval; 2. The Framework letter that is sent to LM-s and includes: a) macroeconomic context (developed by the National Commission of Prognosis) b) budget instructions c) expenditures ceilings as approved by the Government 3.10. Pressures on budget revenue and spending will come from: • The grey economy and fiscal evasion • Budget demands not being made on a realistic basis (based on programmes rather than realistic spending estimates) • Failure to use cost-benefit analysis and prioritise projects. • The lower tax basis for the agricultural sector, which produces no VAT receipts but accounts for 30% of the Romanian economy. 3.11. According to the budget calendar (art 32 from the law no 500/2002 regarding public finances, the Executive is involved in the budget process since the moment of approval of expenditures ceilings when the Government submit to the Finance, Budget, and Banking Commissions of the Parliament objectives of the fiscal and budgetary policy for the budget year and 3 out-years. It does what it can however to take account of income or expenditure fluctuations with supplementary budgets – one in 2003 - and in particular 2 in 2004 to adjust the budget deficit in function of higher revenues. Government also uses its contingency fund for emergency or unpredicted expenditures. 3.12 It is essential to ensure that line ministries have available all substance information necessary to develop their budget requests and that the MPF instructions are clear. Line ministries have the tendency to submit unrealistic requests with the idea that MPF will reduce them accordingly. It is essential that line ministries focus on developing budget requests accordingly with the available resources. They should improve the manner of presenting their budget requests and to prioritise them. Line ministries develop their own budget requests and the IT Directorate within the MPF is helping them to manage IT programs in order to collect budget requests in compliance with the standard forms requested by the MPF, without affecting LM’s requests. 3.13 Program budgeting has been implemented since 2000 by selecting 8 pilot ministries that developed theirs program budgets based on their strategies. The selected ministries proposed programs, established a goal, objectives, strategies and program indicators together with funding sources for each program. Starting 2001 program budgeting has been extended to all line ministries. Programs are approved as annexes to each line ministry’s budget and they are structured as follows: • Goal • Objectives • Program Name • Inputs (Physical indicators) • Outputs (Efficiency indicators) • Outcomes (Result indicators) • Program financing 3.14 The IT software is limited in the process of editing the programs, not being able to introduce more levels, columns, data. 3.15 During 2004, the Minister of Public Finances issued the Order no 1159 that approves the Instructions regarding the content, structure, and format of programs developed by line ministries in order to fund an activity or a group of activities. The Instructions have the purpose programs development so that they represent the decision making tool on sectorial priorities during the budget development step and a tool to emphasize that the resources were spent efficiently in order to achieve the program goal during budget execution. LM has to be accountable for developing, analysing, and selecting the programs within the expenditures ceilings approved by the Government. Efforts and effects can be made by LM through adequate methods for programs to be financed. 3.16 The budget formulation process is still complicated in Romania due to custom to establish in advance for each line ministry a certain percent of GDP like for example for the Ministry of Education that was allocated 4% of GDP. This practice is not compatible with program budgeting. It may happen that the Ministry of Education would be able to justify this level of expenditures, but it should do this within the program budget execution. Budget Execution 3.17 Improvements in the IT facilities in the Romanian administration with the link up to Transfond and improvements in the Treasury cash management arrangements, will hopefully make it easier to deal with the inevitable problems of revenue flow, particularly at the margins, and with the pressures for increased expenditure in the course of the budget. There will always be difficulties, however, such as occur in the other direction, when it becomes clear in the latter half of the budget year that more funds can be made available than seemed possible earlier in the year. Again this is a challenge that can be dealt with more effectively if LM have an appropriate working relationship with the MPF and a tight control over projects and procedures, and are able to manage the necessary adjustments. 3.18. The foreign non-reimbursable funds shall be accumulated into a separate account and shall be spent only within the limit of available funds and according to their destination. (art 51 from Law 500/2002 on public finances); 3.19. The available foreign non-reimbursable funds and public funds designed to cofinance the EU contributions that haven’t been spent at the end of the current year are carried forward for the next year. (art 61 paragraph 4 of Law 500/2002). The carrying forward shall be done according to agreements with foreign partners. 3.20.The foreign non-reimbursable funds and domestic financing unspent by the end of the current year shall be carried forward for the next year according to the rule N+2. 3.21.In Romania funding is approved and allocated based on the annual principle. Exception from this principle is represented by available foreign non-reimbursable funds and available domestic funds designed to co-finance the EU contributions that are not spent by the end of the year (they shall be carried forward for the next year) 3.22.In order to report the program execution, the public institutions have to report 2 annexes: one is designed by each program by source of funding within the approved budget and the other one displays the way the program indicators (inputs, outputs and outcomes) were achieved and data regarding the annual provisions and payments made by source of funding with details about spending titles. 3.23.The reporting shall be done quarterly and annually accompanying the budget execution reporting. Even if the annexes are included in the reporting situations, there is not given special attention to the performance of the program budgets, and a detailed analysis is needed of the use of budget resources and of the program indicators. Only after such an analysis the decision concerning efficient budget allocation can be made. Monitoring 3.24. A vital element of programme budgeting is monitoring. As indicated in the earlier sections it is always necessary for the manager to be both firm and flexible, but this is not possible unless he/she knows at all times precisely what the situation is in the programme and in the individual projects. If monitoring is introduced from the outset it does not demand excessive resources, it enables the manager to be confident and in control, and it provides a rich source of experience and knowledge to improve planning, budgeting and execution. Current situation 3.25 It will be essential in developing and implementing the SDP to have a clear view of the guidelines and instructions to which LM are working, an exact assessment of the TA received and the amount and type of PFM training which should be envisaged over the period 2005 -2007. The number of managers who have received Programme Budgeting training will be required for the Evaluation Reports in November 2005 and March 2006. IV. Accrual Accounting and Financial Reporting Accrual Accounting and Financial Reporting 4.1.Following the commitment of the Government in 2001 to move from cash to accrual accounting:- .. A strategy for the move to accrual accounting was developed for SAPARD and ISPA funds to provide working models based on the accrual accounting principles .. Cash methodology is being developed for Phare transactions together with norms for accounting on an accrual basis that need to be approved by the Ministry; .. New accounting methodology based on accrual basis had been developed to apply to all public entities at central, regional and local government level. .. A re-evaluation of fixed assets was undertaken for the first time in the public sector, with registration at market price by 2003 and the complete re-evaluation of heritage assets by 2007. From 1.1.2004 the depreciation of fixed assets has been registered except for national heritage assets and other exceptional items. .. Budget receivables from tax and contributions have been recorded from 1.1.2003. 4.2. In 2005: .. revenue is registered in the accounts only when received .. expenses will be registered in the accounts when they occur but the principle of separation of budget exercise is not applying. In 2006: .. revenue will be recorded when earned or entitlement established no matter if they were cashed or not; .. expenses will be recorded when they occur no matter if the expenses have been paid ; the principle of separation of budget exercise shall apply (in the case of e.g. rent only the spending related to the exercise shall be recorded even if the rent is paid for a period of time exceeding the current year) . 4.3.Any EU expenditure provided in the budget of a public institution will be dealt with in 4 phases:- .. Commitment .. Validation .. Authorisation .. Payment As provided Law no 500/2002 According to MofPF Order no 1792/2002 the accrual and budget commitments will be shown in accounts off balance sheet; in the financial accounting register the documents relating to validation and payment will be shown. The payment obligations are recorded when the invoices for goods or services; for received services expenditures are recorded simultaneously with the payment obligations. 4.4.A Draft Chart of Accounts based on accrual accounting was drawn up in 2002. It was tested in 2003 and improved with new rules like: fixed assets re-evaluation, fixed assets depreciation and approved in September 2004 for further tests in 2005 on100 public entities. This Chart shall be approved definitively in the second half of 2005 and shall be applied by all public entities starting 1.01.2006. It will make public accounts resemble those of a private company with: .. Revenues as they are earned .. Spendings as they are paid .. Depreciation for inventories, buildings, equipment .. Provision building. By 1.1.2006 accrual accounting should be in place for all public entities with financial statements based on accrual accounting being available by end 2006. 4.5.There has been a substantial training programme which started in 2002 with courses in the MPF Public Finance School, the National Institute for Administration (covering central government) and 8 regional units. There is a twining project with PHARE funding named: “Improve the organization and performance of public accounting system” between Romanian MoPF, Italian Ministry of Economy and Finances, and French Ministry of Economy and Finance. The main objectives envisage the transfer to accrual accounting to analyse the costs of approved programmes and to create a domestic reimbursement system of the State Treasury. The project which has also covered familiarization with IPSAS (International Public Sector Accounting Standards ) and presentations on IPSAS 1,16,and 17, the rest have to be presented by September 2005.The next twinning program will cover Consolidated Financial Statements. Before this twinning project there was a twining project by the Caledonian University of Scotland. 4.6.Although considerable progress has been made, three basic problems persist:- .. Shortage of staff .. Low salaries (these are obviously closely related) .. Lack of an integrated IT system V. Treasury Cash Management 5.1 The State Treasury Management Unit is organized as a General Directorate, it has 2 Directors and is responsible for the Treasury State Account. 38 of the 52 posts in its complement are filled, and divided into 6 services. These services are responsible respectively for: .. Administration of the State Treasury (2 services dealing a) with inter-banking payments including the account prognosis in relation of MPF, Central Bank, TransFonD and lenders and b) management of the general current account of the State Treasury .. Domestic Debt (4 services dealing with c)domestic Government public debt, d) financial markets e) domestic guaranties and local domestic loans, f) synthesis/analysis of public debt). 5.2 The State Treasury Management Unit is well structured but due to the evolution of the financial operations and to the substance changes produced in the Romanian economy there is a need of a continuous modernization and development. Cash management is in an incipient stage so that much money is not used properly. Currently, the only banking market access is done when due to the gap between cashing and payment, corroborated with factors that can not be administered, the pressure over the available money in the account is so high that in order to ensure the payments for own activities and public sector there will be attracted deposits. The State Treasury account forecast is done monthly, weekly, and daily together with the correction based on the execution and real cash flows transmitted by the General Directorate for Public Accounting. The forecasts are used when bonds are issued. 5.3 In order to ensure the activity of electronic payments orders and of forecast of the State treasury current account the service inter-banking payments and operations of the treasury account has been created within the State Treasury Management Unit. The Electronic Payments Service became operational ( since April 8, 2005 ReGISElectronic System of payment in real time in Romania managed by the Central bank and since may 13, 2005 – SENT – Electronic System of payment based on Net of TransFonD SA) and created at national level an infrastructure of electronic transfer if messages regarding cashing and payments and fiscal and banking information as services that add value when is used by participants interested in payment information and time reducing. Thus, the STMU wishes to be an active player that achieve and research results. In December 2003 MPF joined SWIFT – it is the only government institution in the world to be a member of SWIFT, with its staff certified by SWIFT. The personnel is trained and certified to use specific applications and in future selected staff will be trained as market dealers. The TCM has to make up 15 years of delay in acquiring expertise. Once it became operational, the Electronic Payments System managed by the Central Bank ensures the presentation in real time of the cash flows. Currently, the Central Bank and MPF analyze the possibility to implement the electronic bid. With this purpose series of services suppliers as Reuters transmitted the technical and operational terms of such a system. The State Treasury Management Unit wishes to develop the equipment necessary to operate with bonds and to treasury cash management. 5.4 As a matching exercise the electronic system is scheduled for autumn 2005 with the aim of having all data on a single screen to ensure information inputs at STMU and DGCP and to have the provide the possibility to view all data necessary to take the decision regarding the management of the account into one screen. It is a clear banking activity and beyond scope of a normal government department. The Central Bank is permanently consulted about this matter. 5.5 The Ministry of Public Finance review the possibility to create an independent structure to develop the activity based on the public debt management strategy,, with objectives and criteria clearly set out and that will have a professional staff, well motivated, able to manage efficiently the public debt portfolio with respect to the risk management. VI. Internal Audit 6.1 Considerable progress has been made in the setting up and consolidation of the Directorate of Public Internal Audit. The internal audit structure in Romania was developed in the Policy Paper drawn up with the EC and updated from the original 2002 version. The basic model in Romania is the decentralisation of internal audit in ministries and their related agencies; large spending agencies will have their own IA unit while smaller agencies will be covered by the IA unit of their parent ministry. In the latter category are the 70 local government offices (town halls) with an annual budget of less than 100 000 €.The Law on Public Internal Audit provides for it to be headed by the Director General of the Central Harmonisation Unit (DGCHUPIA) based in the Ministry of Public Finance. The staff figures for CHUPIA and MPF are as follows:- CHUPIA 28 (21 filled) Direction IA -MoF 24 (15 filled) Direction IA Fiscal Agency 17 (14 filled) All MoF (including territorial units) 314 (280 filled) 6.2 There are currently 4 000 authorised IA posts in the public sector, of which 2 650 are filled, covering 3 600 public entities. Most IA units have 1 or 2 internal auditors, but the largest - the Directorate in the MPF, which covers 41 regional administrations, has 25. 6.3 The Head of Internal Audit is responsible to the highest hierarchical level – in practice to the minister or head of the public entity – and has direct access to the minister and top management. Internal control in a ministry is the responsibility of the State Secretaries; the Secretary-General is responsible for the “logistics” of the organisation. The appointment and dismissal of the Director of the IAU is subject to the approval of the Director General of the Central Harmonisation Unit for Public Internal Audit, who interviews the person proposed for appointment. The competent Director for PIA for subordinate agencies exercises the same role. So far the DGCHUPIA has not been consulted on any dismissals, but in a number of cases DPIAs were dismissed without consultation of the CHU or its DG and the cases are now before the court. Internal auditors are appointed without consultation since the requirement is that they satisfy civil service entry requirements for a post at this level. 6.4 Strategic and Annual Audit Plans The IA unit draws up SAP and AAP based on risk assessment. High risk areas are dealt with first and the annual audit programme is drawn up in function of available IA resources, and has a built-in contingency reserve of 10% to cover additional priority tasks and take account of staff absences/shortage. The plans must be approved by the minister before they are executed; so far the minister has not asked for changes. It can happen that during the execution of the plan the minister asks for additional audits to deal with particular problems that have arisen, in which case audits covering low-risk subjects are eliminated or postponed. In 2004 two missions were added to investigate allegations of conflict of interest in the SAPARD programme which were the subject of a complaint to the EC and also appeared in newspaper articles. It was found that wives of members of the evaluation committee were managers of companies awarded contracts. The IA report proposed changes in procedures to avoid similar cases in future, the cancellation of contracts in the case in question, and the reimbursement of any payments received, and the launch of a new tender. 6.5 Implementation of audit plans Audits are carried out in accordance with the Law on Public Internal Audit and the General Norms on Public Internal Audit issued by the DGCHUPIA and based on the IIA norms. The DGCHUPIA has also issued an Internal Audit Manual to all public entities, which have in turn drawn up their own IAM based on the central model and endorsed by the DGCHUPIA. The IA Directorate of the PMF has issued 4 manuals:- • Phare • SAPARD taking account of EC requirements • ISPA taking account of EC and BERD requirements • Operations of the MPF 6.6 The DGCHUPIA when endorsing manuals, monitors the variations introduced by the line ministries to make sure that they remain within reasonable limits. He had for instance refused to accept the elimination of the supervision and follow-up phases of the audit process, which were considered bureaucratic and wasteful of scarce resources by some ministries. 6.7 The CHUPIA has carried out evaluation of the audit activity in 17 public entities. The evaluation covered: • Procedures • Quality of IA activity covering: .. Structure and execution of audit activity .. Quality and drafting of AAP, including quality of risk analysis .. Focus on areas of highest risk .. Extent to which IA procedures are respected in carrying out audit .. Quality and consistency of findings .. Pertinence of recommendations .. Impact of IA activity on management – has it improved managers and management? The head of the audited structure, e.g. Director of Human Resources, is also asked to complete a questionnaire about his/her perception and appreciation of the audit process. 6.8 Based on this analysis recommendations are made to the IAU. These may be accompanied by specific suggestions for improved training schedules e.g. for greater emphasis on risk management, and improved quality assessment of audit activity (there is often a tendency to confuse the quality assurance programme of IA activity with the training of internal auditors). The evaluation may also lead to consideration of possible changes in the basic IA manual. The evaluation activity is considered to be the most important function of the CHU and one that should take up to 80% of its time. 6.9 National Committee for Public Internal Audit The Committee has a consultative role and acts like a professional body. In addition to the DGCHUPIA there are 10 other members: 2 university professors teaching IA accounting 3 specialists in law, public accountancy and IT (no representative of private sector audit) President of the Financial Audit Chamber of Romania 3 experienced internal auditors (hospital sector, defence and economics) 1 member of the Chamber of Certified accountants The Committee assists the CHU in defining its role e.g. in developing the strategy of public service IA activity in Romania. It also examines proposals for improving manuals and procedural guides and endorses the annual CHU report on IA activity in Romania, which is submitted to the government. The first report following a standard was issued in 2004 and published on the MPF web site. 6.10 Ongoing Tasks of CHUPIA The central task – in addition to ensuring that internal audit is carried out correctly and effectively - is to improve the perception of IA on the part of managers. Many find it difficult to appreciate the distinction between internal audit and internal control and tend to expect internal auditors to carry out the tasks of the internal (or delegated ) controller, or the old style member of the Control Department. To help line managers appreciate the role and contribution of internal audit, the current technical assistance providers will organize meetings with managers across the country, making it clear that it is State Secretaries or equivalent in public entities who are responsible for internal control. 6.11 As indicated in paragraph 6.4, the PIA may be asked to examine and report on irregularities in the course of their work, but the OLAF counterpart in the Romanian system is the Prime Minister’s Office. VII. Financial Management and Control Systems 7.1 Following the government decision in November 2004 the functions of the DG dealing with preventive ex-ante financial control were changed to make it responsible for preventive ex-ante financial control and tasks relating to financial management and control systems. A manual of preventive financial control based on EU regulations has been issued and internal control standards for Romania take account of COSO and EU internal control standards. 7.2 The DG has a complement of 56 posts of which 40 are filled and 16 affected by the current government freeze on recruitment. Recruitment procedures have already been started on the grounds that the posts in question are related to EU Accession. 7.3 Following the measures implemented as a consequence of the negotiations with the European Union, the existing controllers delegated to the line ministries will no longer exercise the delegated control visa, which will be phased out by July 2006, in accordance with the provisions of Chapter 28 of the acquis and the government programme. The line ministries will maintain their own controllers – normally one per line ministry - dealing with ex-ante financial control and internal control generally. 7.4 The CHUFMC will have the following main functions: .. To regulate, monitor and supervise preventive financial control in public entities in order to ensure the legal, correct and efficient use of public funds .. To define and develop financial management/control standards in accordance with EU best practice, and issue and update as necessary an internal control manual .. To develop the organisation and work of the Directorate General, taking account of practice in the European Commission and CHUs in member states .. To advise on improvements in the organisation and procedures of financial management and control in the light of the findings of the Ministry of Public Finance controllers in line ministries .. To advise on measures of general application in line ministries to improve the administration of public funds through improved financial and internal control procedures .. To advise on, and participate in, the training of public servants in sound financial management, through the School of Public Finance .. To monitor and scrutinise with particular attention the internal and financial control, programme budgeting and budget execution in the main spending departments of the State Budget such as social security, special funds and EU paying agencies; and to advise the departments concerned of the results of the monitoring .. To develop risk management methodology .. To create and develop an annual reporting system to the Minister of Public Finance and the Parliament on the results of internal control across the public service. 7.5 The controllers will evolve from physical controls to surveillance of the LM controllers over the whole range of COSO. Care will be taken to ensure that the withdrawal of MPF controllers from the line ministries will not weaken the overall controls in the LM: MPF controllers will only be withdrawn when it is certified safe to do so by internal audit. 7.6 The creation of the CHUFMCS will not involve any additional recruitment. Each LM has always had its own ex-ante controll...