79581 Pakistan Policy Note 14 Saeeda Sabah Rashid Improving J une 2 0 1 3 Financial Management This note outlines Pakistan’s challenges in public accounts, and prepares annual financial financial management and suggests recommenda- statements. The auditor general has a well- tions for meeting them. The legal and institutional established organization for reviewing finan- framework for public financial management is well cial compliance and conducting performance structured. The government has taken steps in the audits. right direction including automating budgeting, Over the years, the government has under- accounting, and financial reporting nationwide, taken a range of measures for improving PFM, modernizing auditing practices, and adopting most notably:1 medium-term budgetary frameworks. The need now • Decentralization. The 18th Amendment to is to consolidate these reforms and introduce a second the constitution passed in 2010 abolished generation, focused on decentralizing budget man- the Concurrent List (subjects on which both agement by fully delegating budget preparation and the National Parliament and provincial implementation functions to the line departments assemblies can legislate) and transferred (including accounting and financial reporting 17 service delivery–related functions to the responsibilities), strengthening cash management provinces. Further, the share of provinces in through business process reengineering (to prepare federal receipts increased from 46.5 percent accurate and complete statements of cash positions as in 2010 to 57.5 percent in subsequent years THE WORLD BANK GROUP SOUTH ASIA REGION well as reliable and timely forecasts of cash require- under the seventh award of the National ments), and augmenting the capacity of procurement Finance Commission (Mustafa 2011). The regulatory authorities (to enable them to fulfill their Council of Common Interests, comprising mandate effectively). the federal government and the provinces, formulates and regulates policies on mat- Pakistan has a fairly developed infrastructure for ters in Part II of the Federal Legislative List public financial management (PFM). At the pol- and exercises supervision and control over icy level, Parliament has a key role in autho- related institutions. The council has been rizing revenues, expenditures, and debts. The strengthened, and the independence and Ministry of Finance plays a pivotal role in powers of the auditor general have been budget preparation and expenditure control. enhanced (Burki 2010). Line ministries, departments, and agencies • Separation of accounting and auditing functions. (MDAs) have well-defined roles in imple- The promulgation of the Controller Gen- menting budgets and submitting accounts for eral of Accounts Ordinance and the Auditor expenditures incurred. The controller gen- General’s Ordinance in 2001 separated roles eral of accounts (CGA), with an extensive net- and responsibilities of the CGA (account- work of offices, makes payments, maintains ing) and the auditor general (auditing). Pakistan Policy Note—Improving Financial Management • Medium-term budgetary framework. The federal capacity building. Audit responsibility rests Ministry of Finance has rolled out medium- with the Auditor General’s Office, and term budgetary frameworks to all line min- other laws are in place to address financial istries. This framework has also been piloted misappropriation. with some line departments in the provinces • Coordination and transparency. The govern- of Khyber Pakhtunkhwa, Punjab, and Sindh. ment has established a sound legal frame- • Output-based budgets. Khyber Pakhtunkhwa work for coordinating fiscal and debt has piloted these budgets using conditional management policies and improving fiscal 2 grants in health and education, which are transparency through the Fiscal Responsi- being scaled up in 2012/13. bility and Debt Limitation Act 2005, even • Cash management. The government has though compliance has been less than largely abolished personal ledger accounts stellar. that allowed parallel cash balances, along • Project for Improving Financial Reporting and with the consolidated cash balance. Special Auditing. This project has helped improve drawing accounts have been introduced PFM systems (Box 1). with expenditure ceilings that do not trans- fer cash until it is actually spent. These measures have achieved concrete results. In • Procurement regulatory authorities. The fed- 2012, the government and its development eral government and the provincial govern- partners (World Bank, Department for Inter- ments of Sindh and Punjab have established national Development, Asian Development procurement regulatory authorities, which Bank, and European Union) carried out the are custodians of the rules for all pub- Public Expenditure and Financial Account- lic procurement. Responsibilities include ability (PEFA) repeat assessments for the fed- monitoring application of rules, recom- eral and Punjab governments. Limited updates mending revisions to rules, making regula- of PEFA assessments were conducted for Khy- tions, providing guidance to implementing ber Pakhtunkhwa in 2010 and Sindh in 2011. agencies, and supporting these agencies’ A full update of the Sindh 2009 assessment is Box Project for Improvement of Financial Reporting and Auditing 1 In 1997, the Project for Improvement of Financial Reporting and Auditing set up a public financial management reform agenda. The project has supported enhanced internal control and financial accountability systems by: • Implementing a government-wide financial management information system at all levels using a state-of-the-art SAP application, thus enabling automated budget compilation, accounting, and financial and fiscal reporting nationally, including for district account and finance offices. • Introducing a new accounting model based on international principles and standards. • Adopting a uniform chart of accounts for budgeting and accounting by federal, provincial, and district governments since 2007/08, compliant with the International Monetary Fund’s Government Finance Statistics. • Separating accounting and auditing functions. However, the auditor general still has authority for prescribing the form of accounts of the government. • Supporting informed decision making for public sector management through the availability of timely and reliable in-year budget execution reports. Connectivity is in place for all line departments to monitor budget execution on a real-time basis. Further, within 15 days of the end of each month, civil accounts are prepared and presented to the Ministry of Finance. The reliability of these reports has also improved, with material reductions in irreconcilable differences and the elimination of suspense accounts. • Preparing annual financial statements using cash-basis International Public Sector Accounting Standards. Submission of annual financial statements for audit has improved to an average of two to four months after the end of the fiscal year, compared with more than 15 months before 2006/07. • Enhancing the effectiveness, independence, standards, and capacity of government audit and introducing risk-based audit meth- odology compliant with international standards for certification of annual financial statements. • Improving the efficiency of external audit through computer-assisted audit techniques and a system-based audit methodology. The financial statements and audit reports are submitted to the president and governors within eight months of the close of the financial year. under way in 2013. In 2007, an assessment was Weaknesses in the PFM framework can be traced to undertaken for Balochistan. These assessments colonial heritage, resistance to change, rent seeking support findings presented below and confirm by power groups, and a lack of political will. Yet a certain improvements in recent years, as well as popular surge among all segments of society shortcomings. demands change. The next section presents a diagnostic of key issues and selective policy Substantial progress on transparency through public options for more effective performance of the availability of information stands out for Pakistan. public financial management systems. It is evident in the good ratings for indicators 3 in PEFA assessments and the marked improve- Policy Issues ment in the open budget score, from 38 in 2010 Pakistan faces several challenges in the PFM to 58 in 2012 (International Budget Partner- framework: ship 2012). Annual financial statements and an • PFM is fragmented. The Ministry of Finance audit report are laid before Parliament within plays a dominant role in budgeting and nine months of the end of the fiscal year. Some expenditure control. The CGA makes pay- of the provincial finance departments are ments and maintains accounts. The MDAs uploading in-year reports to their websites. execute the budget within the residual space Pakistan’s overall scores on PEFA performance permitted by the Ministry of Finance and indicators are comparable with those in other the CGA even though the secretary of each South Asian countries (Figure 1). line department is the designated principal PEFA assessment scores of federal government in 2012, compared with the average Figure of selected South Asian countries 1 Federal South Asia PI-1 PI-2 PI-3 PI-4 PI-5 PI-6 PI-7 PI-8 PI-9 PI-10 PI-11 PI-12 PI-13 PI-14 PI-15 PI-16 PI-17 PI-18 PI-19 PI-20 PI-21 PI-22 PI-23 PI-24 PI-25 PI-26 PI-27 PI-28 0 1 2 3 4 5 6 Average converted score Note: South Asia represents the simple average scores of Afghanistan (2008), Bangladesh (2006), Bhutan (2010), India (2010), Maldives (2009), and Nepal (2008). Source: Government of Pakistan and others 2012a. Pakistan Policy Note—Improving Financial Management accounting officer (PAO) accountable for • It has delegated more financial powers to MDA performance. PAOs in several steps (the latest in 2006). • Internal controls are excessive but weak. Exten- • It has decentralized accounting and pay- sively documented rules are issued by the ment functions for some MDAs like the mili- Ministry of Finance. The CGA applies con- tary, railways, foreign affairs, food, forests, trols on payments and accounts. The MDAs and public works. only exercise operational controls. Partial • It has improved information on fund releases controls, exercised by three silos of author- to the MDAs. 4 ity, leave loopholes (as highlighted in audit reports). Despite these steps, some shortcomings still hold. The • The MDAs have yet to develop the capacity for PAOs, for example, still have limited flexibility professional financial management. This is in executing budgets, and they must revert to largely because they have not been given full the Ministry of Finance at several stages. Inde- responsibility and authority to manage their pendence of the PAOs is further infringed by a budgets. centralized system of payments and accounts. • The MDAs do not link budgets to implementable Account offices under the CGA process pay- procurement plans. Without this link, the ments, maintain accounts, and prepare annual MDAs do not have a full picture of a pri- financial statements. Although the PAOs sign oritized expenditure plan for development off the final appropriation accounts, they do or for major recurrent activities, leading not assume ownership of them. The perfor- to fragmented budget utilization and poor mance of the system in terms of budgetary cash planning. Moreover, the MDAs do not outcomes is poor, as seen in the expenditure report the planned and actual expenditures outturns for federal and Punjab governments regularly and do not adjust budget priorities in the June 2012 PEFA assessment (Figure 2). in light of actual events. Similarly, the MDAs need approval from the Minis- From these problems stem weaknesses in PFM sys- try of Finance for the following: allocating savings tems, as in the accountability framework. With frag- from one grant to another or even from one budget mented controls, no single authority can be line to another within the same grant; transferring held accountable for failing to deliver. Similarly, funds from current to development expenditure, or because the Ministry of Finance controls bud- vice versa; and using approved lump-sum grants. gets and cash, the MDAs cannot always deliver And though in 2006 the federal government services on time and economically, which is created 22 posts of chief finance and accounts why a stronger public procurement function is officers in the MDAs, their role is still second- key for enhanced PFM management. ary to the Ministry of Finance, which maintains the primary role for stewardship of funds. The Centralized budget management financial advisors assigned to the MDAs by the ministry exercise considerable influence over Good budget management enables a government frequent in-year reappropriations. to be effective in the following areas: planning, executing, and monitoring resource management; The centralized budget management influences the ensuring targeted outcomes; and strengthening MDAs’ ability to prepare realistic budget estimates. accountability. Pakistan needs to decentralize Despite credible and accurate data available budget management. The roles of the Minis- on a timely basis from the government finan- try of Finance and the CGA need to be rede- cial management information system, decision fined for greater delegation. Over the years, makers have not started using this information. the ministry has taken some steps in this Equally, although the PAOs are responsible for direction, for example: internal controls, due to shared responsibility • It oversees more transparent and fair pro- with the Ministry of Finance and the CGA they cesses for reappropriation of funds and sup- have not developed the systems and processes plementary grants. for implementing the controls, overseeing Figure Expenditure outturns for federal and Punjab governments (PI-2), 2008/09–2010/11 2 Federal government Punjab 30 20 Percent 5 10 0 2008/09 2009/10 2010/11 2008/09 2009/10 2010/11 Note: PI-2 is a composite variation (budget and actual expenditures) taking all sectors by functional classification. Source: Government of Pakistan and others 2012a. management overrides, or preventing waste quarterly while the Punjab government pre- and fraud. These weaknesses have led to poor pares them every month. However, there are ratings for internal audit and nonsalary inter- significant gaps on cash forecasts and actual nal controls, per the latest PEFA assessments, cash positions. The accuracy of the cash fore- and increase the risk of over- or underspend- casts is undermined by missing information on ing. These weaknesses also contribute to Paki- the stock of arrears, commitments, and unre- stan’s low rating in PEFA assessment scores solved reconciliation differences. While the (PI-1 to PI-4) on budget credibility—lower than State Bank of Pakistan provides daily data on the average of similar lower middle-income monetary balances, the National Bank of Paki- countries (Figure 3).2 Other scores (PI-13 to stan submits data with varying lags. PI-21) related to budget execution demonstrate a similar pattern (Figure 4). Weak cash management affects the Ministry of Finance’s ability to prepare monthly cash-flow fore- Weak cash management casts, in turn influencing the MDAs’ capacity to implement the budget effectively. Due to delayed The objectives of modern cash management are to information on cash positions and commit- ensure that cash is available to pay for expenditures ments, the Sindh government unknowingly when due, borrowing occurs only when needed at exceeded its overdraft limit in June 2012. Lack optimum costs, returns on idle cash are maximized, of timely reconciliation of balances, unresolved and risks are managed by productive investment of reconciliation differences, and substantially surpluses. The generally accepted good practice incomplete information on commitments and for every government is to have a single trea- arrears undermine the Ministry of Finance’s sury account, which Pakistan has yet to achieve other efforts to streamline cash management according to PEFA assessments. At all levels of (Figure 5). government, some accounts still remain out- side the consolidated funds, even though they PEFA assessments indicate some improvement in represent a very small share of total outlays reconciling bank and book balances in the Khyber (largely related to donor-funded projects). Pakhtunkhwa, Punjab, and Sindh governments but report an unsatisfactory rating for the federal The Ministry of Finance has taken several steps for and Balochistan governments. There remain improving cash management, although accuracy, long-outstanding differences between the completeness, and timeliness of information remain a Economic Affairs Division and the Accoun- challenge. The federal, Sindh, and Khyber Pak- tant General Pakistan Revenue on the status htunkhwa governments prepare cash forecasts of foreign debt, but the overall net unresolved Pakistan Policy Note—Improving Financial Management Figure Budget credibility (PI-1 to PI-4) 3 Pakistan Lower middle-income countries PI-1 4 3 2 1 PI-4 PI-2 6 PI-3 Note: PI-1 is aggregate expenditure outturn compared with original approved budget; PI-2 is composition of expenditure outturn compared with original approved budget; PI-3 is aggregate revenue outturn compared with original approved budget; and PI-4 is stock and monitoring of expenditure payment arrears. Source: Government of Pakistan and others 2012a. Figure Predictability and control in budget execution (PI-13 to PI-21) 4 Pakistan Lower middle-income countries PI-13 PI-21 PI-14 4 3 2 PI-20 1 PI-15 PI-19 PI-16 PI-18 PI-17 Note: PI-13 is transparency of taxpayer obligations and liabilities; PI-14 is effectiveness of measures for taxpayer registration and tax assessment; PI-15 is effectiveness in collection of tax payments; PI-16 is predictability in the availability of funds for commitment of expenditures; PI-17 is recording and management of cash balances, debt, and guarantees; PI-18 is effectiveness of payroll controls; PI-19 is competition, value for money, and controls in procurement; PI-20 is effectiveness of internal controls for nonsalary expenditure; and PI-21 is effectiveness of internal audit. Source: Government of Pakistan and others 2012a. Figure PEFA assessment scores for indicators related to cash management 5 Federal Punjab Sindh Khyber Pakhtunkhwa Balochistan 4 3 Score 2 1 0 PI-4 PI-16(i) PI-17 PI-22 PI-24(i) Note: PI-4 is stock and monitoring of expenditure payment arrears; PI-16(i) is extent to which cash flows are forecasted and monitored; PI-17 is recording and management of cash balances, debt, and guarantees; PI-22 is timeliness and regularity of accounts reconciliation; and PI-24(i) is scope of reports in terms of coverage and compatibility with budget estimates. Source: Government of Pakistan and others 2007, 2011a,b, 2012a,b. differences on this account as of June 30, 2012, custodianship, audit, and penal actions seem to were marginal, at PRs 1.86  billion. Progress ensure sufficient checks and balances, effective in implementing commitment accounting has implementation has yet to be established. been quite slow. Data on commitments and expenditure arrears are absent from the in- Implementing agencies conduct the procurement year reports—generating poor scores in the transactional function. Procurement responsibili- latest PEFA assessments—thus creating a risk ties are allocated at different operational lev- of overspending or failure to make timely pay- els, depending on the cost ceilings of contracts. ments, which can lead to penalties. One con- Various implementing agencies have developed 7 tributing factor is the centralized accounting their own operating procedures for devolving and payments function. financial powers. Transactions with the highest costs require approval of the concerned sec- Lack of capacity in procurement retary. Thus, understanding and compliance regulatory authorities with procurement rules vary by agency. Some have a good appreciation of them, as well as the Procurement is a devolved subject under the constitu- resources and capacity for sound procurement, tion. Reform progress has been intermittent at while others do not. The latest PEFA assess- the federal and provincial levels, though all lev- ments on procurement management show els of government have clear regulatory frame- very low scores for Pakistan, largely because works that apply to all public procurement for of a general lack of credible data among PRAs which open competitive bidding is the default stemming from the absence of effective moni- method, for adequate disclosures of all pro- toring and evaluation (Table 1). curement information, and for dispute mecha- nisms. The federal and provincial governments The major challenge is to improve the implementa- have enacted public procurement rules, gener- tion of the procurement framework. The PR As ally aligned with good practice. are responsible for initiatives to better imple- ment and further develop the framework, but The federal government, as well as Punjab and they face many challenges, such as a lack of Sindh, have procurement regulatory authorities resources, undermining their capacity. Broader (PRAs), but Balochistan and Khyber Pakhtunkhwa challenges include a general lack of procure- have yet to establish them. Regulatory frameworks ment capacity at every level of public admin- at the federal and provincial levels follow a istration and an Auditor General’s Office uniform principle of keeping PRAs in the role historically focused on compliance rather than of custodian of rules. The PRAs develop ade- outcomes. quate documentation and monitoring, assess- More urgent issues include the following: ing and enhancing procurement effectiveness. • The PRAs do not have a monitoring and The audit function lies with the Auditor Gen- evaluating system to collect and analyze eral’s Office, and parallel laws and systems are data on procurement actions or evaluate the in place to take action if major issues arise in procurement performance of the MDAs. compliance, including financial misappropria- • A capacity-building strategy for procure- tion. Yet although these responsibilities for ment by the MDAs is lacking. Table PEFA assessment scores for the procurement-related indicator (PI-19) 1 Government Score Federal D+ Punjab D Sindh C Khyber Pakhtunkhwa C Balochistan D+ Note: PI-19 is transparency, competition, and complaints mechanism in procurement. Source: Government of Pakistan and others 2007, 2011a,b, 2012a,b. Pakistan Policy Note—Improving Financial Management • There is no clear capacity-building pro- Improve cash management gram for vendors, especially small and medium-size enterprises. Any healthy Informed cash management based on monthly cash- procurement system relies on its vendors, flow forecasts, a single treasury account, and regu- who are fundamental for competition and lar reconciliation of accounts has become generally thus in overall procurement, including its accepted best practice. Especially in times of fis- transparency. cal constraint, a credible statement of the cash • The PRAs have no mechanism (formal or position and a robust basis for preparing a 8 otherwise) for knowledge and experience comprehensive cash forecast are critical. Given sharing, coordination, or cooperation. current gaps, business process reengineering • The regulatory framework considers inde- will be required to meet these objectives. For pendent dispute resolution mechanisms for institutionalizing top-rate cash management, vendors’ complaints, but they have yet to be the Ministry of Finance should set up a high- set up. level committee to oversee monthly cash-flow forecasts, reconcile accounts, and borrow and Policy Recommendations invest surplus funds in the short term. Coun- tries such as Argentina, Brazil, Chile, Costa Decentralize budget management Rica, Ecuador, and Peru have such committees Experiences of countries like Norway, South in their treasury departments (van Eden and Africa, and Sweden suggest that the best option Weiner 2010). is to move toward decentralizing budget man- Arrangements to be carried out include the agement, through the following measures: following, benefiting the Ministry of Finance as • All MDAs should have dedicated units for well as the MDAs, which will get more reliable financial management with qualified staff. information on resource availability: The PAOs should have full responsibility • Procedures to ensure that all cash balances become and accountability for the entire budget part of the consolidated funds. Policies and pro- cycle. Internal controls need to be strength- cedures already issued for the establishment ened through internal audits. of a single treasury account need to be made • The Ministry of Finance’s role in budget operational. All existing exemptions for management should be limited to broad keeping some cash balances out of the con- policy guidelines, and the current regime of solidated funds should be withdrawn. the financial advisor needs to end. • Timely and regular reconciliation of differences in • Payments and accounts functions, including accounts needs to be enforced. The present pace accounting for revenues, should be trans- of reconciling outstanding balances must be ferred, with staff, to the MDAs. They would accelerated. A cut-off date must be specified be responsible for ensuring commitment for historical items, after which these should accounting, preparing annual financial be written off as a one-time adjustment. statements, and getting these statements • Associated with timely information on commit- passed by the auditor general. ments are the data on stock of arrears, which are unavailable at any level. The Ministry of Finance, CGA, auditor general, • Better and more robust planning through prepara- and Establishment Division will need to work in tion of procurement plans concurrently with the tandem in bringing to being the proposed decentral- finalization of budget proposals. ized system. It will require dedicated financial management units staffed by professional Ensure that PRAs run effectively personnel, who can initially come from the Making federal and provincial governments’ existing accounting staff. The automation of PR As operational and effective should be budgeting, accounting, and financial report- a priority, based partly on the following ing, as well as connectivity to line ministries, is recommendations: already in place and provide a basic platform • Effectively implement a complaint and dis- for this reform. pute resolution mechanism and strengthen information disclosure mechanisms, as well References as civil society engagement in them. Burki, S. Javed. 2010. “The 18th Amendment: • Design a mechanism for monitoring and Pakistan’s Constitution Redesigned.� ISAS evaluating the MDAs’ procurement per- Working Paper 112. Institute of South Asian formance. This would be cost-effective and Studies, Singapore. would help benchmark the MDAs’ per- Government of Pakistan, World Bank Group, formance, develop action plans for better European Commission, DFID (Department functioning, and improve underlying docu- for International Development), and ADB ments and rules. E-procurement is crucial, (Asian Development Bank). 2007. Pakistan 9 as it will provide the raw data on which to Balochistan Province Government Public Finan- build indicators and algorithms that will cial Management and Accountability Assessment. empower the PR As in their enforcement May. Islamabad: Government of Pakistan. task. It will also provide natural integration ———. 2011a. Pakistan Sindh Province Govern- with the country’s financial management ment Public Financial Management and Account- systems. ability Assessment Update. October. Islamabad: • Have PRAs write consistent and sustainable Government of Pakistan. capacity-building strategies for procure- ———. 2011b. Pakistan Khyber Pakhtunkhwa ment professionals inside the MDAs and the Province Government Public Financial Manage- vendor community, reflecting the vendors’ ment and Accountability Assessment Update. crucial role. June. Islamabad: Government of Pakistan. • Set up a forum for sharing knowledge ———. 2012a. Pakistan Federal Government Pub- among all PRAs, and streamline the stan- lic Financial Management and Accountability dard documents of the PRAs, to harmonize Assessment. June. Islamabad: Government of the national procurement regime. Pakistan. • Support the auditor general to develop a ———. 2012b. Pakistan Punjab Government Pub- strategic plan for auditing the procure- lic Financial Management and Accountability ment performance of all major procure- Assessment. June. Islamabad: Government of ment actions to improve oversight and Pakistan. accountability. International Budget Partnership. 2012. Open Budget Survey 2012: Open Budgets, Notes Transform Lives. Washington, DC. http:// This note was written with contributions from internationalbudget.org/publications/ Uzma Sadaf, Muhammad Akram Khan, and obi-full-report-2012-english/. Hammad Yunus. Mustafa, Usman. 2011. “Fiscal Federalism in 1. “The government� in this note generally Pakistan: The 7th National Finance Commis- includes the federal government and pro- sion Award and Its Implications.� Working vincial governments. Paper 73. Pakistan Institute of Development 2. For more information on performance Economics, Islamabad. indicators (PI), see Government of Paki- van Eden, Holger, and Fanny Weiner. 2010. stan and others (2007, 2011a,b, 2012a,b). “Treasury Management Practices in Latin America: Results of a Survey of State Treasur- ies.� PowerPoint presentation at Seminario Latinoamericano sobre Gestion de Tesore- ria, Lima, April 15–16. © 2013 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street NW Washington, DC 20433 USA All rights reserved This report was prepared by the staff of the South Asia Region. The findings, interpretations, and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the World Bank’s Board of Executive Directors or the countries they represent. The report was designed, edited, and typeset by Communications Development Incorporated, Washington, DC.