Bhutan September Public Financial Management 2016 Performance Report Based on Public Expenditure and Financial Accountability 2016 Framework Royal Government of Bhutan Ministry of Finance Bhutan Public Financial Management Performance Report Based on Public Expenditure and Financial Accountability 2016 Framework September 2016 Royal Government of Bhutan Ministry of Finance CURRENCY AND EXCHANGE RATES Currency: Bhutanese Ngultrum (Nu or BTN) 1.00 Nu = 0.014686 USD 1.00 USD = 67.17 Nu (rate as at 31 May 2016) GOVERNMENT FISCAL YEAR (FY) July 1 – June 30 The text of this publication, “BHUTAN- Public Financial Management Performance Report- Based on Public Expenditure and Financial Accountability 2016 Framework, September 2016”, will be available as a PDF file, once published at https://openknowledge.worldbank.org/. Please use the final version of the book for citation, reproduction, and adaptation purposes. © 2017 International Bank for Reconstruction and Development/The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved. Rights and Permissions This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) http://creativecommons.org/licenses/by/3.0/igo. Under the Creative Commons Attribution license, you are free to copy, distribute, transmit, and adapt this work, including for commercial purposes, under the following conditions: Translations: If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. Adaptations: If you create an adaptation of this work, please add the following disclaimer along with the attribution: This is an adaptation of an original work by The World Bank. Views and opinions expressed in the adaptation are the sole responsibility of the author or authors of the adaptation and are not endorsed by The World Bank. Third-party content: The World Bank does not necessarily own each component of the content contained within the work. The World Bank therefore does not warrant that the use of any third-party-owned individual component or part contained in the work will not infringe on the rights of those third parties. The risk of claims resulting from such infringement rests solely with you. If you wish to re-use a component of the work, it is your responsibility to determine whether permission is needed for that re-use and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Cover photo: Michael Foley Design and print: Macro Graphics Pvt. Ltd. (www.macrographics.com) Royal Government of Bhutan – Ministry of Finance Public Financial Management Performance Report based on Public Expenditure and Financial Accountability Methodology (PEFA) 2016 Framework Final Report – September 2106 The quality assurance process followed in the production of this report satisfies all the requirements of the PEFA Secretariat and hence receives the ‘PEFA CHECK’. PEFA Secretariat September 7, 2016   iii Acronyms and Abbreviations AAR Annual Audit Report CD Current Deposits Accounting and Auditing Standard Board CDB Construction Development Board AASBB of Bhutan CEO Chief Executive Officer ACC Anti Corruption Commission CFA Consolidated Fund Account ACG Annual Capital Grants CG Central Government ADA Austrian Development Agency Certified Government Auditing CGAP ADB Asian Development Bank Professionals AFD Administration & Finance Division CID Citizenship Identity Card Number AFS Annual Financial Statements CIT Corporate Income Tax AIMS Audit Information Management System COFOG Classification of Functions of Government AIN Audit Information Number COSO Committee of Sponsoring Organizations APA Annual Performance Agreement CSAB Civil Service Act of Bhutan, 2010 ARA Audit Recoveries Account CS- Commonwealth Secretariat- Debt DRMS Recording and Management System ATR Action Taken Report CSIS Civil Service Information System BACS Bhutan Automated Customs System CSO Civil Society Organization BAS Budget and Accounting System DDO Drawing and Disbursing Officers Bhutan Chamber of Commerce & BCCI DHI Druk Holding and Investments Industry BCG Budgetary Central Government DLG Department of Local Governance Bhutan Civil Service Rules and DMD Debt Management Division BCSR Regulations DNB Department of National Budget BFA Government Budget Fund Account DNP Department of National Properties BIT Business Income Tax DPA Department of Public Accounts BPC Bhutan Power Corporation DRC Department of Revenue and Customs BPFF Budget Policy & Fiscal Framework DRS Debtor Reporting System BTN Bhutanese Ngultrum DT Dzongkhags Tshogdu BUP Budget Utilization Plan EBU Extra Budgetary Unit CAB Contractors’ Association of Bhutan EC European Commission CBAS Central Budget and Accounting System Electronic Fund Transfer and Clearing EFTCS Ministry of Finance Central Coordinating System CCA Agency EID Employee Identity Number CCC Cash Coordinating Committee EU European Union iv Bhutan: Public Financial Management Performance Report EUR Euro IRB Independent Review Body FAM Finance and Accounting Manual International Standards of Supreme Audit ISSAI FDI Foreign Direct Investment Institutions FIC Financing Item Code JICA Japan International Cooperation Agency FMM Financial Management Manual LC Letter of Credit Account Financial Resources Management LG Local Governments FRMAI Accountability Index LGSP Local Governance Support Program FRR Financial Rules and Regulations IMF-World Bank Debt Sustainability LIC DSA FY Financial Year Framework for Low Income Countries FYP Five Year Plan LLC Limited Liabilities Companies GAO Gewog Administrative Officers LPC Last Pay Certificate GARR General Auditing Rules and Regulations MDF Multi Donor Fund GCA Government Consolidated Account MDTF Multi-Donor Trust Fund GDG Gewog Development Grant Macroeconomic Framework Coordination MFCC Committee GDP Gross Domestic Product Macroeconomic Framework Coordination GFS Government Finance Statistics MFCTC Technical Committee GNH Gross National Happiness MHCA Ministry of Home and Cultural Affairs GNHC Gross National Happiness Commission MOF Ministry of Finance GOI Government of India MP Member of Parliament e-GP e-Government Procurement MTDS Medium Term Debt Strategy GPF Government Provident Fund MTFF Medium Term Fiscal Framework Government Performance Management MW Mega Watt GPMD Division MYRB Multi-Year Rolling Budget Government Performance Management GPMS NICF National Internal Control Framework System GPP Green Public Procurement NKRA National Key Result Area Government Property and Procurement NPPF National Pension and Provident Fund GPPMD Management Division NR Not Rated GT Gewogs Tshogde NTC National Technical Committee HEP Hydro Electric Power NU Bhutanese Ngultrum HR Human Resource PAC Public Accounts Committee HRD Human Resource Division PCA Post Clearance Audit IA Internal Audit PCC Program Coordination Committee IAS Internal Audit Section PE Public Enterprise IAU Internal Audit Units PED Public Enterprise Division IC Internal Control Public Expenditure and Financial PEFA IMF International Monetary Fund Accountability IMF-GFS IMF-Government Finance Statistics PEMS Public Expenditure Management System International Organization of Supreme PFA Public Finance Act 2007 INTOSAI Audit Institutions PFM Public Financial Management International Public Sector Accounting Public Financial Management- IPSAS PFM-GG Standard Governance Group Acronyms and Abbreviations v PFM-PR PFM Performance Report RNR Renewable Natural Resources PI Performance Indicator Report on the Observance of Standards ROSC PIT Personal Income Tax and Codes PlaMS Planning and Monitoring System RAA Royal Audit Authority PLC Project Letter of Credit Account RRCO Regional Revenue and Customs Office PMF Performance Measurement Framework RSTA Road Safety and Transport Authority PMO Prime Minister's Office RTAC Regional Tax Appeal Committee PPD Policy and Planning Division SAI Supreme Audit Institution PPG Public and Publicly Guaranteed SAR South Asia Region Swiss Agency for Development and PPP Public-Private Partnerships SDC Cooperation PPPD Public Procurement Policy Division State Secretariat for Economic Affairs PRR Procurement Rules and Regulations 2009 SECO SECO Economic Cooperation and PSC Project Steering Committees Development PWA Public Work Advance SKRA Sectoral Key Result Areas RAA Royal Audit Authority SNG Sub-National Government Revenue Administration Management SOE State-Owned Enterprises RAMIS Information System SDU Service Delivery Unit RAS Revenue Accounting System STC State Trading Cooperation RBP Royal Bhutan Police TMD Treasury Management Division RCSC Royal Civil Service Commission TMS Tax Management System RGoB Royal Government of Bhutan TPN Taxpayer Number RGR Government Revenue Account TT Thromde Tshogde RMA Royal Monetary Authority UNCDF United Nations Capital Development Fund RMS Revenue Management System UNDP United Nations Development Programme vi Bhutan: Public Financial Management Performance Report Contents ACKNOWLEDGMENTS ix EXECUTIVE SUMMARY xi 1. INTRODUCTION 1 1.1 Rationale and purpose 1 1.2 Assessment management and quality assurance 2 1.3 Assessment methodology 5 2. COUNTRY BACKGROUND INFORMATION 7 2.1 Country economic situation 7 2.2 Fiscal and budgetary trends 10 2.3 Legal and regulatory arrangements for PFM 14 2.4 Institutional arrangements for PFM 16 2.5 Other important features of PFM and its operating environment 20 3. ASSESSMENT OF PFM PERFORMANCE 23 3.1 Pillar I - Budget reliability 23 3.2 Pillar II - Transparency of public finances 29 3.3 Pillar III - Management of assets and liabilities 45 3.4 Pillar IV - Policy-based fiscal strategy and budgeting 60 3.5 Pillar V - Predictability and control in budget execution 71 3.6 Pillar VI - Accounting and reporting 100 3.7 Pillar VII - External scrutiny and audit 110 4. CONCLUSIONS ON THE ANALYSIS OF PFM SYSTEMS 121 4.1 Integrated assessment of PFM performance 121 4.2 Effectiveness of the internal control framework 125 Contents vii 4.3 PFM strengths and weaknesses 126 4.4 Performance changes since a previous assessment 128 5. GOVERNMENT REFORM PROCESS 131 5.1 Overall approach to PFM reforms 131 Recent and on-going reform actions 5.2. 132 Institutional considerations 5.3. 133 ANNEX 1: PERFORMANCE INDICATOR SUMMARY 136 ANNEX 2: SUMMARY OF OBSERVATIONS ON THE INTERNAL CONTROL FRAMEWORK 144 ANNEX 3: SOURCES OF INFORMATION 147 ANNEX 4: COMPARISON WITH 2010 ASSESSMENT 149 ANNEX 5: FINANCIAL MANAGEMENT IN LOCAL GOVERNMENT IN BHUTAN 164 ANNEX 6: CALCULATION OF PI-1, PI-2 AND PI-3 VARIANCES AS PER 2016 FRAMEWORK 177 viii Bhutan: Public Financial Management Performance Report Acknowledgments T he 2016 Public Expenditure and Financial Accountability (PEFA) assessment was carried out by a team comprising of officials from RGoB, World Bank staff and consultants and the IMF represented through its Regional PFM Advisor. The PEFA assessment team acknowledges and appreciates the excellent cooperation extended by Government counterparts who facilitated the entire process and enabled timely completion of the assessment. The RGoB oversight team comprised of Mr. Lam Dorji, Hon’ble Secretary, MoF, Mr. Choiten Wangchuk, Director General, DPA, MoF, Mr. Lekzang Dorji, Director, DNB, MoF and PEFA team members comprised of Hon’ble Karma Tenzin, MP, NAB and the Chairperson of the Parliament’s Finance Committee, Hon’ble Tashi Dorji, MP, NC and member of the Parliament’s Public Accounts Committee (PAC), Mr. Yeshi Norbu, Accounts Officer, NAB, Mr. Tashi Rabten, Legal Asst./ PAC Secretary, NAB, Mr. Rinzin Dorji, Senior Planning Officer, PPD, MoF, Mr. Norbu Dhendup, Dy. Chief Program Officer, PED, MoF, Mr. Loday Tsheten, Chief Internal Auditor, CCA, Internal Audit Services, MoF, Mr. Leki Tshering, Procurement Officer, PPPD, DNP, MoF, Mr. Namgyel Wangchuk, Chief Budget Officer, DNB, MoF, Mr. Gyembo, Chief Budget Officer, DNB, MoF, Mr. Karma Jambayang, Deputy Chief Audit Officer, RAA, Mr. Karma Loday, Collector, DRC, MoF, Ms. Lhakpa Bhuti, DRC, MoF, Mr. Wangdi Gyeltshen, Programme Officer, DLG, MoHCA, Mr. Tshering Dorji, Chief Programme Officer, DMD, DPA, Mr. Budhiman Rai, Chief Accounts Officer, TMD, DPA, Mr. Sonam Tobgyel, Chief Accounts Officer, AD, DPA. The World Bank cross-sectoral task team who contributed to this PEFA assessment report comprised Mr. Savinay Grover, Senior Financial Management Specialist and Task Team Leader, Mr. Mohan Nagarajan, Senior Economist and Co-Task Team Leader, Mr. Puneet Kapoor, Senior Financial Management Specialist and Co-Task Team Leader, Ms. Genevieve Boyreau, Senior Economist, Mr. Tanvir Hossain, Senior Procurement Specialist, Ms. Neha Dhoundiyal Gupta, Financial Management Specialist. The team was supported by Mr. Tony Bennett, International Consultant, Ms. Tanya Gupta, Financial Management Consultant. Ms. Justina Parambaloth, Ms. Shafali Rajora and Ms. Ashwini Bharat provided administrative and logistical support. The team member from IMF was Mr. Suhas Joshi, Regional PFM Advisor. Internal World Bank peer reviewers were Mr. Franck Bessette, Mr. Shanker Lal and Ms. Manvinder Mamak. External peer reviewers from the PEFA Secretariat were Ms. Holy Tiana Rame, Mr. Shouvik Datta and team from European Union and Mr. Johannes Binder and team from Austrian Development Agency. The PEFA team acknowledges the valuable feedback received from the Peer Reviewers. Acknowledgments ix Executive Summary T he purpose of the assessment of the Public Financial Management (PFM) performance of the Royal Government of Bhutan (RGoB) was threefold: (i) to assess the quality (strengths and weaknesses) of PFM in the country against generally accepted international standards; (ii) to assess progress since the last PEFA assessment in 2010, and (iii) to provide RGoB and other stakeholders with a common source of information as a basis for further dialogue on PFM reforms. As the last assessment, dated June 2010, used the 2005 framework, the same framework was used for determining progress since 2010. This assessment was carried out under the approach of full ownership by RGoB and self-assessment by its officials, with technical support from World Bank and IMF. The team, comprising of World Bank staff and consultants, the Regional IMF PFM Advisor and RGoB officials, conducted the assessment initially using the 2015 Testing Version of the PEFA framework and a questionnaire template. Initial drafts were prepared by the designated RGoB officials and discussed and agreed with the World Bank team members. As the final version of the 2016 PEFA framework was launched in February 2016, additional data was collected and the drafts were modified to meet the needs of the new Framework. The assessment covered all ten ministries of RGoB, oversight institutions such as the Royal Audit Authority and legislative committees, autonomous agencies funded by the RGoB, and local government bodies (dzongkhags, gewogs and thromdes). The latter were considered as deconcentrated units of the central government instead of sub-national governments, in accordance with PEFA criteria. All 31 indicators of the 2016 PEFA Framework were included in the assessment, and each indicator was assessed at the time or period prescribed in the Framework. The budget credibility indicators, for instance, were based on the last three financial years for which reliable revenue and expenditure data were available at the start of the fieldwork in October 2015, viz. FY 2012/13, 2013/14 and 2014/15. A table giving an overview of scores for each of the PEFA indicators is given at the end of the PEFA summary and a detailed table showing the scores and explanations is provided in Annex 1. The PFM performance for the 31 indicators and their dimensions was assessed and assigned ratings of DISTRIBUTION OF SCORES AS PER 2016 FRAMEWORK A to D in accordance with the criteria in the PEFA 8 Framework. The distribution of scores are shown in 7 the figure alongside. 5 5 The aggregate scores against each of the seven pillars of PEFA Framework indicates that two pillars 3 are relatively stronger i.e. Pillar III: Management of 2 1 assets and liabilities and Pillar VII: External scrutiny 0 and audit. The pillars showing relatively lower A B+ B C+ C D+ D NA scores are Pillar II: Transparency of government and Executive Summary xi Pillar VI: Accounting and Scores Against Seven Pillars reporting. Performance against Pillar I: Budget A reliability is significantly B+ impacted by the low score on revenue B indicator PI-3, which is C+ largely attributable to the unreliability of donor C grants. Development partners have a D+ significant influence on D PFM performance in two ways. In the first Pillar I. Budget Pillar II. Pillar III. Pillar IV. Policy Pillar V. Pillar VI. Pillar VII. place, donors have reliability Transparency Management -based scal Predictability Accounting External provided technical of government of assets and strategy and and control in and reporting scrutiny and budget assistance on PFM that liabilities budgeting administration audit may have enabled the Government to meet the requirements for a higher PEFA score. On the other hand, donors also have an adverse impact where they forecast aid but it is not disbursed, or delayed, often because the government has not met the conditionality requirements. Strengths and weaknesses identified in the report explains how PFM system performance affects three main fiscal and budgetary outcomes, as discussed below: Fiscal discipline is assisted by the comprehensive coverage of the RGoB’s Public Expenditure Management System, orderly execution of the budget, good control over expenditure commitments and fiscal risks, risk-based administration of revenue, timely and reliable financial reporting, and continued improvements in external audit and legislative scrutiny. At the same time, fiscal discipline is undermined by some lack of public transparency in administrative classification in the budget and accounts, which would inform and facilitate public demand for better accountability. It is also reduced by the limited economic appraisal of projects before inclusion in the budget, as the projected social and economic costs and benefits of proposed projects cannot be exposed to wider scrutiny. Strategic allocation of resources is assisted by a strong planning and budgeting system that translates the Five Year Plans into sectoral strategies, programs and annual budgets within a rolling three-year fiscal framework. Favorable factors are the amount of time allowed to agencies to prepare their budgets, and the reliability of resource flows to service delivery units in accordance with annual budgets (at least where resources are domestically funded). Efficient use of resources for service delivery is assisted by competitive procurement, which yields greater value for money. The recent adoption of a performance management system, based on annual performance agreements with the Prime Minister, is potentially a powerful tool for cost control and efficiency savings, though it is not yet fully developed. The introduction of Annual Performance Agreements is a very important innovation. These are integrated with the budget process but, so far, are only available to the public in a few cases. Accountability would be significantly strengthened if they were published along with financial budgets and out-turns. xii Bhutan: Public Financial Management Performance Report The transparency is a vital aspect of PFM performance. Civil society and community organizations can exercise an important role in budget management, both by participation in the budget preparation process and by monitoring actual performance, but only if relevant fiscal information is freely available, timely and reliable. The RGoB issues an Annual Budget Report in both Dzongkha and English languages, which facilitates public discussion of budgets and results. Since the 2010 PEFA assessment and the implementation of a comprehensive PFM reform program, RGoB has led a wide array of reforms in planning and budgeting, revenue administration, asset and liability management, procurement, internal control, internal audit, reporting, external audit and oversight. In 2013, a new initiative was launched on performance management. Some of these reforms are ongoing or still being consolidated. Their impact on the generic goals of budget management is not measurable but appears to be far-reaching. The following table shows the changes in ratings since the previous PEFA assessment, using 2005 PEFA Framework, which was the basis for the previous assessment. Table 0.1: Comparison of Scores from 2009 to 2016, based on PEFA 2005 Framework Scores from Assessment Description Indicators and Dimensions of change Previous Current  ggregate expenditure out-turn compared to original approved Budget PI-1. A B A Composition of expenditure out-turn compared to original approved budget PI-2.  B D Aggregate revenue out-turn compared to original approved budget PI-3.  A A PI-4. Stock and monitoring of expenditure payment arrears NR NR PI-5. Classification of the budget B A Comprehensiveness of information included in budget documentation PI-6.  A A PI-7. Extent of unreported government operations A B+ PI-8. Transparency of inter-governmental fiscal relations A NA Oversight of aggregate fiscal risk from other public sector entities PI-9.  D+ B PI-10. Public access to key fiscal information B A PI-11. Orderliness and participation in the annual budget process A B+ Multi-year perspective in fiscal planning, expenditure policy and budgeting PI-12.  B+ B+ PI-13. Transparency of taxpayer obligations and liabilities B B+ Effectiveness of measures for taxpayer registration and tax assessment PI-14.  C+ B PI-15. Effectiveness in collection of tax payments C+ B+ Predictability in the availability of funds for commitment of expenditures PI-16.  C+ B+ Recording and management of cash balances, debt and guarantee PI-17.  A A PI-18. Effectiveness of payroll controls B+ D+ PI-19. Competition, value for money and controls in procurement C B PI-20. Effectiveness of internal controls for non-salary expenditure A A PI-21. Effectiveness of internal audit C+ C+ PI-22. Timeliness and regularity of accounts reconciliation B B Availability of information on resources received by service delivery units PI-23.  A C PI-24. Quality and timeliness of in-year budget reports D+ C+ PI-25. Quality and timeliness of annual financial statements C+ C+ PI-26. Scope, nature and follow-up of external audit B+ B+ PI-27. Legislative scrutiny of the annual budget law D+ D+ PI-28. Legislative scrutiny of external audit reports B+ C+ Executive Summary xiii Since 2010, major reforms have been implemented. The assessment of changes in PFM performance since 2010 shows: zz ggregate expenditure and domestic revenue out-turn remain strong and are further strengthened a by implementation of the web-based Multi Year Rolling Budget (MYRB) and Revenue Administration Management Information System (RAMIS); zz adoption of Classification of Functions of Government (COFOG) classification of expenditure; zz introduction of a formula-based system for fiscal transfers to local governments; zz strengthened monitoring of fiscal risk over public enterprises; zz a more active Tax Appeals Board; zz a formal cash flow forecasting system; zz improved effectiveness of internal audit; zz introduction of a formal system of in-year budget execution reporting; zz constitution of a Finance Committee for legislative scrutiny of budgets; and zz a more active Public Accounts Committee for scrutiny of audit reports. The main areas of challenge are expenditure composition out-turn, controls over payroll, expenditure arrears and public access to information, these provide opportunity to strengthen PEMS and related systems. The opportunity also exists in the areas of internal audit, legislative scrutiny of annual budget laws and quality and timeliness of annual financial statements where reforms are either underway or are to be initiated. It is always difficult to attribute particular score changes to particular reform activities, but some of the improvements noted (using the 2005 framework, annex 4) can be clearly attributed to the reform program. Examples are the improvement in budget reliability achieved through closer monitoring of out- turns against the Multi-Year Rolling Budget from FY 2010/11 onwards, and the introduction of quarterly Budget Situation Reports from FY 2015/16. Improvements in procurement include the publication of contract awards on the notice boards of procuring entities: the risk of any mis-procurement is reduced by this public exposure. The procurement complaints process, that was new and untried in FY2009/10, is now fully operational. Most other score improvements are more marginal and many improvements will result in future score changes. Bhutan has always attached great importance to good governance on principles of accountability, transparency and efficiency. The PFM Reform Program prepared in 2010 has been implemented by a committed government and its development partners. To further improve PFM in the country and take forward the reform agenda, this PFM assessment is expected to be used as a basis for a comprehensive, sequenced and time-bound PFM reform action plan to be supported through a PFM Multi Donor Fund1 (MDF) that is being established. 1 MDF means Multi-Donor Fund, referred to by the Bank as Multi-Donor Trust Fund that may receive contribution from more than one donor, whose funds are pooled under a single set of agreed terms and such funds are not earmarked by individual donors for specific categories of expenditure. xiv Bhutan: Public Financial Management Performance Report Table 0.2:  Overall summary of PFM performance scores (2016 Framework) Scoring Dimension Ratings Overall PFM Performance Indicator Method 1 2 3 4 Rating Pillar I. Budget reliability PI-1 Aggregate expenditure out-turn M1 A A PI-2 Expenditure composition out-turn M1 C B A C+ PI-3 Revenue out-turn M2 C D D+ Pillar II. Transparency of government PI-4 Budget classification M1 A A PI-5 Budget documentation M1 A A Central government operations outside financial PI-6 M2 B B D C+ reports PI-7 Transfers to subnational governments M2 NA PI-8 Performance information for service delivery M2 C D C D D+ PI-9 Public access to information M1 D D Pillar III. Management of assets and liabilities PI-10 Fiscal risk reporting M2 A NA A A PI-11 Public investment management M2 C A C C C+ PI-12 Public asset management M2 B C A B PI-13 Debt management M2 A A D B Pillar IV. Policy-based fiscal strategy and budgeting PI-14 Macroeconomic and fiscal forecasting M2 A B C B PI-15 Fiscal strategy M2 B C B B Medium-term perspective in expenditure PI-16 M2 C B C C C+ budgeting PI-17 Budget preparation process M2 A A D B PI-18 Legislative scrutiny of budgets M1 C C C A C+ Pillar V. Predictability and control in budget administration PI-19 Revenue administration M2 B B A A B+ PI-20 Accounting for revenues M1 A A B B+ PI-21 Predictability of in-year resource allocation M2 B B A A B+ PI-22 Expenditure arrears M1 D* D D PI-23 Payroll controls M1 D A D C D+ PI-24 Procurement M2 C B B A B PI-25 Internal controls on non-salary expenditure M2 A A A A PI-26 Internal audit effectiveness M1 B C A C C+ Pillar VI. Accounting and reporting PI-27 Financial data integrity M2 B C B B B PI-28 In-year budget reports M1 B C B C+ PI-29 Annual financial reports M1 C B C C+ Pillar VII. External scrutiny and audit PI-30 External audit M1 B B A B B+ PI-31 Legislative scrutiny of audit reports M2 B C A A B+ Executive Summary xv 1. introduction 1.1 Rationale and purpose The Royal Government of Bhutan (RGoB) places high priority on good governance, and sound public financial management is one of the key elements of good governance. Over the past decade, Bhutan has been making steady progress in strengthening public financial management covering budget preparation, budget execution, control, reporting and oversight. There is increased legislative oversight on budget approval through a Finance Committee and of audit reports through a Public Accounts Committee. As in other countries, the public at large has become more demanding in terms of transparent and efficient government. Bhutan prepared a PFM Reform Program/Strategy in 2012 following a PEFA Assessment. Bhutan undertook a PEFA assessment in 2010 with support from the World Bank and the report was issued in 20102. Based on the PEFA Report, RGoB prepared, in 2012, a comprehensive, sequenced and time-bound action plan (called PFM Reform Program or Strategy) to bring about improvements in the PFM systems and processes in line with international standards. Evaluation of the progress of the Reform Strategy has been limited to some development partners and its progress is not widely known in public. There is, therefore, an opportunity for an updated and revised PFM Reform Strategy. Development partners have actively supported Bhutan’s initiatives to strengthen PFM. The World Bank Group and other development partners, including IMF, EU, ADA, SECO, UNDP and ADB have been actively partnering, largely on a bilateral approach, to strengthen PFM in Bhutan. The interventions include: support in the development of an e-payment gateway, strengthening budget preparation process, treasury management and cash flow forecasting and macro-fiscal management (by the IMF); supporting the development of internal audit, inter-governmental fiscal transfers, implementation of Bhutan Accounting Standards and development of a PFM reform group (by the World Bank); supporting development of a Revenue Administration and Information Management System and an Audit Resource Management System for the supreme audit institution, and technical support on debt sustainability analysis and macro-fiscal regulation (by the ADB); supporting judiciary, CSO and Supreme Audit Institution (ADA) and local government strengthening with support from the European Union. Recently, the seeds for the establishment of a PFM Multi-Donor Fund3 (MDF) has been sown, led by the World Bank, with the objective of aligning 2 Bhutan: Public Financial Management and Accountability Assessment (June 2010), Report no. 58444-BT, The World Bank. 3 Referred to by the World Bank as Multi-Donor Trust Fund or MDTF that may receive contribution from more than one donor, whose funds are pooled under a single set of agreed terms and such funds are not earmarked by individual donors for specific categories of expenditure. 1. introduction 1 support of development partners in Bhutan for joint dialogue and efforts in implementing an RGoB owned PFM reform strategy. RGoB has set up a high level national group to steer the PFM Reform Program and to take it forward. This is the Public Financial Management- Governance Group (PFM-GG) that is expected to steer the PFM reform action plan of Bhutan and also coordinate the resources required for the implementation of the action plan4. The PFM-GG has a role of providing oversight, guidance and monitoring implementation of the RGoB’s PFM reform program/action plan. In this background, RGoB proposed a PEFA re-assessment (repeat) diagnostic study of the PFM system using the PEFA methodology5. Objectives of the assessment The overall objective of the PEFA assessment is to provide an evidence-based performance assessment to guide the government’s PFM reform strategy and potential engagement with its development partners in further strengthening PFM in the country. The assessment will provide a comprehensive PFM Performance Report (PFM-PR) containing an analysis of the overall performance of the current PFM systems of the country, and to measure progress over time since the previous assessment in 2010. The assessment will help RGoB to update its PFM Reform Action Plan, and sharpen its focus in the areas where reform is needed most, thus contributing to strengthening the PFM environment in the country. The specific objectives of the re-assessment are to: zz assess the quality (strengths and weaknesses) of PFM in the country following the PEFA framework of 2016; zz establish and explain the level of improvement in PFM performance from 2010 to date by updating the then indicator scores using the same 2005 framework/methodology that was the basis of the initial assessment; and zz provide RGoB and the development partners a basis for further dialogue on PFM reforms and enable updates to the PFM Reform Program and subsequent monitoring. 1.2 Assessment management and quality assurance The repeat PEFA assessment was carried out under the approach of full ownership of RGoB and self-assessment by its officials with technical support from the World Bank/IMF team. The assessment was carried out by a team led by the World Bank and comprised of officials from World Bank, IMF and RGoB. RGoB nominated focal points for the various performance indicators and a nodal 4 The PFM-GG was formed in Nov 2013 under the Ministry of Finance (MoF), chaired by the Finance Secretary, with representation from all the four departments of MoF, the Accounting and Auditing Standard Board of Bhutan, Public Procurement Policy Division, Internal Audit Service and Policy and Planning Division, with the Chief Accounts Division, Department of Public Accounts being the Member Secretary. The PFM-GG is the apex body leading the PFM reform programs in Bhutan through a PFM Reform Strategy and an Action Plan adopted and updated on a periodic basis (RGoB notification May 2015). 5 The PEFA Program is a partnership among the World Bank, the European Commission, the UK Department for International Development, Swiss State Secretariat for Economic Affairs, French Ministry of Foreign Affairs, Royal Norwegian Ministry of Foreign Affairs and the International Monetary Fund. A Steering Committee, comprising members of these agencies, manages the Program. A Secretariat is located at the World Bank in Washington, DC. 2 Bhutan: Public Financial Management Performance Report person for inter-departmental coordination (see Box 1). Data collection, assessment, preparing the write-ups and scoring were done by the RGoB team. The core team of RGoB comprised representatives from budget, revenue, treasuries, accounts, audit, oversight and procurement. The Bank/IMF team (see Box 1) supported through technical inputs and dissemination of scoring methodology and evidence requirements. The PEFA assessment commenced in October 2015 and was based on the 2015 Testing version of PEFA. A planning and preparatory mission, including a launch workshop, was held October 25 to 31, 2015 and attended by the PFM-GG, heads of the departments, Royal Audit Authority and development partners to disseminate the new PEFA framework, the methodology and the expectations from the assessment. During this mission, the Bank/IMF team also held face-to-face interviews with counterparts for a better understanding of the PFM environment which was to help during the review of the indicator write-ups and scoring. The World Bank/IMF team provided continuous technical support in the assessment. The completed templates (questionnaires), write-ups and scoring were reviewed by the Bank/IMF team and gaps in information or additional information required to strengthen the quality of evidence were identified and discussed with the RGoB focal points. In mid-assessment, PEFA launched the 2016 upgraded PEFA framework and RGoB agreed to use the latest methodology and the Bank/IMF team supported the transition. Initial self-assessments were made by RGoB team in accordance with the 2015 Testing Version. The 2016 upgraded version was launched by the PEFA Secretariat on February 1, 2016. As the PEFA assessment was under way and not finalized and based on the guidance provided by the PEFA Secretariat, RGoB and the Bank mutually agreed to follow the final “Framework for assessing public financial management, February 2016, PEFA Secretariat”. Reference was also made to the guidance note – “Good Practice when Undertaking a Repeat Assessment” dated February 1, 2010 published by PEFA Secretariat. The initial indicator assessment write-ups and scoring were received for all indicators along with the write-ups for other sections and an initial draft of the report has been prepared. The initial draft of the report has been shared with RGoB which will be followed up with a mission from January 25 to 29 and May 28 to June 3, 2016 for sharing of initial scores based on available evidence, identification of gaps and further information required, briefing on the scores, including progress over time to RGoB counterparts and agreeing on the scores and further work to be done. Going forward, the PEFA Performance Report will be updated and revised incorporating the feedback received during the third mission and then subjected to validation process. This will include quality assurance by peer reviewers from the Bank and development partners (see Box 1) and PEFA Check from the PEFA Secretariat. 1. introduction 3 Box 1: Assessment management and quality assurance PEFA Assessment Management Organization Oversight Team Chair & Members: zz Mr. Lam Dorji, Hon’ble Secretary, MoF zz Mr. Choiten Wangchuk, Director General, DPA, MoF zz Mr. Lekzang Dorji, Director, DNB, MoF Assessment Manager zz Mr. Fily Sissoko, Practice Manager, PRMM, The World Bank Assessment Team Leader and Team Members: The assessment was carried out by a core team comprising officials from RGoB, World Bank, IMF staff and consultants. The teams from the World Bank took the lead in the assessment, with the IMF participating through its Regional PFM Advisor and RGoB through its officials in various ministries and offices. The assessment team is as follows: The World Bank Group: zz Mr. Savinay Grover, Senior Financial Management Specialist and Task Team Leader zz Mr. Mohan Nagarajan, Senior Economist and Co-Task Team Leader zz Mr. Puneet Kapoor, Senior Financial Management Specialist and Co-Task Team Leader zz Ms. Genevieve Boyreau, Senior Economist zz Mr. Tanvir Hossain, Senior Procurement Specialist zz Ms. Neha Dhoundiyal Gupta, Financial Management Specialist zz Mr. Tony Bennett, International Consultant zz Ms. Tanya Gupta, Financial Management Consultant zz Ms. Justina Parambaloth, Program Assistant zz Ms. Shafali Rajora, Program Assistant IMF: zz Mr. Suhas Joshi, Regional PFM Advisor RGoB: zz Hon’ble Karma Tenzin, MP, NAB and the Chairperson of the Parliament’s Finance Committee zz Hon’ble Tashi Dorji, MP, NC and member of the Parliament’s Public Accounts Committee (PAC) zz Mr. Yeshi Norbu, Accounts Officer, NAB zz Mr. Tashi Rabten, Legal Asst./PAC Secretary, NAB zz Mr. Rinzin Dorji, Senior Planning Officer, PPD, MoF zz Mr. Norbu Dhendup, Dy. Chief Program Officer, PED, MoF zz Mr. Loday Tsheten, Chief Internal Auditor, CCA, Internal Audit Services, MoF zz Mr. Leki Tshering, Procurement Officer, PPPD, DNP, MoF zz Mr. Namgyel Wangchuk, Chief Budget Officer, DNB, MoF zz Mr. Gyembo, Chief Budget Officer, DNB, MoF zz Mr. Karma Jambayang, Deputy Chief Audit Officer, RAA zz Mr. Karma Loday, Collector, DRC, MoF zz Ms. Lhakpa Bhuti, DRC, MoF zz Mr. Wangdi Gyeltshen, Programme Officer, DLG, MoHCA zz Mr. Tshering Dorji, Chief Programme Officer, DMD, DPA zz Mr. Budhiman Rai, Chief Accounts Officer, TMD, DPA zz Mr. Sonam Tobgyel, Chief Accounts Officer, AD, DPA 4 Bhutan: Public Financial Management Performance Report Review of Concept Note and/or Terms of Reference Date of reviewed draft concept note and/or terms of reference: August, 2015 1. Invited reviewers and Reviewers who provided comments: zz Mr. Sonam Tobgyel, RGoB zz Ms. Karine Olislagers and team, EU zz Ms. Holy Tiana Rame, PEFA Secretariat zz Ms. Grabner Sonja, ADA zz Mr. Franck Bessette, The World Bank zz Mr. Shanker Lal, The World Bank zz Ms. Manvinder Mamak, The World Bank Date(s) of final concept note and/or terms of reference: October 14, 2015 Review of the Assessment Report 1. Date(s) of reviewed draft report (s): June 28, 2016 2. Invited reviewers: zz Mr. Sonam Tobgyel, RGoB zz Mr. Shouvik Datta and team, EU zz Ms. Holy Tiana Rame, PEFA Secretariat zz Mr. Johannes Binder and team, ADA zz Mr. Franck Bessette, The World Bank zz Mr. Shanker Lal, The World Bank zz Ms. Manvinder Mamak, The World Bank 1.3 Assessment methodology 1. Coverage of the assessment This assessment is based on the 2016 PEFA framework using all the 31 performance indicators and the scope of the assessment covered the operations of the central government in Bhutan. This covered all the budgetary agencies of RGoB including the ten ministries, dzongkhags, gewogs, thromdes, oversight institutions such as the Royal Audit Authority and the Parliamentary committees on budget and audit reports, and other semi- or fully autonomous agencies funded by the government. Being a repeat assessment, progress over time was also measured since the last PEFA assessment in 2010 on the basis of 2005 PEFA framework used then. This followed PEFA Guidance on tracking performance across time: Comparing PEFA 2016 against PEFA 2005 or PEFA 2011 for directly comparing PFM performance with a previous assessment. As it is not possible to track changes in performance by comparing an assessment based on PEFA 2011 or PEFA 2005 with a subsequent (repeat) assessment using PEFA 2016, hence a precise comparison requires that assessments be based on the same PEFA version. Therefore, the progress over time used the same indicator set of PEFA 2005 as used in the 2010 assessment in Bhutan. The results are summarized in Annex 4. 1. introduction 5 2. When performance is assessed The assessment was carried out using the most recently available data based on the guidance in PEFA 2016. Data for the financial years 2012/13, 2013/14 and 2014/15 was used where three-years data was required and for financial year 2014/15 where data for last completed fiscal year was needed. Dimensions of some indicators (PI-5, 6, 8, 10, 13, 15, 16, 17, 18, and 26) used the data available in the last budget presented in Parliament i.e. for FY 2015/16. 3. Sources of Information The assessment used a range of government documents from various ministries and other budgetary agencies specific for each indicator and also evaluations/assessments or studies made by other development partners. The choice of information was based on the guidance provided in the PEFA 2016. These included the core PFM legal documents, five year and annual plans, budget reports, annual financial statements, and audit reports, information was also obtained or supplemented or validated through interviews or specific queries raised with the stakeholders. A list of documents referenced for the assessment and list of persons met are provided in Annex 3 of the report. A planning and preparatory mission, including a launch workshop, was held October 25 to 31, 2015 and was attended by the members of PFM-GG, heads of the departments, Royal Audit Authority and development partners, to disseminate the new PEFA framework, the methodology and the expectations from the assessment. The objective of the workshop was to: (i) familiarize the RGoB team with the updated PEFA framework; (ii) understand the information needs; (iii) identify the possible sources of information; and (iv) agree on responsibilities and work schedules. A follow-up PEFA mission was carried out from January 26 to 29, 2016 to hold discussions on draft indicator write-ups and ratings. The mission updated RGoB officials that dzongkhag, gewogs and thromdes could not be considered as sub-national governments for the purposes of PEFA assessment as they do not fall within the definition of sub-national government. A third field mission was carried out from May 28-June 7, 2016. This was a validation mission for discussions on the first draft report including initial scores based on available evidence, identification of gaps and further information required, including progress over time and agreeing on the scores and further work to be done. 4. Other methodological issues for the preparation of report The main change in the current assessment as compared to the 2010 assessment is in respect of sub-national government. Local governments have not been considered as sub-national governments as done in the earlier assessment. Dzongkhags, gewogs and thromdes are considered as local governments in Bhutan. However, for purpose of PEFA assessment, these bodies could not be considered as Sub-National Government (SNG) since these do not meet the definition of SNG recognized by PEFA, which is based on Government Financial Statistics 20016. These bodies are more in the nature of de- concentrated units of the central government. The officers of these bodies are appointed by the Royal Civil Service Commission (RCSC) and they are financed directly from the central government budget. Hence, for the PEFA assessment, no separate level of SNG has been recognized. A note summarizing the PFM systems in these local bodies, primarily using national systems, is presented in Annex 5. 6 Supplementary Guidelines for the application of the PEFA framework to Sub-national governments, (January 2013) PEFA Secretariat. 6 Bhutan: Public Financial Management Performance Report Country Background 2. Information 2.1 Country economic situation Bhutan’s record of socio-economic development is remarkable. A lower middle-income country with an impressive poverty reduction record, Bhutan has achieved or surpassed targets in five of eight Millennium Development Goals (MDGs). Looking forward, the tenets of Bhutan’s Gross National Happiness are inherently aligned with the Sustainable Development Goals. Bhutan has peacefully transitioned to a democracy, cut poverty to low levels, and reaped positive results from sustained investment in rural infrastructure, including roads, schools, telecommunications, power, and health centers, across a difficult terrain. Its per capita Gross Domestic Product (GDP) is US$2,400, the economy has grown on average 7% for the past five years, and this performance is likely to continue. Large hydropower developments, better performance in the tourism sector, and improved services lead the country’s economic growth. This constitutes a remarkable record for a small, mountainous, landlocked country of 720,000 people situated between two economic giants (China and India). Bhutan follows India’s inflation closely. Bhutan has a fixed exchange rate with India, from which it imports most of its consumption. Consumer price inflation in Bhutan slowed to 3.2% in January 2016, from 4.7 in June 2015 (year-over-year), driven by the decline in oil prices and India’s easing of inflation. Bhutan has a strong record of poverty reduction, shared prosperity, and gender equality. Poverty reduction in Bhutan has been rapid and broad-based, and other social indicators have improved. Both consumption-based poverty measures and multi-dimensional poverty indicators show that the percentage of poverty was cut by nearly half in five years: from 23% in 2007 to 12% in 2012. On average, per capita consumption among the bottom 40% of the population has grown faster than for the rest. Bhutan has almost eliminated extreme poverty (US$1.90 purchasing power parity terms, per day per person) within the living memory of a generation. Primary drivers of rapid poverty reduction and shared prosperity are agricultural commercialization, rural infrastructure, and spillovers from the construction of hydroelectric projects. Bhutan achieved the MDG target for halving extreme poverty ahead of time, reached gender parity in primary education and significantly reduced maternal mortality rates. Bhutan has also made considerable strides in closing gaps in gender equality, making it comparable to that achieved in higher middle income nations. Areas with persisting gender gaps are (i) agricultural land holding and inheritance practices and (ii) labor markets and job quality. That said, the reduction in poverty has been accompanied in rural areas by rising vulnerabilities and, in urban areas, by rising youth unemployment, magnified by rural-urban migration. The chronically poor constituted two-thirds of all poor people in 2012. The absence of formal social protection institutions and targeting mechanisms for identifying the chronically poor contribute to 2. Country Background Information 7 shackling them in a poverty trap. Urbanization is on the rise, with the capital, Thimphu, attracting most rural migrants. In addition, because Bhutan is heavily dependent on donor support and on hydropower projects under construction, growth has been volatile. Large spillover from hydropower investments (with construction costs equivalent to Bhutan’s GDP) and vulnerability of donors’ disbursements complicate macroeconomic management and policymaking. Bhutan faces a large fiscal gap, with only two-thirds of public expenditures funded by domestic revenues. Grants finance about 30% of Bhutan’s budget, or about two-thirds of capital spending. Moreover, tax revenue has been declining relative to the country’s GDP over the last four years, from 15.2% to an estimate of 13.7% in 2015/16.7 The recent decline in tax revenue (relative to GDP) results not from changes in tax instruments or rates but from policy decisions totally or partially freeing specific groups of tax payers from their obligations. Tax holidays, exemptions and incentives are increasingly common. This results in low implicit tax rates on household income across most population groups. On the other hand, public expenditure continues and will continue to increase in the short and medium term. In the medium term, the social sectors will exert pressures to expand public expenditure, per Bhutan’s constitutional commitment to provide free health and educational services to all. In 2015/16 and 2016/17, accelerated implementation of the five-year plan, now at its mid-term, will push up public capital spending, while recurrent spending should remain contained. Overall, the estimated fiscal deficit in 2015/16 is 3.4% of GDP, but the fiscal gap, that is, the extent to which domestic resources finance domestic expenditures, will be much larger, at 14.5% of GDP. Bhutan runs a large current account deficit funded by donor assistance. As of December 2015, the current account deficit was estimated at about 26% of GDP, of which about half was (self-financed) hydropower imports: the remainder was split between fuel and consumption goods, including both private and public imports. The current account deficit is essentially financed by donor resources, to which India contributes the most through loans and grants to finance hydropower development. The resulting trade deficit and need to borrow to finance consumption creates significant national costs. Foreign Direct Investment (FDI) finances a low 8% of the capital account (about US$20 million). Gross international reserves are currently equal to a comfortable 11.7 months of goods and services imports. At the end of December 2015, international reserves were US$1,072 million, 77% of which was in convertible currency and the rest in Indian rupees.8 Bhutan’s public and publicly guaranteed external debt stood at 99% of GDP by the end of 2015, two-thirds of which relates to commercially profitable hydro projects. External debt risk of distress is moderate, because these hydropower projects carry their own creditworthiness by promising to produce substantial earnings after covering their debt obligations, with very limited risk for the Bhutanese government (see section 2.2 below). The Indian government largely finances and purchases the electricity generated by these projects, paying in Indian rupees. As a result, a large portion of external debt–58%–is denominated in Indian rupees. Other than for the hydropower projects, external convertible-currency public and publicly guaranteed (PPG) debt stands at a 32.2% of GDP and comes from concessional loans from multilateral financial institutions and bilateral donors (Austria, Denmark, and Japan). Domestic debt stands below 5% of GDP. 7 Bhutan’s fiscal year runs from July 1 to June 30. 8 The Constitution requires maintaining foreign exchange reserves equal to 12 months of essential imports. 8 Bhutan: Public Financial Management Performance Report Outlook The medium-term outlook is positive, but macroeconomic pressures on domestic demand will have to be managed as Bhutan nears the commissioning dates of the three mega- hydropower projects under construction. The impact on Bhutan’s economy of the ongoing rebalancing in global markets is expected to remain moderate. These effects will be from lessened tourism earnings and a slowdown in new hydropower project approvals. While debt risk is still moderate, the rapid build-up over recent years calls for caution. Bhutan’s debt-carrying capacity will improve in the long run, reflecting significantly higher electricity exports when hydropower projects come online. To provide the basis for financing sound and sustainable development, the financial sector must be deepened. Fiscal accounts are projected to remain in check, assuming improvement in tax collection efforts and spending efficiency. This also assumes continued donor support; some tax efforts and prudent management of current spending, projected to remain stable as a share of GDP (above 16%); and conservative assumptions regarding capital spending funded with foreign aid. Over the short to medium term, the current account deficit should reduce slightly, with hydropower projects starting generation and continuous efforts to contain demand for imports. These include fiscal measures through prudent public spending, new taxation measures on imports of vehicles and fuels, and prudent debt policy to finance capital spending. Export earnings are expected to strike up starting in late 2018 with the commissioning of the Punatsangchhu 2 and Mangdechhu hydropower projects (1,020 MW and 720 MW, respectively), followed by the Punatsangchhu 1 project in 2019 (1,200 MW). Government’s main economic challenges and government-wide reforms To sustain and deepen these achievements, Bhutan faces two challenges: First, in the short to medium term, large macroeconomic imbalances which translate into a twin deficit - a large fiscal gap and a large current account deficit. Bhutan’s large current account deficit stands at about 26% of GDP. This external deficit is reflected in the financing by domestic revenues of only 65% of government spending; the rest is financed by donor resources. Tax collection is as low as 13% of GDP, and the rate has been declining. Given that Bhutan is a small country with an exchange rate pegged to India’s rupee, its fiscal policy will play a pre-eminent role in reducing this twin deficit by increasing the revenue effort, enhancing the efficiency of public spending, and managing debt sustainably. Second, while the public sector is the preferred employer, private-sector development will be necessary for sustainable growth and job creation. The government’s ability to absorb the new, young workers entering the labor market each year has reached a saturation point. While total unemployment remains low at 2.6%, youth unemployment reached 9.4% in 2014, and it is expected to rise. Currently, the private sector, limited in size, plays a limited role in the economy. In 2014, 99% of the country’s approximately 42,000 businesses were micro or small sized; only about 350 were Limited Liabilities Companies (LLC); and a handful were joint-stock companies and partnerships. The competitiveness of Bhutan’s nascent entrepreneurial sector is affected by the country’s challenging terrain, limited access to finance and markets, a difficult investment climate, and low productivity levels. A simple, predictable, and easily accessible investment climate can contribute to investment attraction and job creation. In addition, a pro-active public policy to crowd-on private investment through smart procurement, shifting finance from the supply of service delivery to the demand side and developing more systematically smart partnerships with the private sector would go a long way. Table 2.1 shows Key Macroeconomic Indicators and Outlook. 2. Country Background Information 9 Table 2.1: Key Macroeconomic Indicators and Outlook Estd. Proj. Proj. Proj. Indicator 2012 2013 2014 2015 2016 2017 2018 Gross domestic product (US$ million at current 1,825 1,781 1,959 2,224 2,432 2,880 3,197 prices) Consumer price index 9.5 11.8 7.2 5.0 n.a n.a n.a (% change) Real annual growth rate 5.1 2.0 4.8 6.3 6.8 7.4 11.0 Balance of Payments 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 (% GDP) Exports 34% 31% 29% 29% 29% 27% 34% Imports 56% 49% 49% 51% 52% 53% 53% Trade balance -22% -18% -20% -22% -24% -25% -19% Current account balance -22% -24% -25% -26% -30% -30% -24% Out of which hydropower -6% -14% -9% -13% -15% -16% -10% Reserves (US$) 674 917 998 958 1,177 1,273 1,503 Exchange rate (Nu/US$) 53 59 61 64 n.a n.a n.a Public finance (as % of 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 GDP at market prices) Expenditures 38.2 36.2 29.8 27.5 33.1 32.9 30.2 Revenues 22.3 20.9 20.7 20.0 18.7 18.9 19.1 Out of which hydropower 7.5 6.8 8.2 6.3 6.0 5.6 6.5 Grants 13.7 9.5 12.7 7.9 11.0 8.9 10.4 Fiscal balance -1.1 -4.2 3.8 0.6 -3.4 -5.2 -3.0 Fiscal gap (domestic -14.7 -14.6 -9.1 -7.5 -14.5 -14.0 -11.2 revenues - expenditures) External PPG debt Out of which hydropower 75.1 90.9 91.2 94.5 102.8 107.6 99.1 publicly guaranteed Domestic debt 44.8 51.7 58.1 68.1 78.7 85.0 80.7 Monetary Indicators 2012 2013 2014 2015 2016 2017 2018 M2/GDP (%) 59 58 63 58 n.a n.a n.a Growth of M2 (%) -1 18.6 26.0 5.1 n.a n.a n.a Private-sector credit 30.1 7.1 9.4 13.8 n.a n.a n.a growth (%) Total credit growth (%) 51.3 12.8 7.2 11.4 n.a n.a n.a Source: Royal Government of Bhutan, Royal Monetary Authority, Ministry of Finance, and World Bank. 2.2 Fiscal and budgetary trends 2.2.1 Fiscal performance Tables 2.1, 2.2 and 2.3 below show RGoB’s fiscal performance from 2011/12 to 2014/15. The tables are drawn from annual financial statements and the National Budget Report of the Ministry of Finance (available online). This goes a little wider than the scope of this PEFA report, as general government 10 Bhutan: Public Financial Management Performance Report includes dzongkhag and gewogs. However, these inclusions do not make any significant difference, as dzongkhag and gewogs collect very little revenue and are largely dependent on central government transfers. The tables show that domestic revenue to GDP has decline over the last three years, falling from 22.3% to 19.9% of GDP between 2011/12 and 2014/15. Total expenditure has also fallen in line with this decline in revenue falling from 36.9% of GDP to 31.4%. Some of the saving has been on current expenditure (down from 18.3% to 17.6% of GDP) but a significant part of this fall in revenues has been absorbed by a corresponding fall in capital expenditure which has declined from 19.9% to 15.1% of GDP. The overall balance showed a decline from -14.6% of GDP in FY 2011/12 to -11.4% in FY 2014/15. Simultaneously, the inflow of grants has also declined from 13.5% to 9.2% of GDP. 2.2.2 Allocation of resources Details of functional, economic and program classification of expenditure are available for the period covered by this assessment. As may be seen from Tables 2.1 and 2.2 current expenditure has risen steadily, except in 2013/14, although as a percentage of GDP it has shown a modest decline, except in 2014/15 when it fell by 1%. The wage bill has grown steadily with a sharper increase in 2014/15 although as a percentage of GDP it has shown a steady decline for 2012/13 and 2013/14, rising sharply again in 2014/15. This was the result of civil service pay revision in 2014. Non–wage expenditure has shown a slight increase although as a percentage of GDP it has shown a steady decline, rising only slightly in 2014/15. Capital expenditure has shown a similar trend and has steadily fallen as a percentage of GDP. At the agency level, there is high variance of expenditure (PI-2.1). On an administrative classification, variance of expenditure composition from the budget (current and capital together) was more than 15% in each of the past three years. Much of this appears to be due to major shortfalls in Ministry of Finance expenditure compared with its original budgets although areas like Education, RNR, Transport and Communication and General Public Services have also contributed significantly to the deviation. 2.2.3 Fiscal Policy Targets 2014-2018 In terms of % to GDP, the domestic revenue is expected to be about 17% of the GDP at the end of 11th FYP (FY 2017-18). Since hydropower is the main source of revenue and with expected commissioning of the new mega hydropower projects in the FY 2017-18, the major increase in the revenue is expected in that year. In the 11th FYP, the Government’s main strategic thrust areas to achieve outcomes will be on inclusive social development (poverty reduction, develop health and education sectors), accelerated green economic development and strategic infrastructure development. Total public debt is projected to increase to 111% of GDP in FY 2017-18. The hydropower debt constitutes the major part of the public debt, which is expected to be about 90% of GDP in FY 2017-18. However, it is not a major concern as hydropower sector generates adequate revenue through export proceeds to service its debt. The fiscal balance is projected to be in surplus at 2.7% of GDP in FY 2017-18. This is mainly due to expected increase in revenue from hydropower with the expected commissioning of new hydropower projects. 2. Country Background Information 11 Table 2.2A: General government fiscal performance 2011-14 (million Nu.) 2011/12 2012/13 2013/14 2014/15 Particulars Actual Actual Actual Actual Total revenue 32,855.982 30,656.117 37,819.123 35,096.050 Tax revenue 14,676.929 15,403.118 16,182.774 18,387.335 Direct taxes 8,987.042 9,390.039 11,132.042 11,626.968 Indirect taxes 5,689.887 6,013.079 5,050.732 6,760.367 Provincial taxes - - - - Non-tax revenue 5,571.695 5,609.681 6,979.480 6,643.633 Capital revenue 105.838 88.892 82.356 110.062 Grants 12,501.520 9,554.426 14,574.513 9,955.020 Total expenditure and net lending 33,897.636 34,900.809 33,522.834 33,199.258 Current expenditure 16,705.648 18,096.551 17,941.151 21,032.044 Wage 7,012.836 7,363.355 7,658.545 9,304.837 Non-wage 9,692.812 10,733.196 10,282.606 11,727.207 Provincial expenditure Capital expenditure 18,137.114 18,431.264 16,668.752 15,443.805 Locally financed 8,262.232 7,512.114 8,130.961 8,330.837 Externally financed 9,874.882 10,919.150 8,537.791 7,112.968 Net lending -826.946 -739.889 -1,331.989 -3,687.747 Advance/Suspense (Net) -118.180 -887.117 244.920 411.156 Overall balance -1,041.654 -4,244.692 4,296.289 1,896.792 Financing 1,041.654 4,244.692 -4,296.289 -1,896.795 Foreign (net) -1,007.148 492.306 -867.009 -1,086.409 Loans 6,212.866 16,463.456 1,534.544 1,685.268 Amortization 7,220.014 15,971.150 2,401.553 2,771.677 Domestic (net) 2,048.802 3,752.386 -3,429.280 -810.386 Source: Annual Financial Statements. Table 2.2B: General government fiscal performance 2011-14 (% of GDP) 2011/2012 2012/2013 2013/2014 2014/2015 Particulars Actual Actual Actual Actual Total revenue 36.01% 29.34% 34.32% 28.04% Of which central government Tax revenue 16.08% 14.74% 14.68% 14.69% Direct taxes 9.85% 8.99% 10.10% 9.29% Indirect taxes 6.24% 5.76% 4.58% 5.40% Non-tax revenue 6.11% 5.37% 6.33% 5.31% Capital revenue 0.12% 0.09% 0.07% 0.09% Grants 13.70% 9.15% 13.23% 7.95% Total expenditure and net lending 37.15% 33.41% 30.42% 26.52% Current expenditure 18.31% 17.32% 16.28% 16.80% Wage 7.69% 7.05% 6.95% 7.43% 12 Bhutan: Public Financial Management Performance Report 2011/2012 2012/2013 2013/2014 2014/2015 Particulars Actual Actual Actual Actual Non-wage 10.62% 10.27% 9.33% 9.37% Provincial expenditure Capital expenditure 19.88% 17.64% 15.13% 12.34% Locally financed 9.05% 7.19% 7.38% 6.65% Externally financed 10.82% 10.45% 7.75% 5.68% Net lending -0.91% -0.71% -1.21% -2.95% Overall balance -1.14% -4.06% 3.90% 1.52% Financing 1.14% 4.06% -3.90% -1.52% Foreign (net) -1.10% 0.47% -0.79% -0.87% Loans 6.81% 15.76% 1.39% 1.35% Amortization 7.91% 15.29% 2.18% 2.21% Domestic (net)_ 2.25% 3.59% -3.11% -0.65% GDP figures 91,249.081 104,473.003 110,201.219 125,184.795 Source: Annual Financial Statements. Table 2.2C: Aggregate fiscal data (Nu. millions and % of GDP) 2012/13 % of GDP 2013/14 % of GDP 2014/15 % of GDP Domestic revenue 21,101.691 20.20% 23,244.610 21.09% 25,141.030 20.08% Tax revenue 15,403.118 14.74% 16,182.774 14.68% 18,387.335 14.69% Non-tax revenue 5,698.573 5.45% 7,061.836 6.41% 6,753.695 5.39% Grants 9,562.636 9.15% 14,236.353 12.92% 9,955.021 7.95% Program grants 2,618.453 2.51% 1,749.693 1.59% 2,125.000 1.70% Project-tied grants 6,944.183 6.65% 12,486.660 11.33% 7,830.021 6.25% Total revenue 30,664.327 29.35% 37,480.963 34.01% 35,096.051 28.04% Recurrent expenditure 18,096.551 17.32% 17,941.151 16.28% 22,521.411 17.99% Personnel emoluments 8,076.200 7.73% 8,426.800 7.65% 10,173.589 8.13% (codes 01-05) Goods and services 5,078.100 4.86% 3,414.700 3.10% 5,784.795 4.62% (codes 11-19) Transfers (codes 2,299.751 2.20% 4,009.151 3.64% 4,538.087 3.63% 21-26 & 61-62) Interest (code 31) 2,642.500 2.53% 2,090.500 1.90% 2,024.940 1.62% Capital expenditure 18,431.264 17.64% 16,668.752 15.13% 15,443.805 12.34% (codes 41-63) Net lending -1,618.796 -1.55% -1,425.229 -1.29% -3,276.591 -2.62% Total expenditure 34,909.019 33.41% 33,184.674 30.11% 33,199.257 26.52% Overall balance -4,244.692 -4.06% 4,296.289 3.90% 1,896.794 1.52% Financing 4,244.692 4.06% -4,296.289 -3.90% -1,896.794 -1.52% External 667.608 0.64% -867.009 -0.79% -911.106 -0.73% Domestic -175.302 -0.17% -175.302 -0.16% -175.302 -0.14% Change in balance 3,752.386 3.59% -3,253.978 -2.95% -810.386 -0.65% GDP figures 104,473.003 110,201.219 125,184.795 Source: AFS Tables 1 and 2 and breakdown of recurrent expenditure from Schedule 2. 2. Country Background Information 13 In Table 1 of AFS, Other Receipts (net) are deposits, net of repayments, and have been re-classified as domestic financing. Changes in advances are classified under net lending. Table 2.3: Budget allocation by Sectors (Nu. millions) Sectors 2012-13 2013-14 2014-15 Social Services 29% 29% 28% Health 8% 9% 9% Education 21% 20% 19% Economic and Public Services 41% 38% 35% Agriculture 14% 12% 12% Trade and industry 3% 2% 2% Roads 11% 10% 8% Urban, housing & public amenities 5% 6% 6% Communications 5% 4% 2% Energy 2% 2% 3% Cultural Services 4% 4% 5% Law and Order Services 10% 6% 5% General Public Services 16% 23% 27% Total expenditure 100% 100% 100% Source: National Budget Report. 2.3 Legal and regulatory arrangements for PFM Bhutan’s political system has evolved from an absolute monarchy into a constitutional monarchy with Parliamentary democracy established through the 2008 Constitution of Bhutan, following a decade of planning and consultations, and the transition happening in a peaceful manner. The first elections were held in 2008 and a new government elected directly by the people was installed on the basis of the constitutional provisions. The next elections were held in 2013. Bhutan has an Election Commission, established by the Constitution, which prepares for and oversees the elections to Parliament and local governments. The Druk Gyalpo (the King of Bhutan) is the Head of State. The Constitution of Bhutan provides for a government consisting of three main branches – the Legislative, Executive and Judiciary, and an apolitical Monastic Affairs Commission of the state religion. zz The legislative power is vested in Parliament, which consists of the Druk Gyalpo and two houses: the National Council and the National Assembly. Besides its legislative functions, the Parliament reviews the policies, plans and programs of the government and its performance, the implementation of resolutions and laws passed by the Parliament and issues of national importance and performs legislative scrutiny of the budget and the audit reports. zz The executive power is vested in the Council of Ministers headed by the Prime Minister (who is the leader of the party having majority seats in the National Assembly). The Druk Gyalpo appoints ministers from the members of the National Assembly on recommendation of the Prime Minister. zz Judicial authority is vested in the Royal Courts of Justice and comprises the Supreme Court, the High Court, the Dzongkhag Courts, the Dungkhag Courts, and any other Courts and Tribunals. The appointment of judges, working of the courts and the establishment of the courts are done by the Druk Gyalpo on the recommendation of a National Judicial Commission. 14 Bhutan: Public Financial Management Performance Report Other Constitutional bodies: Bhutan has an Anti-Corruption Commission, established as an independent authority under the Constitution, to take necessary steps to prevent and combat corruption in Bhutan. The Royal Civil Service Commission manages the Civil Service Regulations, which are intended to ensure that only competent staffs are appointed and that their performance meets their job descriptions and performance standards. The promotions and career progress of the staff are also based on their performance. The Gross National Happiness Commission is responsible for setting the planning framework and preparing the five year plans. The 2008 Constitution lays down the principles for Public Financial Management (PFM). These include articles on passage of money bills and financial bills, finance, trade and commerce, and the establishment of a Royal Audit Authority (“to audit and report on the economy, efficiency, and effectiveness in the use of public resources”), Public Accounts Committee (“to review and report on the Annual Audit Report to Parliament or on any other report presented by the Auditor General”) and other constitutional institutions. The key principles of public finance followed by RGoB are: exercise proper management of the monetary system and public finance, ensure that the servicing of public debt will not place an undue burden on future generations, and finance recurrent expenditures only from internal resources of the country. The National Internal Control Framework (NICF) sets the control environment and sets the “tone at the top” and all agencies are obliged to follow this. The key legislation on PFM is the Public Finance Act, 2007 passed on June 20, 2007 by the National Assembly that regulates financial management for the effective and efficient use of public resources, accountability and fiscal policy and vests the overall responsibility of managing the public finances with the Council of Ministers. Major taxes levied in the country are Corporate Income Tax, Business Income Tax, and Personal Income Tax under Direct Taxes; Sales Tax, Import Duty and Excise Duty under Indirect Taxes, and managed by the Department of Revenue and Customs of the MoF. These taxes are governed by specific laws. The Financial Rules and Regulations (FRR) 2001 is a set of over-arching documents governing PFM in Bhutan and consists of a main document, the Financial Management Manual and six technical documents, the Finance and Accounting Manual; the Budget Manual; the Aid & Debt Management Manual; the Property Management Manual; the Procurement Manual; and the Revenue Manual. These cover the following tools of financial management namely: cash flow management; procurement management; asset management; debt or liabilities management; accounting; and budgeting. Further guidance is contained in the Manual on Standard Operating Procedures for Public Debt Management, 2007 and the Revised Procurement Rules and Regulations 2009. The NICF casts responsibility on ministries and other autonomous agencies to identify and evaluate risks at departmental, divisional and operating unit levels; establish policies, plans, procedures and systems to deal with risks and conduct a self-assessment of the five control components. Risks are identified in budget preparation: both revenue and expenditure are projected under multiple scenarios. RGoB closely monitors the fiscal risks from public enterprises through their annual reports and key data are included and discussed in the Budget Reports and the audit report. Local governments do not generate any fiscal risks as their activities are regularly monitored and they do not borrow. The Public Enterprises Division and Debt Management Division monitor risks arising out of operations of the public enterprises, debt and contingent liabilities while the Department of Revenue and Customs manages risks on taxpayer registration, assessment, collection and audit. 2. Country Background Information 15 The Public Finance Act, read with the FRR, empowers the MoF to set the government accounting standards and determine the financial reporting framework. Revenue and expenditure accounting and control is done on computerized applications that also determine the control activities. Ministry of Finance is the parent agency for a government-wide internal audit function. An Internal Audit Central Coordinating Agency reports to the Finance Secretary administratively and to the high level Committee of Secretaries in case of any disrespect or disregard of any internal audit functions and its recommendations. The Annual Financial Statements (AFS) of the Government are prepared by the Department of Public Accounts, MoF. Audit of the Government in Bhutan is governed by the Audit Act, 2006. The AFS are audited by the RAA, which tables in Parliament an annual audit report on the AFS and reports on its other audit work (e.g. the RAA has recently tabled a report on Public Debt). The RAA places emphasis on personal accountability in holding individuals accountable for their PFM responsibilities and imposing personal sanctions until rectification is complete. Article 25 of the Constitution of Bhutan provides for the appointment of a five-member Public Accounts Committee (PAC) to review and report on the Annual Audit Report of the Royal Audit Authority (RAA) or on any other report presented by the Auditor General. The PAC is a joint committee of both Houses of Parliament (with members from the ruling and opposition parties) and is governed by the Rules of Procedure of the Public Accounts Committee (2015).9 2.4 Institutional arrangements for PFM Bhutan is a unitary state. The public sector in Bhutan comprises the central government (including the local governments - dzongkhags, gewogs and thromdes, constitutional bodies and autonomous institutions), which together form the “budgetary sector” and extra-budgetary bodies such as the trust funds and the National Pension and Provident Fund (social security organization), and the state-owned enterprises/corporations. The structure of the public sector is depicted in Table 2.5. Ministries/Departments: RGoB has 10 ministries each divided into several departments. Each Ministry is headed by an elected Minister (political head) with a Secretary being the administrative head. They, together with various divisions (such as policy and planning, administration and finance, human resource, internal audit), form the Secretariat. Broadly, the Secretariat decides the policies while the departments implement the programs. Local Government: Political power is delegated to elected local governments to facilitate the direct participation of the people in the development and management of their own social, economic and environmental well-being. The Local Government Act of 2009 establishes local governments at two levels: 20 dzongkhags (first tier local government) with each dzongkhag consisting of gewogs, (second- tier local governments serving groups of communities) total of gewogs being 205. There are four class A thromdes or city corporations which are autonomous while other thromdes or municipalities are part of the dzongkhags. 9 The PAC’s terms of reference include reviewing and reporting to Parliament on the various reports of the RAA that the PAC may choose to review and accounts of all agencies in which public funds have been invested. The RAA audit reports are scrutinized, debated, and results in hearings. The PAC has the power to summon any person before it to give evidence or produce documents. A ministry or department is represented by its Secretary or Head of Department and, if permitted, a senior officer can represent the ministry/department. The PAC has the power to compel attendance and production of documents. 16 Bhutan: Public Financial Management Performance Report Constitutional offices: There are four constitutional offices in Bhutan – the Royal Civil Service Commission, Anti-Corruption Commission, Election Commission and the Royal Audit Authority. They work independently within the roles defined in the Constitution and Royal Charters. Autonomous bodies: There are 29 autonomous bodies including the Prime Minister’s office, the National Council and Assembly, the Judiciary, office of Attorney General, and the Gross National Happiness Commission besides institutes, councils and the Thromdes. Trust Funds: RGoB has set up five trust funds outside the government for specific mandates in the areas of environment, health, culture, education and telecom. State-owned enterprises: There are nine state-owned enterprises in Bhutan. One of the major public enterprises is Druk Holding and Investments Ltd, which has holdings in another 20 companies. The State-Owned Enterprise sector (SOE) contributes about 41% of the government’s revenue; SOE assets are 192% of the country’s GDP and long-term debt is 27% of GDP. Total equity holding of RGoB is over Nu. 48,000 million. The SOE oversight is exercised by the Public Enterprises Division in the MoF. The majority of government expenditure is incurred at the level of the 10 ministries; the local governments account for 25% of the expenditure while autonomous bodies account for 11%. In 2013/14, local governments received an allocation of Nu. 16,148 million which was 34% of the total outlay10. The PEFA assessment covered the Government sub-sector (budgetary). Public enterprises were covered to the extent of assessing the oversight of the government over this sub-sector. Table 2.5: Structure of the public sector (number of entities and financial turnover) (All figures for 2013/14 in Nu. million) Public sector Government subsector Public corporation subsector Year: 2014/15 (numbers) Social Extra- security Nonfinancial Budgetary Financial public budgetary funds public unit corporations unit corporations Ministries (10) 24,218.8 Constitutional bodies (4) 483.4 Autonomous bodies (29) 3,991.1 Dzongkhags (20) 7,648.3 Gewogs (205) 1,415.8 Trusts Funds (5) 161.1 National Pension and 1,279.8 Provident Fund (1) Public enterprises 37,082.0 9,043.411 (9 with direct government holding and 20 with equity held by Druk Holding) Others Source: Budget Report 2015/16 and Annual Financial Statements (audited) 2013/14. Note: Figures for government sector represent expenditure; while for others, the figures are for revenue. 10 This includes provisions for local governments provided in the budget of ministries. 11 Bhutan Development Bank; Bhutan National Bank; Bank of Bhutan; Royal Insurance Corpn. 2. Country Background Information 17 Table 2.6: Financial structure of central government – budget estimates (All figures for 2015/16 in Nu. million) Central government Budgetary Extra-Budgetary Social Security Total Year Unit Units Funds Aggregated Revenue 41,017.9 - - 41,017.9 Expenditure 47,348.2 - - 47,348.2 Transfers to (-) and from (+) other units of - - general government Liabilities - - zzProjected Public Debt 150,576.7 150,576.7 Financial Assets - - - - Non-financial assets - - - - Source: Budget Report 2015/16 na = not available. Table 2.7: Financial structure of central government – actual expenditure (All figures for 2013/14 in Nu. million) Central government Year Extra-budgetary Budgetary Social security Total Units Trust Unit Funds NPPF Aggregated Funds Revenue 37,819.112 161.1 1,279.8 - Expenditure 34,609.9 366.5 70.5 - Transfers to (-) and from (+) other units of - - - - general government Liabilities - - - zzPublic Debt 108,370.3 zzRGoB’s share of SOE borrowing 26,233 Financial Assets (-) 2,562.813 4327.3 17,498.816 - zzCash/Bank balances 943.614 zzGovt. Equity Holding 813.715 48,032.4 Non-financial assets Not available Source: Budget Report 2015/16 and Annual Financial Statements (audited) 2013/14. Note: As the figures are not comparable/complete, these have not been aggregated. MoF is responsible for implementing the system of PFM in Bhutan. The Ministry is divided into several divisions on functional lines and administers many key departments (see figure below). MoF has four departments dealing respectively with revenue administration, the budget, accounts and asset 12 Includes Nu. 14,236 being international grants received. 13 Balance in Consolidated Account. 14 Closing balances with the Bhutan Information and Communication Media Authority, and in the Refundable Deposits Account and the Revolving Fund Account. 15 Closing balances in 333 Current Deposit Accounts of Gewogs, Judiciary, Municipalities and others held outside the consolidated fund. 16 Total assets of the Fund. 18 Bhutan: Public Financial Management Performance Report management. The Public Enterprises Division has oversight of the SOEs and the Central Coordination Unit deals with government internal audit. Organogram of Ministry of Finance, RGoB FINANCE MINISTER FINANCE SECRETARY SECRETARIAT Department of Department Department Department Revenue & of National of Public of National Customs Budget Accounts Properties Public Procurement Policy Division Human Planning & Internal Public ADM & Rules Resource Policy Audit Enterprise Finance & Legal Division Division Division Division Division Division The Ministries and departments have Administration and Finance Divisions (AFD) and Dzongkhags and Autonomous bodies have Administration and Finance Sections (AFS) to manage their financial affairs. Finance personnel (budget officials, accounts officials, revenue and customs officials, procurement officials and internal auditors) are placed in all the budgetary bodies across the country. Accounts personnel are also placed at the lowest level of the administration i.e. Gewog Administration. There are more than 700 National Accounts Service (NAS) personnel in the country. The responsibility of Finance personnel includes mobilization and judicious application of resources, management of the equity portfolio and debts of the Government, proper custody, use and maintenance of Government properties, clear and transparent accounting of all public receipts and expenditures and reporting on them. The MoF tables before Parliament three key documents: the audited financial statements; the budget policy and fiscal framework statement; and the budget and appropriation bill. The Ministry issues rules and regulations across government. It requires budgetary and other bodies to follow the financial management and accounting policies of the government. MoF is responsible for preparing the budget which is subject to legislative scrutiny and Parliamentary approval. Recently, a Finance Committee of Parliament has been constituted for review and assessment of the budget proposals. The Policy and Planning Division of the MoF compiles a Budget Policy and Fiscal Framework Statement to match overall expenditure with the availability of resources in the medium term on a rolling basis. A Medium Term Fiscal Framework has been instituted including a system of revenue forecasting based on economic indicators such as GDP, imports and consumption. Projections 2. Country Background Information 19 are examined by a Macroeconomic Framework Coordination Technical Committee and approved by a Macro Fiscal Coordination Committee. The former also approves the annual capital outlay based on the five-year plan. The Royal Monetary Authority is the Central Bank. The Government’s banking services for payment and revenue collection are managed by the Bank of Bhutan, a Government owned public corporation. Audit is conducted by the RAA, which is the Supreme Audit Authority in Bhutan and it has the mandate over the entire public sector. Bhutan’s development planning is guided by the development framework of Gross National Happiness (GNH). The Constitution directs the State “to promote those conditions that will enable the pursuit of Gross National Happiness”. A Gross National Happiness Commission (GNHC) has been established, under the Prime Minister, to ensure that GNH is mainstreamed into the government planning, policy making and implementation process. The GNHC has developed a tool (2015) and every project is screened on 22 parameters and scored which sets the priority of selecting (or declining) the project. The Bhutan 2020: A Vision for Peace, Prosperity and Happiness (1999) and the Economic Development Policy (2010) also guides planning in Bhutan that culminates in five year plans. The country is presently implementing the 11th Five Year Plan (2013-2018). 2.5 Other important features of PFM and its operating environment The annual budget prepared by MoF is presented to Parliament and formal approval is accorded by Parliament in its summer session along with a supplementary (revision) budget for the on-going year. Budget formulation, execution and reporting is based on every level of administrative, economic and functional classification using GFS/COFOG-compliant classification. The Budget Policy and Fiscal Framework Statement contains key aggregates of potential deficit, external and internal debt, as well as instruments of financing are also projected. The Budget Report contains the revenue picture and budget ceiling for spending agencies and also clarifies the major differences in expenditure from the time of budgeting at the beginning of the previous fiscal year to its revision in the middle of the current year and the final actual outcomes for both expenditure and revenue accounts. The budget is managed by the MoF through its departments. After the budget is approved by Parliament, the Department of National Budget notifies all the budgetary agencies of their approved budgetary provisions. Drawing and Disbursing Officers (DDOs) ensure that all claims/bills are cleared within one month of their receipt. The Public Expenditure Management System (PEMS), is the basis for budget execution, in-year reporting and annual financial reporting, and covers the revenue and expenditure of all government budgetary bodies - constitutional bodies, autonomous bodies, the judiciary, ministries, dzongkhags and gewogs. Externally financed projects are fully accounted in the Budget Reports and Annual Financial Statements. It is mandatory for all budgetary agencies to initiate, process and complete transactions and accounts in the PEMS on a daily basis. PEMS does not cover the revenues and expenditures of public enterprises, the National Pension Fund and some trusts. All public monies not allocated to specific purposes by law are deposited in a Consolidated Fund maintained with the central bank. Government receipts and payments are segregated, with payments made from one set of bank accounts and receipts paid into another. Expenditures are limited by the amounts provided in the annual budget and by letters of credit issued by MoF. Letters of credit are 20 Bhutan: Public Financial Management Performance Report instructions to banks to honor checks drawn on specified accounts up to specified limits. Unless the budget is amended, MoF cannot issue letters of credit that exceed the sums provided in the budget. This system enables individual units to fund their expenditures, with their parent ministries acting as accounting units. A system of in-year budget execution reports has been instituted recently. Cash balances of the Government are consolidated and monitored daily. The balances in the subsidiary accounts - the Budget Fund Account, Government Revenue Account, Non-Revenue Receipts and Deposits Account are consolidated daily into the Government Consolidated Account. The daily cash position of the budgetary operations of the Government is ascertained from this account. The cash balances with the various budgetary agencies are reported on a monthly basis through the submission of monthly accounts and at the end of the fiscal year this consolidated figure is reported as the closing cash balance of the Government in the consolidated receipts and payments statement of the Government. Government revenue and expenditures are managed through computerized applications - PlaMS or Planning and Monitoring System of GNHC; MYRB or Multi Year Rolling Budget System of the Department of National Budget; PEMS or Public Expenditure Management System of the Department of Public Accounts; and RAMIS or Revenue Administration Management Information System of the Department of Revenue and Customs. This is supported by the Civil Service Information System (CSIS) of the Royal Civil Service Commission for payroll accounting. The AFS has information on revenues, expenditures, grants and loans for each budgetary unit and includes statements of the government’s equity portfolio in corporations and financial institutions, government guarantees to various organizations and outstanding public debt. The AFS is normally compiled within six months from close of the financial year and submitted to the RAA for audit. Internal Audit is guided by a Charter, Code of Conduct and a Manual. Internal audit units in the ministries report directly to the heads of the agencies in which they are established. The audits performed by internal audit are characterized by being both risk-based and transaction-based. They meet the professional standards of internal auditing. Local governments do not have legislative functions, but they may make rules and regulations consistent with laws made by the Parliament. A system of fund allocation to the local governments has been instituted based on population, poverty index, geographical area and transport cost.17 There are some extra-budgetary bodies established by law, but funds handled by them are not significant. Revenue and expenditure outside the government’s budget is less than 5% of the total. In a recent development (2014/15), Ministers are now required to sign Annual Performance Agreements (APA) with the Prime Minister with subsidiary APAs signed between the Minister and the Secretaries and between Secretaries and the departmental heads as well. Since 2015/16, all budgeted activities are required to be aligned to their APAs. Achievement of APAs is directly monitored by the Government Performance Management Division under the Prime Minister’s Office. The Department of National Budget and the Prime Minister’s Office are planning to develop a new system that will be linked to outcome/ output based budgeting. Some performance audits have also been done by the RAA. Key fiscal information is publicly disclosed primarily through the Budget Report and the annual financial statements. 17 A discussion on the PFM arrangements of local governments is provided in Annex 5. 2. Country Background Information 21 Assessment of 3. PFM Performance Pillar I – Budget reliability 3.1  (Performance indicators 1 to 3) PI-1: Aggregate expenditure out-turn Dimension to be assessed The difference between actual expenditure and the originally budgeted expenditure This indicator is intended to assess the accuracy of budgeting and the degree of enforcement of the budget. Table 3.1.1.1 shows the Actual and Budgeted expenditure for the last three years. Table 3.1.1.1: Actual and budgeted expenditure for last three years (Nu. millions)s 2012/13 2013/14 2014/15 Original Actual Original Actual Original Actual budget expenditure budget expenditure budget expenditure Total expenditure 34,515 36,528 36,114 34,610 37098 36,477 Actual/budget % 105.8% 95.8% 98.3% Source: AFS 2014 & MYRB-PEMS. Note:  Expenditure includes debt interest and expenditure for donor funded projects (whether from loans and grants) but not lending by RGoB or RGoB’s repayments of loans. Expenditure includes both current and capital expenditure. Score Minimum requirements for scores 1.1: Aggregate expenditure out-turn A Aggregate expenditure out-turn was between 95% and 105% of the approved aggregate budgeted expenditure in at least two of the last three years. B Aggregate expenditure out-turn was between 90% and 110% of the approved aggregate budgeted expenditure in at least two of the last three years. C Aggregate expenditure out-turn was between 85% and 115% of the approved aggregate budgeted expenditure in at least two of the last three years. D Performance is less than required for a C score. Indicator/Dimension Score Brief justification for score (with cardinal data used)  ggregate expenditure out-turn PI-1: A A In only one year, 2012/13, the ratio of actual expenditure compared to original approved budget to the original budget was outside the range 95-105% 3. Assessment of PFM Performance 23 The major variances are due to: zz Incorporation of donor-funded projects finalized and signed after budget approval by the Parliament. Such incorporations are authorized by the PFA 2007, clause 60 on Revision of Budget and Appropriations. zz First year of 11th Five Year Plan (2013-18) was delayed as the Parliament was constituted only in September 2013. zz Slow fund disbursements by the donors. On-going and planned reforms Budget and expenditure management system was transferred from a standalone system to a web- based and real time online system called MYRB (Multi-Year Rolling Budget) since FY 2010/11. This is a major change in the financial management system since the last PEFA exercise in 2010. Several new reports can be generated through the new system. Generation of financial information has become far more efficient and in real time using MYRB system than it was in the past. The new system has improved monitoring of budget and expenditure, and shortened processing time for incorporation of donor funds. Also, the budget call notification includes submission of pre-requisite documents along with the budget proposals to expedite implementation of the proposed activities. These pre-requisites include social clearance, estimates with drawings and designs, environmental clearance for construction works, etc. These pre-requisite documents that DNB initiated along with the budget proposals are to reduce the gap between the budget allocation and the actual expenditure by the budgetary agencies. DNB reviews the proposed budget estimates to see that there is no lavish designs and unwarranted size of constructions, etc. before the concerned budgetary agency can award such works. All these strategies are aimed at reducing the variance. Further, agencies are required to sign Annual Performance Agreement (APA) with the Prime Minister wherein all the budgeted activities are required to be aligned to their APA. This will also drastically reduce the variance by curtailing unwanted activities that the agencies propose earlier. Currently there are three independent systems that should be integrated. However, since these systems were developed independently using different parameters, there are integration issues. To address this, DNB is developing a new integrated system. This system, which seeks to integrate PlaMS, PEMS and MYRB, is expected to address the current integration issues by incorporating relevant parameters. PI-2: Expenditure composition out-turn This indicator is intended to measure the extent to which reallocations between budget lines have contributed to variance in expenditure composition beyond the variance resulting from changes in the overall level of expenditure. It is an indicator of adherence to budget policy. Dimension to be assessed (Scoring Method M1) Dimension 2.1: Expenditure composition out-turn by function On an administrative classification, variance from budget of expenditure composition (current and capital) was 6.7% in 2012/13, 15.8% in 2013/14 and 11.1% in 2014/15 (see Annex 6). This is rated C, as variance was less than 15% in two of the last three years. 24 Bhutan: Public Financial Management Performance Report DNB now reviews the proposed budget estimates to see that there is no lavish design and unwarranted size of constructions, etc. before the concerned budgetary agency can award such works. All these strategies are aimed at reducing variance. Dimension 2.2: Expenditure composition out-turn by economic type The variance on the economic classification is 8.1%, 10.5% and 4.9% over the last three years (see Annex 6). In 2012/13, the main variance was on interest, which was budgeted at Nu. 2,041 million, whereas actual interest paid that year was Nu. 2,642 million. In 2013/14, capital expenditure funded externally was 31% over the original budget, slightly offset by under-spending on the domestic capital budget. In 2014/15, personnel emoluments were 19% over the original budget. Despite these individually large variances, the overall variance was less than 10% in two years out of three, which gets a B rating. Dimension 2.3: Expenditure from contingency reserves The contingency fund kept by the Department of National Budget is transferred to the various agencies as required and expenditure booked under the respective implementing agencies. In FY 2013/14, the contingency (Reserve Fund) was Nu. 4,376 million, which was 13% of total expenditure. Though this is a relatively high proportion of total expenditure, no expenditure is booked under contingency budget head. This dimension is, therefore, rated A. The overall rating for this indicator, using the M1 method of combining the dimensional scores,is C+. Major sources of deviation are in pay and allowances, travel, office supplies, structure building (roads & bridges), capital grants to NGOs and purchase of vehicles. There were no major changes made in the economic classification. However, DNB and the Prime Minister’s office will be incorporating a new objective in the MYRB system whereby budgeted activity will be tagged to Annual Performance Agreements (APAs) in the system. This will be initiated only from FY 2016-17. Thereafter, any budget the agency proposes will have to be linked to an overall national target. Score Minimum requirements for scores 2.1: Expenditure composition out-turn by function A Variance in expenditure composition by program, administrative or functional classification was less than 5% in at least two of the last three years. B Variance in expenditure composition by program, administrative or functional classification was less than 10% in at least two of the last three years. C Variance in expenditure composition by program, administrative or functional classification was less than 15% in at least two of the last three years. D Performance is less than required for a C score. 2.2: Expenditure composition out-turn by economic type A Variance in expenditure composition by economic classification was less than 5% in at least two of the last three years. B Variance in expenditure composition by economic classification was less than 10% in at least two of the last three years. C Variance in expenditure composition by economic classification was less than 15% in at least two of the last three years. D Performance is less than required for a C score. 3. Assessment of PFM Performance 25 2.3: Expenditure from contingency reserves A Actual expenditure charged to a contingency vote was on average less than 3% of the original budget. B Actual expenditure charged to a contingency vote was on average more than 3% but less than 6% of the original budget. C Actual expenditure charged to a contingency vote was on average more than 6% but less than 10% of the original budget. D Performance is less than required for a C score. Indicator/Dimension Score Brief justification for score PI-2: Expenditure composition out-turn C+ M1 method of combining dimension scores Expenditure composition out-turn by 2.1:  C Variance on administrative classification was less than function. 15% in two of the last three years.  xpenditure composition out-turn by 2.2: E B Variance on economic classification was less than 10% economic type. in two years out of three. 2.3: Expenditure from contingency reserves. A Actual expenditure charged to contingency vote was nil in each year. PI-3: Revenue out-turn This indicator is intended to assess the quality of revenue forecasting by comparing revenue estimates in the original approved budget to actual domestic revenue collection based on tax and non-tax recurrent revenues and grants. Forecasting methodology and assumptions Revenue forecasting is done by DRC on a medium and long-term basis as part of the Medium Term Fiscal Framework (MTFF) and basically covering the five-year plan period. The forecasting methodology uses economic indicators like GDP, imports and consumption as a base. Normally, revenue projection is intended to cover all recurrent expenditure and part of capital expenditure. DRC’s projections are examined by the Macroeconomic Framework Coordination Technical Committee (MFCTC), of which DRC is a member, and approved by Macro Fiscal Coordination Committee (MFCC). Forecasts are re-examined on a quarterly (i.e. October, January, April and June) basis. It is important to note that the initial forecast or estimates are done on a baseline scenario assuming no policy changes. Any policy changes are incorporated and reflected in the revised revenue. The revenue estimates are revised based on the actual collections for the preceding year and incorporating any policy changes that might impact the revenue. Therefore, if the variation is compared between estimates and the actual revenue then the deviation, as prescribed in the PEFA framework, the deviation is much higher than the variation between revised and actual revenue. For FY 2012/13 the revenue estimate was based on a broad assumption that the economic activities will continue to perform well, and no major policy changes would take place. The growth in tax revenues (both direct and indirect taxes) was estimated at 13.7% while non-tax revenue was projected to increase by 2.9%. The increase in revenue was expected mainly from Business Income Tax (BIT) and Personal Income Tax (PIT) under tax revenue along with an increase in non-tax revenue. Estimated profit transfer was lower than the revised estimates of FY 2011/12 based on information provided by the RMA. 26 Bhutan: Public Financial Management Performance Report The estimate for FY 2013/14 projected a 3.3% increase over the previous year. While the direct tax revenue was estimated to be at least the same as the previous year, indirect tax was expected to be lower by 17.4% since in the previous fiscal years two import year’s claims of excise refund from GoI were received whereas only one import year was to be received for the year. The projections for the FY 2014-15 were computed using the effective tax rate incorporating the following policy changes during the year: zz Tax measures impact on sales tax, customs duty and green taxes, arrears of excise duty from GoI, excise duty claims for the year 2013, impact of salary revision on PIT, additional royalty from tourism due to relaxation of minimum daily package rate introduced for tourists from Thailand in order to celebrate Bhutan-Thailand Friendship. Adjustments for the delay in the commissioning of Dagachhu Hydropower Project and on account of Chukha Hydropower Plant’s revision of export tariff rates retrospective from January 2013 was received in the previous FY, it was also adjusted from the original revenue estimates. zz The projections for the fiscal year were computed using the effective tax rate incorporating the following changes during the year. zz The remittances from the commissioning of Dagachhu hydropower plant, higher remittances from BPC and profit transfer from the Royal Monetary Authority was included in the projection for the year. zz However, it was noted that the revenue growth may be affected if Dungsam Cement Corporation Ltd. continues to incur losses as there will be no payment of CIT and dividend. Any change in fiscal measures and exemptions would also impact the revenue growth. zz At the time initial projection was being worked on, the GDP was growing by 7% from FY 2014-15 to FY 2015-16, and therefore it was also assumed that domestic revenue would be growing at least by 5% (increase on the 2014-15 projections). Non-tax revenue was projected to increase by 7.2% mainly on account of higher dividend projections. However, interest receipts from corporations were projected to be lower compared to FY 2013/14 due to a change in the repayment schedule from annual to semi-annual. It is important to note that the effect on revenue through fiscal measures or policy changes has not been taken into account in the estimation of revenue for FY2014/15. However, the major deviation noted under indirect taxes particularly on customs duty and green tax is mainly due to introduction of policy changes as part of fiscal measures such as sales tax on telecom services and green tax on fuel along with the revision of sales tax and customs duty on import of vehicles. Further, arrears of excise duty refund received from GOI BTN 449 million and BTN 150 million as an additional royalty from tourism. However, BTN 486.7 million on account of delay in commissioning of Dagachu Hydropower Project and BTN 450 million on account of CHP’s revision of export tariff rates retrospective from January 2013 which was received in the previous FY were adjusted from the original revenue estimates and the revenue was revised. 3. Assessment of PFM Performance 27 Institutional arrangements for revenue forecasting The Ministry of Finance has instituted a Macroeconomic Framework Coordination Committee (MFCC) and Macroeconomic Framework Coordination Technical Committee (MFCTC) comprising members from all relevant agencies for the forecasting of macroeconomic variables. Each member is responsible for maintaining and updating the respective files and the Department of Revenue and Customs (DRC) maintains and updates the revenue file and forecasting of national revenue. The file is documented and maintained in Budget Policy and Fiscal Framework Statement in the excel format. The forecast done by the MFCTC is put up to the MFCC for endorsement. MFCC is chaired by the Finance Secretary and represented by the head of the department or organization of all the relevant agencies. The main sources of data on estimates of revenue are a revenue projection file (BPFFS file) which is part of the Medium Term Fiscal Framework (MTFF) exercise and is reported in the annual National Budget Report. Further, the actual collections of revenue are reported annually in the National Revenue Report by the Department of Revenue and Customs (DRC), which is sourced from the Revenue Accounting System of the department. Gross National Happiness Commission (GNHC) is responsible for collecting grants data which are updated before the annual budget ceiling is finalized for each budgetary agency. The projection for Grants in the annual budget is based on the MoU drawn between GNHC and Development Partners. Thereafter the implementing agencies draw up annual work plan for budget estimations that is submitted through annual budget proposals. The accuracy of revenue forecasting is largely dependent on the information provided by other agencies especially the electricity file since hydro sector is one of the main sources of revenue. The unpredictable nature of certain sources of revenue, unforeseen policy reforms, inadequate information and other external factors affect the reliability of the estimates. From the hydro sector, revenue is received in the form of corporate income tax, dividends and profit transfers. Dimension 3.1: Aggregate revenue out-turn Aggregate revenue was 96.4% of original budget in 2012/13, 125.4% in 2013/14 and 113% in 2014/15. This is between 92% and 116% of budget in two years out of three, and is rated C. If the variation in aggregate revenue is considered without taking external grants into consideration the variation in the aggregate revenue would be 99.9%, 106.6% and 101.4% which would be in the range for a score of A. With decentralization of local government, local taxes are retained by the gewogs to meet local expenditures. Further, with creation of thromdes the taxes collected by the thromdes in the form of land tax, house and building tax and ownership transfer tax are retained to meet their expenditure. Such revenues are not reported and accounted in the national revenue, but they are insignificant (approximately 1% of total revenue). Dimension 3.2: Revenue composition out-turn Detailed data on execution of budgeted revenue forecasts is provided in the annual budget report. The main revenue is broken down partly in GFS classification. Annex 6 converts the classification to GFS 2014 classification, and calculates composition variance. Variance was 5.2% in 2012/13, 21.8% in 2013/14 and 16.2% in 2014/15, which is rated D. About half of the total variance was on external grants. 28 Bhutan: Public Financial Management Performance Report Grants are not entered into the budget unless they are confirmed, DNB incorporates only those projects where 1st tranche of releases are received, yet grant revenue varied compared with the original budget in the years under consideration. The variance in the grant figure is due to non-receipt of funds on time and incomplete procurement and administrative formalities at the agency level. In the last two years grants exceeded the budgeted amounts either because of carryover from previous years or because of conservative budgeting. Without external grants revenue composition would be 2.4%, 3.3% and 4.5% qualifying for a score of A. Score Minimum requirements for scores 3.1: Aggregate revenue out-turn A Actual revenue was between 97% and 106% of budgeted revenue in at least two of the last three years. B Actual revenue was between 94% and 112% of budgeted revenue in at least two of the last three years. C Actual revenue was between 92% and 116% of budgeted revenue in at least two of the last three years. D Performance is less than required for a C score. 3.2: Revenue composition out-turn A Variance in revenue composition was less than 5% in two of the last three years. B Variance in revenue composition was less than 10% in two of the last three years. C Variance in revenue composition was less than 15% in two of the last three years. D Performance is less than required for a C score. Indicator/Dimension Score Brief justification for score PI-3: Revenue out-turn D+ M2 method of combining dimension scores 3.1: Aggregate revenue out-turn. C Actual revenue was between 92% and 116% of budget in two years out of three. 3.2: Revenue composition out-turn. D Variance was more than 15% in 2 of the last 3 years. Ongoing and planned reforms DRC is improving classification of the main types of revenue according to GFS 2014. Pillar II – Transparency of public finances 3.2  (Performance indicators 4 to 9) PI-4: Budget classification A robust classification system allows the tracking of spending on the following dimensions: administrative unit, economic, functional and program. Where standard international classification practices are applied, governments can report expenditure in GFS format and track poverty- reducing and other selected groups of expenditure. The budget will be presented in a format that reflects the most important classifications (usually administrative combined with economic, functional and/or programmatic) and the classification will be embedded in the chart of accounts to ensure that all transactions can be reported in accordance with any of the classifications used. 3. Assessment of PFM Performance 29 In countries where a poverty reduction strategy is a core element in the government’s overall policy framework, the definition of poverty reducing expenditure is normally linked directly to the classification of the budget. The international standard for classification systems is the Government Finance Statistics (GFS) - www.imf.org/external/pubs/ft/gfs/manual/index.htm - which provides the framework for economic and functional classification of transactions. Under the UN-supported Classification of Functions of Government (COFOG) - http://unstats.un.org/unsd/cr/registry/regcst.asp?Cl=4&Lg=1 - which is the functional classification applied in GFS, there are ten main functions at the highest level and 69 functions at the second (sub-functional) level. No international standard for programmatic classification exists, and this type of classification is used in widely deviating ways across countries. This assessment is based on the 2014/15 budget formulation, execution and reporting. Dimension 4.1: Extent to which the classification system used for formulation, execution and reporting of the central government’s budget is consistent with international standards. The major changes since 2010 have been that the standalone Central Budgeting & Accounting (CBA) System and Budget and Accounting System (BAS) have been merged as Multi-Year Rolling Budgeting (MYRB) system and made a web-based real time system. Today, financial information can be generated online efficiently. As explained above, budget proposals starting from FY 2010/11 have been done online using the web-based MYRB system. The primary objective of MYRB is to address the shortcomings of the earlier CBA system, viz. 1. Annual based budget which lacked medium/long-term perspective; 2. Weak linkage between national policy priorities and budget; 3. Resource un-predictability; 4. Line itemized and activity based budgeting. This allowed no flexibility in resource utilization by the implementing agency. The classification remains the same since the last PEFA exercise in 2010 as follows: 1. The three categories of administrative classification are: a. Autonomous agencies b. Ministries c. Dzongkhags and Gewogs 2. Government expenditures are classified into four main economic categories, namely: a. Current expenditure b. Capital expenditure c. Lending d. Repayment These categories are further classified economically into objects of expenditure in accordance with the chart of accounts (Finance and Accounting Manual). This is for the purpose of assessing and monitoring 30 Bhutan: Public Financial Management Performance Report the resource allocation and general macro-economic implications of the budget transactions. The economic classification is converted to a GFS classification by a bridging table for the purpose of annual IMF-GFS reporting. 3. Government expenditure is also classified by activity and sub-activity (Budget Manual). A bridging table is used to convert this to a COFOG classification down to sub-functional level, and in some cases to a third level. For instance, the sub-function Pre-primary and primary education (GFS code 70910) is divided between Pre-primary education (70911) and Primary education (70912). Expenditure on primary education in 2013/14 was Nu. 4,858.44m. 4. Government expenditure is also classified by source of funds (Financing Item Code). 5. Government receipts are classified broadly as: a. Taxes and duties b. Fees and income from property and enterprises c. Proceeds from sale of land and other capital assets d. Recovery of on-lending e. Grants from multilateral and bilateral sources f. Borrowings g. Receipts from other sources A bridging table is used to convert this to the IMF-GFS classification. Score Minimum requirements for scores 4.1: Budget classification A Budget formulation, execution, and reporting are based on every level of administrative, economic, and functional classification using GFS/COFOG standards or a classification that can produce consistent documentation comparable with those standards. Program classification may substitute for sub- functional classification if it is applied with a level of detail at least corresponding to sub-functional classification. B Budget formulation, execution, and reporting are based on administrative, economic (at least “Group” level of the GFS standard—3 digits), and functional/sub-functional classification, using GFS/COFOG standards or a classification that can produce consistent documentation comparable with those standards. C Budget formulation, execution, and report in gare based on administrative and economic classification using GFS standards (at least level 2 of the GFS standard—2 digits) or a classification that can produce consistent documentation comparable with those standards. D Performance is less than required for a C score. Indicator/Dimension Score Brief justification for score PI-4: Budget classification. A Budget formulation, execution and reporting is based on every level of administrative, economic and functional classification using GFS/COFOG-compliant classification. Ongoing and planned reforms It is expected that MYRB will improve macroeconomic balance by developing a realistic fiscal revenue framework, improve resource allocation to strategic priorities within and across sectors, increase resource predictability and provide line agencies with budget ceilings and at the same time more autonomy to make decisions for increased efficiency and effectiveness. 3. Assessment of PFM Performance 31 With the introduction of Annual Performance Based Budgeting in 2014/15, the Department of National Budget and the Prime Minister’s Office are planning to develop a new system that will be linked to outcome/output based budgeting, which is lacking in the current system. The new initiative will be undertaken after detailed study by the IT personnel of the Prime Minister’s Office and the Ministry of Finance/DNB. PI-5: Budget documentation Annual budget documentation (the executive’s budget proposals for the next fiscal year with supporting documents) for 2015/16, as submitted to the legislature for scrutiny and approval, should allow a complete picture of central government fiscal forecasts, budget proposals and out-turn of the current and previous years.18 Since the last PEFA assessment, the major changes are the formation of a Finance Committee in the Parliament to review and assess the budget proposals presented to the National Assembly by the Finance Minister from FY 2015-16. The Finance Committee’s findings and recommendations are also presented to the National Assembly for debate within 10 days from the date of Budget report presentation by the Finance Minister. For FY 2015/16, the budget documents presented to Parliament were: zz The Annual Financial Statement for financial year 2013/14 zz The Budget Report zz Budget Bill zz The Budget Supplementary Appropriation Bill. This indicator assesses the comprehensiveness of the information provided in the annual budget documentation, as listed below in Table 3.2.5.1.  ssessment of comprehensiveness of the information provided in the Table 3.2.5.1: A annual budget documentation Basic elements Provided?  orecast of the fiscal deficit or surplus (or accrual operating 1. F Yes, in the annual budget report, Chapter 3 result). Previous year’s budget out-turn, presented in the same format 2.  Yes, in the annual budget report, Chapter 1 as the budget proposal. Current year’s budget (either the revised budget or the 3.  Yes, in the annual budget report, Chapter 2 estimated out-turn), presented in the same format as the budget proposal. Aggregated budget data for both revenue and expenditure 4.  Yes, in the annual budget report, Chapter 2, according to the main heads of the classifications used 3 and 4. (ref. PI-4), including data for the current and previous year, in addition to the detailed breakdown of revenue and expenditure estimates. 18 The following terminology is used: Current year (T) is the fiscal year in which the budget proposals are being prepared and usually presented. Next year (T+1) is the budget year or fiscal year for which the annual budget proposals are made. Previous Year (T-1) is the last Fiscal Year completed. Outer Years (T+2, T+3 etc.) are the fiscal years beyond the year for which the annual budget proposals are made. Outer years are relevant for the medium-term budget perspective in PI-14, PI-15 and PI-16. 32 Bhutan: Public Financial Management Performance Report Basic elements Provided? Additional elements 5. Deficit financing, describing its anticipated composition. Yes, in the annual budget report, Chapter 3  acro-economic assumptions, including at least estimates of 6. M No. The annual budget report, Table 4.4, GDP growth, inflation, interest rates, and the exchange rate. makes projections of GDP growth and inflation and gives a time series on the exchange rate, but not on interest rates Debt stock, including details at least for the beginning of 7.  Yes, in Table 4.4 the current year (presented in accordance with GFS or other internationally recognized standard). Financial assets, including details at least for the beginning of 8.  No the current year (presented in accordance with GFS or other internationally recognized standard). Summary information on fiscal risks (including contingent 9.  Yes, in budget report Chapter 6 liabilities such as guarantees, and contingent obligations embedded in Public-Private Partnership (PPP) contracts, etc.) 10. E xplanation of budget implications of new policy initiatives Yes, in budget report Chapter 3 and major new public investments, with estimates of the budgetary impact of all major revenue policy changes and/or major changes to expenditure programs. 11. Documentation on the medium-term framework. Yes, in budget report Chapter 4 12. Quantification of tax expenditures. Yes, in DRC Annual Reports online at MoF website, and Chapter 4 of FY 2015-16 budget report, Table 4.3: Fiscal incentives. Dimension: Share of the above listed information in the executive’s annual budget proposals for 2015/16 (in order to count in the assessment, the full specification of the information benchmark must be met). In the annual budget document for 2015/16, the following elements are included: 1. Chapter 1: Fiscal performance/operation in FY 2013/14. In this chapter a comparative statement of approved budget with that of actual outcomes for the year is given in summary. Under each head, justifications are given for increase or decrease in expenditure. The amount of domestic and external resources mobilized during the fiscal year. 2. Chapter 2: Revised budget of FY 2014/15. The detailed explanation for the revision of expenditure during the fiscal year is give here. 3. Chapter 3: Budget Estimates for FY 2015/16. The proposal for FY 2015/16 is based on the macroeconomic projection of the Macroeconomic Framework Coordination Committee (MFCC). Accordingly budget ceiling is prepared and sent out to agencies for calling budget proposals. Thereafter agencies prepare their budgets and submit them to DNB online. The final output is the estimates for FY 2015/16 which were approved by the Parliament in June 2015. The chapter also includes budget estimate summary covering revenue and expenditure. 4. Chapter 4: Macroeconomic performance and outlook for FY 2015/16. This chapter presents the macroeconomic performance and outlook for the medium term i.e. GDP growth, consumption and investment, inflation, employment fiscal framework projections 3. Assessment of PFM Performance 33 for past two years, current year and the two outer years, fiscal incentives, debt stock, balance of payment, etc. The chapter also includes the fiscal framework for the previous year (actual), current year (revised estimate), budget year and projections for two following years. 5. Chapter 5: Royal Monetary Authority The role played by RMA as the central bank in the economy in regulating the commercial banks. 6. Chapter 6: State owned enterprises (see details online) 7. Chapter 7: Druk Holdings and Investments (see details online) 8. Chapter 8: National Pension and Provident Fund (see details online) 9. Chapter 9: Trust Funds (see details online) 10. Chapter 10: Hydropower Development in Bhutan (see details online) These basic elements are complete set in the Government’s annual budget proposals to the Parliament. Besides the National Budget proposal document, a separate Supplementary Appropriation Bill and Budget Appropriation Bill are also submitted to the Parliament for endorsement. The National Budget Reports are available on the Ministry of Finance website at www.mof.gov.bt. Budget documentation includes all four basic elements, and six out of eight of the additional elements. Score Minimum requirements 5.1: Budget documentation A Budget documentation fulfills 10 elements, including every basic element (1-4). B Budget documentation fulfills 7 elements, including at least 3 basic elements (1-4). C Budget documentation fulfills at least 3 basic elements (1-4). D Performance is less than required for a C score. Indicator/Dimension Score Brief justification for score PI-5: Budget documentation. A Budget documentation includes all four basic elements, and six out of eight of the additional elements. PI-6: Central government operations outside financial reports Ex-ante and ex-post fiscal reports to the legislature should cover all budgetary and extra-budgetary activities of central government to allow a complete picture of revenue and expenditures across all categories, as well as financing. This will be the case if extra-budgetary operations (central government activities which are not included in the annual budget law, such as those funded through trust funds, extra-budgetary funds and externally financed projects) are insignificant or if any significant expenditures on extra-budgetary activities are included in ex-ante and ex-post fiscal reports and reported to the legislature. While having a large number of extra-budgetary or off-budget funds should be discouraged, there can be a case for the selective use of these funds, depending on the institutional and governance arrangements in the country. The use of off-budget funds should be accompanied by mechanisms that promote accountability and efficiency, i.e. be included in regular reports to the legislature. Without such controls, extra-budgetary funds can end up serving corrupt interests, weaken good governance and macro-fiscal stability. 34 Bhutan: Public Financial Management Performance Report Dimension 6.1: Expenditure outside financial reports This dimension assesses the magnitude of operations in FY 2014/15 that are not reported through the RGoB budget and reporting system, i.e. off-budget or off-account or both. The Public Expenditure Management System (PEMS), which is the basis for budgeting, in-year reporting and annual financial reporting, covers the revenue and expenditure of all government budgetary bodies - constitutional bodies, autonomous bodies, the judiciary, ministries, dzongkhags, gewogs and thromdes. These are Bhutan – Central Government Units all counted as central government (see section 2.3 above). Externally financed projects are fully accounted in the Central Government Budget Reports and Annual Financial Statements. 19 The diagram below shows the structure of central Extra Budgetary government. Budgetary Units Units The PEMS does not cover refundable deposits, which are not government money, nor the National Pension and Provident Fund, nor five trust funds.20 The annual financial Trust Funds Line Ministries 5 nos statements include a descriptive chapter on the NPPF, and 10 nos (Bhutan Trust fund a summary table showing trust fund income, expenditure for Environment and balances held, but no detailed statements of income Conservation, Cultural Heritage or expenditure. Dzongkhags Fund, Universal 20 nos Service Fund, Nor does the PEMS cover the revenues and expenditures Bhutan Health of public corporations, financial or non-financial, as these Trust Fund and are outside the RGoB and have separate accountability Bhutan Education Gewogs Endowment Fund) arrangements. The annual financial statements include 205 nos some information on the Royal Monetary Authority, but not its financial statements. Information on the performance National Pension of state-owned enterprises (SoEs) and linked companies and Provident Fund Constitutional are reported in the Budget Reports. The Budget Report Bodies 4 nos (NPPF) for FY 2015/16 contains detailed write-ups and statistics on the financial performance of the SoEs. A new chapter is dedicated to financial reporting on the Druk Holding and Autonomous bodies Investments (DHI) in which Government holds more than 133 nos, incl. 90% of the total equity. Thromedeys 4 nos The MOF has initiated a report on the hydro-power sector Extra Budgetary Unit or EBU is a unit within CG that receives revenue or incurs expenditure that is not in of Bhutan from the FY 2015/16. It reflects the background the National Budget or not in the Annual Financial of the hydro-power projects, financial modalities and Statements. 19 As per AFS 2013/14, pp.7/8, grants received do not include certain scholarships provided by development partners, grants for the three HEP projects being constructed (Nu. 9360 million) and roads constructed under GOI project, Dantak (Nu. 825 million). These are not taken into account in scoring because these activities are being undertaken under inter-governmental special arrangements and entirely funded through the respective governments and development partners. 20 Bhutan Trust Fund for Environment Conservation, Cultural Heritage Fund, Universal Service Fund, Bhutan Health Trust Fund and Bhutan Education Endowment Fund (Budget for 2015/16, p.109). Their total income in FY 2014/15 was Nu. 95 million (0.3% of total revenue), and total expenditure Nu. 173 million (0.5% of total expenditure). The NPPF operating and management expenditure, pensions and Provident Fund refunds in 2014/15 was Nu. 716271 million (Annual Report), which was 2.10.8% of total expenditure., Current Deposit accounts are bank accounts operated by CG entities, not accounting units in themselves. 3. Assessment of PFM Performance 35 benefits, and the existing and future hydro-power projects. Project information on loan commitments, repayments and loan balances are provided in the AFS and National Budget Reports. For FY 2014/15, NPPF expenditure was Nu. 716 million and the five Trust Funds had expenditure of Nu. 173 million. Together these extra-budgetary units had expenditure of Nu. 889 million, or 2.6% of total 2014/15 expenditure. Dimension 6.2: Revenue outside financial reports The main central government budget and accounts include the great majority of revenue. NPPF revenue in 2014/15 (all from investments) was Nu. 1,537 million, and the five Trust Funds had revenue of Nu. 95 million, total Nu. 1,632 million, or 4.5% of total revenue. Dimension 6.3: Financial reports of extra-budgetary units Extra-budgetary units (EBUs) in the central government of Bhutan appear to be the National Pension and Provident Fund, and the five trust funds mentioned above. NPPF rules and regulations (sections 92-97) specify that: “The NPPF shall submit annually not later than October 31, a report covering the activities undertaken by the NPPF during the preceding year including information and recommendations on the broad policies for the development of the NPPF. The NPPF shall in each year prepare its annual accounts; namely the Revenue and Expenses Account and Fund Statement separately. The books of accounts and other documents shall be made available for inspection to the Royal Government or its authorized agents at any time during business hour on any working day within a reasonable time. The accounts of the NPPF shall be audited once a year and the correctness and fairness of its accounts and annual statements of financial condition and results of operations ascertained by auditor(s) appointed by the National Pension Board from the panel maintained by the Royal Audit Authority.” The annual reports of NPPF are submitted to the Government and the Parliament on an annual basis and key data are included in the National Budget Report (Chapter 8). The last submission was made for the FY 2013/14 in Budget Report for FY 2015/16, issued in May 2015. Bhutan’s Trust Funds, all established by Royal Charters, have to submit activity and financial reports within six months of the end of the financial year. (e.g. Bhutan Trust Fund for Environmental Conservation Royal Charter, Section IX). Key data on the Trust Funds for FY 2014/15 are included in the National Budget Report for FY 2015/16 (Chapter 9). Taking the NPPF and Trust Funds together, there is no evidence that their detailed financial reports were submitted to government within nine months of the FY end. Score Scoring Method M2 (AV). Minimum Requirements 6.1: Expenditure outside financial reports A Expenditure outside government financial reports is less than 1% of total BCG expenditure. B Expenditure outside government financial reports is less than 5% of total BCG expenditure. C Expenditure outside government financial reports is less than 10% of total BCG expenditure. D Performance is less than required for a C score. 6.2: Revenue outside financial reports A Revenue outside government financial reports is less than 1% of total BCG revenue. B Revenue outside government financial reports is less than 5% of total BCG revenue. C Revenue outside government financial reports is less than 10% of total BCG revenue. D Performance is less than required for a C score. 36 Bhutan: Public Financial Management Performance Report Score Scoring Method M2 (AV). Minimum Requirements 6.3: Financial reports of extra-budgetary units A Detailed financial reports of all extra-budgetary units are submitted to government annually within three months of the end of the fiscal year. B Detailed financial reports of most extra-budgetary units are submitted to government annually within six months of the end of the fiscal year. C Detailed financial reports of the majority of extra-budgetary units are submitted to government annually within nine months of the end of the fiscal year. D Performance is less than required for a C score. Indicator/Dimension Score Brief justification for score PI-6: C entral government operations C+ M2 method of combining dimension scores outside financial reports.  xpenditure outside financial 6.1: E B Expenditure outside government financial reports is less reports. than 5% of total BCG expenditure.  evenue outside financial 6.2: R B Revenue outside government financial reports is less than reports. 5% of total BCG revenue.  inancial reports of extra- 6.3: F D Financial reports of the NPPF and Trust Funds are submitted budgetary units. to the Government annually and key data are included in the National Budget Report, but not within 9 months of the end of the year. PI-7 Transfers to sub national governments Sub National Government (SNG) in many countries has wide-ranging expenditure responsibilities. Decentralized governance arrangements give rise to a set of intergovernmental financial relations between levels of government including key issues related to the transfer and distribution of funds from central government to SNG, the timeliness and accuracy of information on funds to be transferred, the requirements for reporting from SNG to central government and the risk exposure of central government to SNG operations. By contrast, funding provided to deconcentrated units of central government is not within the scope of this indicator. In Bhutan, specific laws determine the role and functions of local government, their expenditure responsibilities and arrangements for revenue sharing. In section 2.3 above it is shown that local governments in Bhutan – dzongkhags, gewogs and thromdes, though they have locally elected councils, do not at present meet the criteria of autonomy from central government and are effectively deconcentrated units of central government. This indicator is not strictly applicable. However, for information, it is assessed as though local governments were SNGs. A detailed discussion on financial management in LGs is placed as Annex 5. Dimension (i) assesses the transparency and objectivity in the horizontal allocation among the first tier of SNGs (dzongkhags). Transfers to support SNG expenditure can be made in the form of unconditional grants, where their final use is determined by the SNG through their budgets, or through conditional (earmarked) grants to SNG to implement selected service delivery and expenditure responsibilities e.g. by function or program, typically in accordance with an agreed regulatory/policy standard. The overall level of grants (i.e. the vertical allocation) is determined by policy decisions at the central government’s discretion or as part of constitutional negotiation processes, and is not assessed by this indicator. However, clear criteria, such as formulas, for the distribution of grants among SNG entities 3. Assessment of PFM Performance 37 (i.e. the horizontal allocation of funds) are needed to ensure allocative transparency and medium-term predictability of funds available for planning and budgeting of expenditure programs by SNG. All fiscal transfers from central government directly to local governments are taken into consideration. Dimension (ii) assesses the timeliness of providing information to dzongkhags on their allocations. It is crucial for them to receive firm and reliable information on annual allocations from central government well in advance of the completion (preferably before commencement) of their own budget preparation processes. Information on transfers to SNG budgets should be regulated by the central government’s annual budget calendar, which should provide for reliable indications of allocations early in the cycle. Dimension 7.1: System for allocating transfers Article 9, Principles of State Policy, and Clauses 7 & 8 of the Constitution of Bhutan state: “The State shall endeavor to develop and execute policies to minimize inequalities of income, concentration of wealth, and promote equitable distribution of public facilities among individuals and people living in different parts of the Kingdom”. “The State shall endeavor to ensure that the dzongkhags are treated with equity on the basis of different needs so that the allocation of national resources results in comparable socioeconomic development”. The PFA 2007 and amended PFA 2012 require a sound system of public finance, based on the principles of: (a) efficiency; (b) economy; (c) effectiveness; (d) equity; (e) sustainability; (f) transparency and (g) accountability.” Under the 11th FYP, which began in FY 2013/14, the RGoB has initiated the following formula-based fiscal transfer allocation for annual grants: 1. Population: The population factor is calculated based on actual residency and not the number of people registered with the 2005 Population and Housing Census as the source of data. From the overall resource envelope, 35% weightage is assigned for population. Local governments administering larger populations receive higher shares of resources. 2. Poverty: Poverty criteria used in the 10th FYP have been replaced by a multidimensional poverty index with a weight of 45%. 3. Geographical area: The geographical size or area is also a determining factor for resource allocation with 10% of the resources devoted to it. Data for these criteria is sourced from the National Land Commission. 4. Transport cost: a new criterion introduced in the 11th FYP is a transport cost index with a weight of 10%. This is included to allow for the higher cost of investments in interior and remote dzongkhags/ gewogs that face higher transportation costs. The formula-based allocation does not apply to class A thromdes. The resource allocations to class A thromdes are based on needs due to the diversity and complexity of their social, economic and environmental issues. Capital budget allocation are based on differences in the level of economic development, particularly with regard to infrastructure, economic opportunities, landscape and social factors amongst the thromdes, which are considered the main players in deciding the amount of resource allocation. 38 Bhutan: Public Financial Management Performance Report The allocation of current budget is done in a way of filling marginal gaps between the fund balance available with the Thromdes as per the bank statement provided, the amount of projected revenue collection and the fund requirement considering the past expenditure trends. This grant is given to meet the current expenditure of the Thromdes. However, the allocation of capital budget is done based on the five year plan outlays determined by the Gross National Happiness Commission (GNHC) and the annual budget allocation is done by the Department of National Budget (DNB) through an annual ceiling based on the resource envelope determined by the Macroeconomic Fiscal framework Coordination Committee (MFCC) with the concurrence of the Cabinet. Based on the ceilings provided the Thromdes prioritize the capital activities that are reflected in the Five Year Plan. As such funding for the Thromdes is also predictable as it is based on the plan outlay and annual budget ceiling. In the Eleventh Five Year Plan total capital grants to Class ‘A’ Thromdes was to the tune of Nu. 5 billion. Out of this Nu. 2 billion was earmarked for Thimphu as it is the capital city and owing to large population and area. Remaining Thromdes (i.e. Phuentsholing, Gelephu and Samdrup Jongkhar) were allocated Nu.1 billion each. The Royal Government is very much concerned about the need to develop a proper formula for the resource allocation to the Thromdes. A project is being undertaken in developing a formula based resource allocation to the class A Thromdes funded by the World Bank. It is named as the “Intergovernmental fiscal systems and capacity building”. The main component of the project is to design and implement a Principle Based Framework for grants to urban local governments (Class ‘A’ Thromdes). Table 3.2.7.1 shows the Resource allocation to four Thromdes excluding lending and repayment. Table 3.2.7.1: Resource allocation to four Thromdes excluding lending and repayment Nu. in millions Sl. No. Fiscal Year Total sector Allocation Allocation to Thromdes Percentage 1 FY 2013-14 38,215.04 619.783 2% 2 FY 2014-15 41,356.03 661.118 2% 3 FY 2015-16 49,739.34 689.639 1% Dimension 7.2: Timeliness of information on transfers LGs are part of the central government budgets and the budget is prepared line-item wise for each LG. The Budget Call Circular (generally issued in January every year) indicates the overall allocation to each LG in terms of percent of the FYP and this facilitates them to plan their activities and prepare their own budgets (see also PI-17). The Budget Cycle starts on July 1st and ends on June 30th. Budget preparation begins with the Budget Call Circular containing resource allocations issued in December/ January to all budgetary units including local governments. By end of February, the budget proposals are received. Thereafter the proposals are reviewed, discussed and finalized by the Ministry of Finance, endorsed by the Cabinet and submitted to the Parliament. Financial Year Date of submission of budget to Parliament Date of approval of budget by Parliament FY 2014-15 06/06/2014 09/07/2014 FY 2015-16 25/05/2015 25/06/2015 3. Assessment of PFM Performance 39 Score Scoring Method M2 (AV). Minimum Requirements 7.1: System for allocating transfers A The horizontal allocation of all transfers from central government is determined by transparent and rules based systems. B The horizontal allocation of most transfers from central government is determined by transparent and rules based systems. C The horizontal allocation of some transfers from central government is determined by transparent and rules based systems. D Performance is less than required for a C score. 7.2: Timeliness of information on transfers A The process by which SNGs receive information on their annual transfers is managed through the regular budget calendar, which is generally adhered to and provides clear and sufficiently detailed information for SNGs to allow at least six weeks to complete their budget planning on time. B The process by which SNGs receive information on their annual transfers is managed through the regular budget calendar, which provides clear and sufficiently detailed information for SNGs to allow at least four weeks to complete their budget planning on time. C Substantial delays may be experienced in implementation of the budget procedures. Information on annual transfers to SNGs is issued before the start of the SNG fiscal year which could be after budget plans are decided. D Performance is less than required for a C score. Not scored as the indicator is not applicable. PI-8: Performance information for service delivery This indicator examines the service delivery performance information in the executive’s budget proposal or its supporting documentation, in year-end reports, and in audit reports or performance evaluation reports. It also measures the extent to which service delivery units receive and spend resources allocated in the budget. It contains four dimensions and uses the M2 (AV) method for aggregating dimension scores. Dimension 8.1: Performance plans for service delivery The Government has recently (2013) initiated a Government Performance Management System (GPMS), which is managed by the Government Performance Management Division (GPMD), established in March 2015, in the Office of the Prime Minister. With this GPMS, heads of ministries, autonomous agencies (six) and dzongkhags are required to sign Annual Performance Agreements (APAs) with the Prime Minister. Responsibility and accountability for achieving the targets in each APA are devolved to lower levels within the respective ministry or agency21. In all, ten ministries, six autonomous agencies and 20 dzongkhags have signed APAs for financial year 2014/15 (being the first year of implementing GPMS) and also for 2015/16. The signing of the APAs is covered by the media. 21 E.g. in case of Ministries, APA is signed between the Minister and Secretary; between the Secretary and Directors; and between the Directors and Division Heads which is captured in PEMS. 40 Bhutan: Public Financial Management Performance Report The institutional framework, processes and systems for APA are documented in the “Guidelines for Preparation, Monitoring and Evaluation of Annual Performance Agreement” (draft)22. Each budgetary unit prepares its individual APA. The Guidelines define the method of preparation and the formats, the process of approval, monitoring and evaluation and timelines. Methodological guidance is provided by the GPMD and all agencies have a focal point for GPMS who is trained on the methodology. The APA consists of objectives, activities, performance targets and indicators which a ministry/agency plans to undertake and achieve during the forthcoming fiscal year. These activities are presently drawn from the 11th Five Year Plan (FYP) which is linked with Sectoral Key Result Areas (SKRA) and National Key Result Areas (NKRA). For the preparation of APAs, the GPMS is used. This system is linked with PlaMS (Planning and Monitoring System of GNHC). When preparing an APA in GPMS, every activity is tagged to NKRA and SKRA of the FYP. This is enabled by the linkage between the GPMS and PlaMS. It is mandated that targets should be within the resource envelope notified by MoF in the Budget Call Circular. APA preparation starts before budget preparation (in December). The targets are set for the medium term period - for the budget year and next two years. This ensures that the budget proposals of the ministry/agency and the APA are aligned. The MoF also takes into account the APA of an agency in order to align the activities. The budget for 2015/16 was the first budget prepared based on APAs. The Budget Call Notification for that year mandated as follows: While submitting the budget proposals, the budgetary agencies shall provide a narrative policy statement highlighting the program targets/outputs at the Ministry/Sector level in order to deepen the linkages between the proposed budget and targets to be achieved as per the APA”. RGoB has introduced a system of key performance targets in a pre-defined format to bring clarity in what is being measured (i.e. the outputs) and the methodology for measurement for all key service delivery functions. While clear linkages exist between the budget and the forecast targets for the budget year, the targets are presently not part of budget documentation. Links to the APAs are provided on the websites of RGoB, but these are not active; hence, APAs are not effectively available to public. Few agencies have hosted the APAs on their individual websites. Dimension 8.2: Performance achieved for service delivery The GPMS Guidelines prescribe a system of midyear review and a year-end evaluation and assessment process. For midyear review, a Sector level Technical Committee has been instituted. The year-end evaluation is a combination of self-assessment and evaluation by the STC and a National Technical Committee. A system of Composite Score has been prescribed (sum of the products of percent achievement and weight of each indicator) reflecting the degree to which the agency has been able to achieve its planned targets. The assessment/evaluation is on the same indicators as incorporated in the signed APAs because the final progress report on the APA is expected to explain any gap or discrepancy between targets and actual outputs. The results of the evaluation and the recommendations of the STC/ NTC will be considered for the next set of APAs. The actual results are provided in the APAs for the following year. For instance, in the APAs for 2015/16, actual results have been provided for 2014/15 in the same format as the targets for all service delivery functions. Links to the APAs are provided on the websites of RGoB, but these are not active; hence, APAs are not effectively available to public. Few agencies have hosted the APAs on their individual websites. 22 Based on experience, GPMD will revise the draft guideline which are expected to be finalized by July 2016. 3. Assessment of PFM Performance 41 Dimension 8.3: Resources received by service delivery units Nearly all resources of budgetary units are routed through the budget and withdrawals are subject to the authorization and appropriation rules and procedures. Frontline units such as primary schools and health centers are within the budgets of the gewogs that are part of the national budget. There are various systems by which RGoB can monitor the resources received by the Service Delivery Units (SDU). These systems are PlaMS (Planning and Monitoring System of Gross National Happiness Commission), MYRB (Multi Year Rolling Budget System), PEMS (Public Expenditure Management System) and GPMS (Government Performance Management System). All these systems are interlinked and source data from each other. These systems and their inter-linkages ensure that the resources allocated are used by and for the SDUs. The Department of Public Accounts monitors the expenditure through PEMS where the agencies book their expenditure against their budgets per the MYRB. The Department of National Budget monitors the budget through MYRB by using the expenditure figures from PEMS. Budget is allocated at the level of SDUs. Dimension 8.4: Performance evaluation for service delivery GPMD of the Office of Prime Minister is in charge of performance evaluation of all government agencies, but this aspect of the GPMS is yet to be operational. Internal Audit Service is restricted to risk management, control mechanism and governance. The SAI (Royal Audit Authority) is mandated by the Constitution to assess economy, efficiency and effectiveness in the use of public resources. As such it carries out performance audits within the government structure and presently it is the only agency conducting performance evaluations. Performance audits undertaken by RAA in the last three years include: 1. Performance audit on Mining 2. Performance audit on LPG and SQL 3. Performance Audit on Constitutional Development Grant 4. Performance audit on Energy Most performance audits on service sectors like health, education and others were carried out before the past three years. All performance audits include recommendations. The recommendations are developed through a study of best international practices, and adapted to ensure that they are implementable and practical in the Bhutanese environment. Agencies are provided specific recommendations to be implemented. They are required to submit Action Taken Reports on the recommendations. Ongoing and planned reforms The last assessment in 2010 was based on reliable information provided by Budget and Accounting System (BAS). Since then, BAS was replaced with MYRB and PEMS systems. These systems are interlinked and also linked with PlaMS (the GNHC planning system) to establish better alignment of planning and budgeting. Recently, all these systems have been linked with GPMS to ensure that resources are spent for intended purposes and deliver the target outputs and outcomes. This will further improve the performance on this indicator. 42 Bhutan: Public Financial Management Performance Report Score Scoring Method M2 (AV). Minimum Requirements 8.1: Performance plans for service delivery A Information is published annually on policy or program objectives, key performance indicators, outputs to be produced and the outcomes planned for most ministries, disaggregated by program or function. B Information is published annually on policy or program objectives, key performance indicators, outputs to be produced or the outcomes planned for most ministries. C Information is published annually on the activities to be performed under the policies or programs for the majority of ministries OR a framework of performance indicators relating to the outputs or outcomes of the majority of ministries is in place. D Performance is less than required for a C score. 8.2: Performance achieved for service delivery A Information is published annually on the quantity of outputs produced and outcomes achieved for most ministries disaggregated by program or function. B Information is published annually on the quantity of outputs produced or outcomes achieved for most ministries. C Information is published annually on performance achieved in terms of activities performed for the majority of ministries. D Performance is less than required for a C score. Dimension 8.3: Resources received by service delivery units A Information on resources received by front-line service delivery units is collected and recorded for at least two large ministries, disaggregated by source of funds. A report which compiles the information is prepared at least annually. B Information on resources received by front-line service delivery units is collected and recorded for at least one large ministry. A report which compiles the information is prepared at least annually. C A survey carried out in one of the last three years provides estimates of the resources received by service delivery units for at least one large ministry. D Performance is less than required for a C score. 8.4: Performance evaluation for service delivery A Independent evaluations of the efficiency and effectiveness of service delivery have been carried out and published for most ministries at least once within the last three years. B Evaluations of the efficiency and effectiveness of service delivery have been carried out and published for the majority of ministries at least once within the last three years. C Evaluations of the efficiency or effectiveness of service delivery have been carried out for some ministries at least once within the last three years. D Performance is less than required for a C score. Indicator/dimension Score Brief justification for score PI-8: P erformance information D+ M2 method of combining dimension scores for service delivery Performance plans for 8.1:  C Information on policy or program objectives, KPIs and outputs to be service delivery. produced are contained in the APAs prepared for all ministries and dzongkhags and some autonomous bodies. The APAs are on the website of the GPMS but the links are not active, so they are not effectively published. A few agencies include their APAs on their own websites. Performance achieved for 8.2:  D Information on quantities of outputs is included in the APAs for the service delivery. following year for all ministries and dzongkhags and some autonomous bodies. The APAs are on the website of the GPMS but the links are not active, so they are not effectively published. A few agencies include information on actual APA results on their own websites. 3. Assessment of PFM Performance 43 Indicator/dimension Score Brief Justification for Score  esources received by 8.3: R C Information on resources received by front-line delivery units is service delivery units. collected and recorded for all ministries and dzongkhags. However, a report compiling the information is not prepared.  erformance evaluation of 8.4: P D Evaluations of the efficiency and effectiveness of service delivery service delivery. have been carried out for a few ministries in the last three years. PI-9: Public access to key fiscal information This indicator assesses the comprehensiveness of fiscal information available to the public. There is one dimension for this indicator, divided into 9 elements of information as listed below in Table 3.2.9.1:  ssessment of comprehensiveness of fiscal information available to the Table 3.2.9.1: A public Basic elements Public access Annual executive budget proposal 1.  No. When the Finance Minister presents the budget to documentation: A complete set of executive Parliament, there is live media coverage (TV and radio) budget proposal documents (as presented by the and it is also covered by the print media for the general country in PI-5) is available to the public within public, but the complete budget proposal (National one week of the executive submitting them to the Budget Report) is not available to the public within one legislature. week after it is submitted to Parliament. Enacted budget: The annual budget law 2.  Yes. The annual National Budget report submitted to the approved by the legislature is publicized within Parliament is made publicly available ahead of approval two weeks of passage of the law. of the Parliament. With the approval of the Parliament, this report is considered to be the enacted budget. For FY15/16, while the budget was approved on 19 June 2015, it was made available on the website in May, 2015. 3. In-year budget execution reports: The reports No. The Department of National Budget issues a are routinely made available to the public within quarterly Budget Situation Report. This is made available one month of their issuance, as assessed in only for official purposes to monitor the performance of PI-27. respective sectors. Annual budget execution report: The report is 4.  No. The annual Budget Report includes a revision of the made available to the public within six months of original estimates before the year end, but there is no the year end. annual budget execution report showing actual revenue and expenditure. Audited annual financial report, incorporating 5.  Yes. Audited annual financial report which is called or accompanied by the external auditor’s Annual Financial Statement (AFS) is also presented to the report: The report(s) are made available to the Parliament and publicly made available in the website of public within twelve months of the year end. the Ministry of Finance (www.mof.gov.bt) within twelve months of the year end. Additional elements Pre-budget statement: The broad parameters 6.  No. The Budget Call Circular is made available to the for the executive budget proposal regarding public six months before the start of the new fiscal year expenditure, planned revenue and debt is made and is available on MoF’s website, but does not constitute available to the public at least four months before a pre-budget statement as it does not include the broad the start of the fiscal year. parameters regarding expenditure, revenue and debt. 7. Other external audit reports: All non- Yes. The Annual Audit Report is published by the Royal confidential reports on central government Audit Authority on their website (www.raa.gov.bt consolidated operations are made available to and www.bhutanaudit.gov.bt) within six months of the public within six months of submission. submission. 44 Bhutan: Public Financial Management Performance Report Basic elements Public access Summary of the budget proposal: A clear, 8.  Yes. Summary of the budget proposal is included in the simple summary of the Executive’s Budget annual National Budget Report, which is made available Proposal or the Enacted Budget accessible to the public in both Dzongkha and English languages. to the non-budget experts, often referred to as a ‘citizen’s budget’, and where appropriate translated into the most commonly spoken local language, is publicly available within two weeks of the Executive Budget Proposal being submitted to the legislature and within one month of the budget’s approval respectively. Macroeconomic forecasts: As assessed 9.  Yes. The Annual Budget Report includes macroeconomic in PI-14.1, is available within one week of its forecasts underlying the budget estimates. endorsement. The Government publishes two out of the five basic elements and three out of four of the additional elements. Score Minimum requirements 9.1: Public access to fiscal information A The government makes available to the public in accordance with the specified time frames 8 elements, including every basic element. B The government makes available to the public in accordance with the specified time frames 6 elements, including at least 4 basic elements. C The government makes available to the public 4 basic elements. D Performance is less than required for a C score. Indicator/dimension Score Brief justification for score  ublic access to fiscal PI-9: P D Two of the four basic elements are made available to the information. public. Pillar III – Management of assets and liabilities 3.3  (Performance indicators 10 to 13) PI-10: Fiscal risk management This indicator measures the extent to which fiscal risks to central government are reported. Fiscal risks can arise from adverse macro-economic situations, financial positions of Sub-National Governments (SNG), public corporations, and contingent liabilities from central government’s own programs and activities, including extra-budgetary units. They can also arise from other implicit and external risks such as market failure and natural disasters. The indicator contains three dimensions and uses the M2 (AV) method for aggregating dimension scores. Dimension 10.1: Monitoring of public corporations A Public Enterprise (PE) is either a Government Company (with 100% shareholding) or Government Controlled Company (with more than 50% shareholding) as defined in the Companies Act of 3. Assessment of PFM Performance 45 Bhutan 2000. There are nine public corporations (public enterprises - PEs). One of the major public enterprises is Druk Holding and Investments Ltd, which has holdings in 20 other companies. PEs have become one of the major sources of revenue for the Government and they contributed more than 41% of the total domestic revenue in 2014. PEs are required to submit their annual financial statements to the MoF. The financial year for all PEs in Bhutan is the calendar year ending December 31. The annual report has to be filed with the Registrar of Companies by May 31 in case of listed companies and by July 31 in the case of unlisted companies. They are monitored by the Public Enterprise Division (PED) in the MoF and PED is in charge of consolidating reports and information sent by PEs. As per the Public Finance Act of Bhutan 2007, they are required to prepare an annual report including the audited financial statements in accordance to the provisions of the Companies Act of Bhutan 2000. The monitoring of PEs is done as per Schedule 14 (ii) ‘Minimum audit examination and reporting requirement’ under the Companies Act of Bhutan 2000. These are reported by statutory auditors on an annual basis. The Public Finance Act also requires the Finance Minister to present the annual reports of PEs to the Parliament as a whole. All PEs publish their audited annual financial statements within six months from the end of the year which are included in their Annual Reports. Their annual financial results (assets, reserves and net worth and revenue, expenses and profitability) are consolidated and included in the Annual Budget Report (Annexure 6 and 7), which the Finance Minister presents to the Parliament. Dimension 10.2: Monitoring of sub-national governments Dzongkhags, gewogs and thromdes are considered as local governments in Bhutan. However, for purpose of PEFA assessment, these bodies could not be considered as Sub-National Government (SNG) since these do not meet the definition of SNG recognized by PEFA, which is based on Government Financial Statistics 200123. These bodies are more in the nature of de-concentrated units of the central government. The officers of these bodies are appointed by the Royal Civil Service Commission (RCSC) and they are financed directly from the central government budget. Hence, for the PEFA assessment, no separate level of SNG has been recognized. The central government (MoF) monitors the whole government’s fiscal position, which includes that of the local governments and presents it in the annual budget report. Dimension 10.3: Contingent liabilities and other fiscal risks The Public Finance Act of Bhutan (section 132) empowers the Minister of Finance to provide a guarantee or indemnity in respect of the performance of budgetary body, state enterprise or organization. There are no contingent liabilities of budgetary bodies and organizations. Contingent liabilities of public enterprises are monitored by the Public Enterprise Division and Debt Management Division in the MoF. The Department of Public Accounts in the Ministry of Finance consolidates and reports contingent liabilities in detail in the Annual Financial Statements of the Government (AFS 2013/14, Table 25). There are no contingent liabilities pertaining to government programs. However, for the contingent liabilities of public enterprises, the risks are assessed and reported. There are also no implicit contingent liabilities on account of pension or legal action against RGoB or those arising from PPPs. Table 3.3.10.1 shows the Identified explicit contingent liabilities as at 30 June 2014. 23 Supplementary Guidelines for the application of the PEFA framework to Sub-national governments, (January 2013) PEFA Secretariat. 46 Bhutan: Public Financial Management Performance Report Table 3.3.10.1: Identified explicit contingent liabilities as at 30 June 2014 Entity/program/ Risk description and Estimated amount How reported project analysis Public Enterprises Government guarantees Nu. 974.7 m at Detailed in the Annual Financial 30 June 2014 Statements and also the Budget Report Share of exposure of Nu.26,270.678 million Companies report to PED, MoF. RGoB to PE debt for fiscal year 2013/14 However, from FY 2015/16, they are reported in the Budget Report Source: AFS RGoB. Score Scoring Method M2 (AV). Minimum Requirements 10.1: Monitoring of public corporations A Audited annual financial statements for all public corporations are published within six months of the end of the fiscal year. A consolidated report on the financial performance of the public corporations sector is published by central government annually. B Audited annual financial statements are published for most public corporations within six months of the end of the fiscal year. C Government receives financial reports from most public corporations within nine months of the end of the fiscal year. D Performance is less than required for a C score. 10.2: Monitoring of Sub-National Government (SNG) A Audited annual financial statements for all SNGs are published within nine months of the end of the fiscal year. A consolidated report on the financial position of all SNGs is published at least annually. B Audited annual financial statements for most SNGs entities are published at least annually within nine months of the end of the fiscal year. C Unaudited reports on the financial position and performance of the majority of SNGs are published at least annually within nine months of the end of the fiscal year. D Performance is less than required for a C score. 10.3: Contingent liabilities and other fiscal risks A A report is published by central government annually that quantifies and consolidates information on all significant contingent liabilities and other fiscal risks of central government. B Central government entities and agencies quantify most significant contingent liabilities in their financial reports. C Central government entities and agencies quantify some significant contingent liabilities in their financial reports. D Performance is less than required for a C score. Indicator/Dimension Score Brief justification for score PI-10: Fiscal risk reporting A M2 method of combining dimension scores  onitoring of public corporations. 10.1: M A Audited annual financial statements are published for all PEs within six months from the close of the financial year and their financial performance is consolidated. Monitoring of sub-national 10.2:  Not A separate level of SNG has not been recognized for governments. applicable PEFA assessment.  ontingent liabilities and other 10.3: C A All significant contingent liabilities and other fiscal risks fiscal risks. are reported in the annual financial statements of RGoB. 3. Assessment of PFM Performance 47 Ongoing and planned reforms A Public Debt Policy document has been drafted and submitted for Government approval. This is expected to improve performance on this indicator. Guidelines to clearly define responsibilities for monitoring liabilities against quantitative thresholds are included in the draft Debt Management Policy, which is currently under consideration. PI-11: Public investment management This indicator assesses the economic appraisal, selection, costing, and monitoring of public investment projects by the government, with emphasis on the largest and most significant projects (i.e. major investment projects)24. The indicator is assessed through four dimensions and uses M2(AV) method for aggregating the scores. Capital expenditure as per the Financial Rules and Regulations derived from the Public Finance Act are investments which have future returns. It includes acquisition of goods and services, the benefits of which extend beyond the fiscal year and which add to the assets of the Government. Examples are acquisition of land and buildings, land improvements, buildings and structures, plants, equipment and tools, vehicles, etc. (Budget Manual). Capital expenditure includes all investment projects such as construction of roads, bridges, power projects, schools, hospitals, etc, whether big or small. Dimension 11.1: Economic analysis of investment proposals Public investment management function is decentralized in Bhutan and feasibility studies of projects are undertaken at the level of each line ministry/agency. There are guidelines for specific projects such as construction of roads, farm roads, schools, hospitals, hydropower plants, etc. which are issued by the concerned agencies. These guidelines require social and economic impact assessments including health and environmental assessments. Projects have to obtain clearances from relevant agencies in order to be implemented. For example, projects are required to get environmental clearance from the National Environment Commission. All proposals are submitted to the Ministry of Finance and Gross National Happiness Commission (GNHC) for their endorsements. GNHC has a project screening tool comprising of 9 domains, but does not include economic analysis. Appraisal of proposals is primarily done from viewpoint of social and environment aspects. Major investment projects approved during 2014/15 are shown in Table 11.1.125. Some of the development partners, conduct economic analysis in accordance with their own methodology in which case the analysis is published. Economic analysis was conducted for projects at serial number 12 and 13 in table next page. 24 For the purpose of this indicator, “major investment projects” are defined as projects meeting the following criteria: •  The total investment cost of the project amounts to 1% or more of total annual budget expenditure; and • The project is among the largest 10 projects (by total investment cost) for each of the 5 largest central government units, measured by the units’ investment project expenditure. The indicator was assessed using a sample of such projects. 25 Economic analysis frequently involves application of specific techniques such as cost-benefit analysis, cost-effectiveness analysis and multi-criteria analysis. 48 Bhutan: Public Financial Management Performance Report Table 11.1.1: Major investment projects approved during 2014/15 Sl. Project cost Project description No. (Nu. in million) 1 School Reform Program 3,487.20 2 Black topping of Gewog Connectivity (GC) roads in 20 Dzongkhags (486 km) 1,400.93 3 Upgradation of Yadi-Lingmethang Highway (138 km) 1,018.60 4 Upgradation of Trongsa-Nangar Highway (55 km) 789.54 5 Upgadation of Simtokha-Wangdue Highway (65 km) 764.22 6 Upgradation of Wangdue-Chuserbu Highway (82 km) 693.64 7 Upgradation/improvement of Trongsa-Chuserbu Highway (45 km) 683.21 8 Urban Water Supply System 600.00 9 Infrastructure development under various colleges, RUB 494.61 10 Urban infrastructure Development projects at Kanglung, Nganglam & Bumthang 400.00 11 Enhancing Rural Livelihoods through enterprise based livestock production in Bhutan 378.00 12 Bhutan Road Connectivity Project 4,140.00 13 Bhutan 2nd Green Power Project 8,361.00 Total 23,211.53 Source: Information from DNB and ADB website for project cost in case of projects at serial 12 and 13 above. Dimension 11.2: Investment project selection Overall development in Bhutan is guided by the Economic Development Policy (the last policy was issued in 2010) that sets the agenda and general direction for the development of sectors that have the highest potential. Decisions on major investment projects are taken by the Government through the Cabinet. All proposals are submitted to the Ministry of Finance and Gross National Happiness Commission (GNHC) for their endorsements. The key basis of prioritization of investment projects is the social mandate of the government, availability of resources (RGoB or donor), whether there are future returns, etc. GNHC has a policy screening tool for prioritizing projects and programs while approving proposals - this comprises 22 variables across 9 domains culminating in a consolidated GNH score. Proposals are approved by the Department of National Budget and the GNHC on the basis of standard criteria for project selection, which are published. During annual budget preparation, agencies are required to include projects in their proposals only if they are in line with the five-year plan and with the annual performance agreements, with priority given to spillover and ongoing activities. They are then entered in the Multi-Year Rolling Budget (MYRB) system. Projects are considered when they are ready to be implemented after completion of all preparatory works including drawing, design and estimate, and after obtaining various clearances. Guidelines are provided in the budget call circular. Proposals are submitted to the Government for final approval and only approved projects are incorporated in the budget. All decisions on investment projects and the prioritizing of projects are based on the feasibility studies and GNH score. Dimension 11.3: Investment project costing All investment projects have to be included in the Five Year Plan of the concerned ministries. The investment projects are managed by the concerned ministries with regular consultations with Ministry of Finance and GNHC. 3. Assessment of PFM Performance 49 The Public Finance Act requires the submission of the Budget Policy and Fiscal Framework Statement to Parliament showing the priorities of the Government to guide the annual budget and the medium term budget. All multi-year investment projects have a multi-year budgeting plan. Agencies must indicate in their budget proposals if there are any multiyear projects. The concerned ministries have to prepare detailed documents for each major investment project for the purpose of budgeting which are submitted to the Department of National Budget in the Ministry of Finance. Feasibility study cost estimates are used for budget planning, but estimates of recurrent costs are not included. Capital costs are included in the forthcoming budget year for those projects that are funded by RGoB, and through external assistance only if agreements have been signed and fund release is confirmed, and major projects are individually listed in the Budget Report as and when funds release for externally funded projects are known, these are included in the in-year budget changes and finally included in the supplementary budget, presented to Parliament in June medium term projections on major investment projects on full cost basis over life is presently not included in the budget documents. Dimension 11.4: Investment project monitoring The Budget Manual specifies that the goal of the monitoring shall be to check if the physical progress of capital expenditures is in compliance with the reports received from the project managers and Heads of Agencies and monitoring shall be done as a combination of analysis of reports and actual site visits. Project monitoring is carried out by the Project Steering Committees (PSC) in the agencies concerned to assess the progress of each activity. Independent monitoring is also carried out by the Ministry of Finance and the GNHC. The agencies are required to submit quarterly financial and physical progress reports to the Ministry of Finance. Site visits are also undertaken to monitor the projects. The concerned agencies, MoF and GNHC maintain records on the financial and physical progress of every project. After every inspection visit to the project sites, the team prepares a progress report. This report is submitted to the higher authority. If there are any major implementation issues, appropriate actions are implemented for the project. While monitoring, any deviations are clearly identified and explained in the reports. Pursuant to a recent directive from the Government, a focal officer is identified in each ministry to monitor implementation of donor funded projects and update progress. The implementation of these investment projects/programs are linked to the objectives of the Annual Performance Agreements. These focal persons serve as a member of the PSC of the projects as seen from the above mention projects. Auditing of the project is carried out by the Royal Audit Authority and concerned agencies including MoF and GNHC are provided with their findings and recommendations. External funding forms a significant part of financing of capital expenditure. The development partners also undertake extensive monitoring missions of the capital investments financed by them jointly with the implementing units. Financial and physical progress of major investment projects is monitored at the level of the departments through Project Steering Committees and centrally by MoF and GNHC and the standard procedures are complied with. Information on implementation of such projects is prepared after each monitoring visit and otherwise, but these are not published. 50 Bhutan: Public Financial Management Performance Report Score Minimum requirements for scores 11.1: Economic analysis of investment proposals A Economic analyses are conducted, as established in national guidelines, to assess all major investment projects and the results are published. The analyses are reviewed by an entity other than the sponsoring entity. B Economic analyses are conducted, as established in national guidelines, to assess most major investment projects, and some results are published. The analyses are reviewed by an entity other than the sponsoring entity. C Economic analyses are conducted to assess some major investment projects. D Performance is less than required for a C score. 11.2: Investment project selection A Prior to their inclusion in the budget, all major investment projects are prioritized by a central entity on the basis of published standard criteria for project selection. B Prior to their inclusion in the budget, most major investment projects are prioritized by a central entity on the basis of standard criteria for project selection. C Prior to their inclusion in the budget, some of the major investment projects are prioritized by a central entity. D Performance is less than required for a C score. 11.3: Investment project costing A Projections of the total life-cycle cost of major investment projects, including both capital and recurrent costs together with a year-by-year breakdown of the costs for at least the next three years, are included in the budget documents. B Projections of the total capital cost of major investment projects, together with a year-by-year breakdown of the capital costs and estimates of the recurrent costs for the next three years, are included in the budget documents. C Projections of the total capital cost of major investment projects, together with the capital costs for the forthcoming budget year, are included in the budget documents. D Performance is less than required for a C score. 11.4: Investment project monitoring A The total cost and physical progress of major investment projects are monitored during implementation by the implementing government unit. There is a high level of compliance with the standard procedures and rules for project implementation that have been put in place. Information on the implementation of major investment projects is published in the budget documents or in other reports annually. B The total cost and physical progress of major investment projects are monitored by the implementing government unit. Standard procedures and rules for project implementation are in place, and information on implementation of major investment projects is published annually. C The total cost and physical progress of major investment projects are monitored by the implementing government unit. Information on implementation of major investment projects is prepared annually. D Performance is less than required for a C score. Indicator/dimension Score Brief justification for the score PI-11: P ublic Investment C+ Scoring Method M2 Management Economic analysis of 11.1:  C There are no national guidelines on economic analysis. Some of the investment proposals. development partners conduct economic analysis in accordance with their own methodology in which case the analysis is published. 3. Assessment of PFM Performance 51 Indicator/dimension Score Brief justification for the score Investment project 11.2:  A As per current practice, prior to inclusion in the budget, all major selection. investment projects are prioritized by the departments and approved by the Department of National Budget and the GNHC on the basis of published standard criteria for project selection. Investment project 11.3:  C Capital costs are included in the forthcoming budget year for those costing. projects that are funded by RGoB, and through external assistance only if agreements have been signed and fund release is confirmed. Projects are included in the in-year budget changes as and when these conditions are met and finally included in the supplementary budget presented to Parliament in June. Major activities are individually listed in the Budget Report. Investment project 11.4:  C Financial and physical progress of major investment projects is monitoring. monitored at the level of the departments through PSCs and centrally by MoF and GNHC and the standard procedures are complied with. Information on implementation of such projects is prepared after each monitoring visit and otherwise, but these are not published. PI-12: Public asset management This indicator assesses the management and monitoring of government assets and transparency of asset disposals. It contains three dimensions and uses the M2 (AV) method for aggregating dimension scores. Dimension 12.1: Financial asset monitoring The Ministry of Finance (MoF) and the Royal Monetary Authority (RMA) are in charge of managing government financial assets. The MoF manages assets like loans, receivables owned by the government and equity investment in Public Enterprises (PEs) and other companies, on-lending and loans to PEs, trust funds, etc. and the responsibilities of monitoring of financial assets are clearly established in the Financial Rules and Regulations, 2001 (FRR). RMA manages the official financial assets related to money and banking such as external assets including foreign currency reserves and currency and bullion in accordance with the Royal Monetary Authority Act of Bhutan, 2010. Criteria for management, monitoring and accounting of financial assets such as bank balances and advances are provided in the Finance and Accounting Manual (part of the FRR), but have not been specified for assets such as equity in public enterprises. Criteria for management of financial assets relating to money and banking are defined under the RMA Act. Information on financial assets is maintained by concerned agencies for major categories recorded in the annual financial statements which are readily available and the performance is publicly disclosed. Monitoring and accounting of financial assets are carried out as per the Financial Rules and Regulations 2001 at least on an annual basis. Records of financial assets are maintained by the concerned agencies and in PEMS, are recognized at acquisition cost and disclosed in the annual financial statements/budget reports including information on performance of major categories of financial assets. 52 Bhutan: Public Financial Management Performance Report Table 3.3.12.1: Categories of non-financial assets Captured in Categories Sub-categories Comments register(s) Fixed assets Buildings and Stock Registers Concerned user agency owns and administers. 1.  structures of concerned user Updated on acquisition and followed up 2.  agency and Central annually by DNP. Inventory of DNP. 3. Assets are valued only on disposal by DNP. Machinery and Stock Registers Concerned user agency owns and administers. 1.  Equipment of concerned user Updated on acquisition and followed up 2.  agency and Central annually by DNP. Inventory of DNP. 3. Assets are valued only on disposal by DNP. Other fixed assets N/A N/A Weapons systems N/A N/A Inventories Stock Registers Updated on acquisition. of concerned user agency. Valuables Non-produced Land Stock Registers Concerned user agency owns and administers. 1.  assets of concerned user Updated on acquisition and followed up 2.  agency and Central annually by DNP. Inventory of DNP. Will be valued by DNP. 3.  Mineral and Recorded by Ministry Records on mines and hydropower projects are energy resources of Economic Affairs. maintained. Other naturally N/A N/A occurring assets Intangible non- N/A N/A produced assets Dimension 12.2: Non-financial asset monitoring The responsibilities for monitoring non-financial assets are clearly articulated in the Property Management Manual of the Financial Rules and Regulations (FRR). The responsibility for proper accounting, safeguarding and utilization vests with the Head of Office who may delegate, without disowning his/her accountability, to subordinate officials called Property Officers. All non-expendable assets are required to be registered with the Department of National Properties (DNP) in the Ministry of Finance who maintain a central database and assign an identification code to each asset. The Manual also mandates maintenance of fixed assets registers and registers of inventories. The registers are available on request to the concerned authority but these are not publicly disclosed. The rules for monitoring and accounting of assets are given in the Property Management Manual of FRR. In essence, every agency is required to maintain the record of the properties. The Royal Audit Authority (RAA) of Bhutan has recently developed an assessment tool to promote accountability in the use of public resources called the Financial Resources Management Accountability Index (FRMAI). The Index is based on nine elements and element V pertains to Property Management System (www.bhutanaudit.gov.bt/frmai). The RAA reports that the Government follows cash basis accounting and capital expenditures are expended on a year-to-year basis. Therefore, the account balances are not carried forward in subsequent years, indicating absence of adequate financial control. It is important that government agencies maintain accurate and up-to-date memorandum records and 3. Assessment of PFM Performance 53 exercise adequate administrative, supervisory and other controls including physical controls over the custody, use and control of government property. To conclude, the Government maintains records of its holding of fixed assets and other non-financial assets and information on their usage and age is collected only partially but is not published. Dimension 12.3: Transparency of asset disposal The rules and procedures for sale, transfer and disposal of assets and asset usage rights are clearly established in the Property Management Manual of the FRR and are easily accessible. They do clearly promote competition and transparency. The responsibilities on sale of non-financial assets are clearly established. The Auction and Records Section under the Government Property and Procurement Management Division (GPPMD) in the Department of National Properties (DNP) specifically caters to the sale of non-financial assets. The decision making process is clear and transparent and exercised by the Auction Committee comprising the Director General of DNP and representatives from the MoF, Road Safety and Transport Authority (RSTA) and the Royal Bhutan Police (RBP). The fact that there are no audit issues/memos on the disposal of surrendered government properties suggests that the rules are being fully complied with. The DNP prepares an auction report after each auction and submits it to MoF. Information on transfer/disposal is provided to the Legislature through the annual financial statements and budget reports. The rules for disposal of financial assets relating to money and banking are established in the RMA Act. There have not been any disinvestment in government companies in Bhutan; hence procedures and rules in this area have yet to be established. The information on sale, rental or transfer of financial and non-financial assets (including sale of and rent from government property and dividend from RGoB’s investments in equity shares of government companies) is disclosed in the annual financial statements (e.g. in Schedule 13 to the 2013/14 audited financial statements). Performance relating to treasury bills are discussed in the annual financial statements and the budget report and of other financial assets pertaining to money and banking in the annual report of the RMA. Score Scoring Method M2 (AV). Minimum Requirements 12.1: Financial asset monitoring A The government maintains a record of its holdings of all categories of financial assets which are recognized at fair or market value, in line with international accounting standards. Information on the performance of the portfolio of financial assets is published annually. B The government maintains a record of its holdings of major categories of financial assets which are recognized at their acquisition cost or fair value. Information on the performance of the major categories of financial assets is published annually. C The government maintains a record of its holdings of major categories of financial assets. D Performance is less than required for a C score. 12.2: Non-financial asset monitoring A The government maintains a register of its holdings of fixed assets, land, and (where relevant) sub- soil assets, including information on their usage and age, which is published at least annually. 54 Bhutan: Public Financial Management Performance Report Score Scoring Method M2 (AV). Minimum Requirements B The government maintains a register of its holdings of fixed assets, including information on their usage and age, which is published. A register of land (where relevant) and sub-soil assets is also maintained. C The government maintains a register of its holdings of fixed assets, and collects partial information on their usage and age. D Performance is less than required for a C score. 12.3: Transparency of asset disposal A Procedures and rules for the transfer or disposal of financial and non-financial assets are established, including information to be submitted to the legislature for information or approval. Information on transfers and disposal is included in budget documents, financial reports or other reports. B Procedures and rules for the transfer or disposal of non-financial assets are established. Information on transfers and disposals is included in budget documents, financial reports or other reports. C Procedures and rules for the transfer or disposal of non-financial assets are established. Partial information on transfers and disposals is included in budget documents, financial reports or other reports. D Performance is less than required for a C score. Indicator/Dimension Score Brief justification for the score PI-12: Public asset management B Scoring Method M2 12.1: Financial asset monitoring. B Records of financial assets are maintained by the concerned agencies and in PEMS. Financial assets are recognized at acquisition cost and disclosed in the annual financial statements/ budget reports including information on performance of major categories of financial assets.  on-financial asset 12.2: N C The government maintains records of holding of its fixed assets monitoring. and other non-financial assets and information on their usage and age is collected only partially, and is not published. Transparency of asset 12.3:  A Procedures and rules for transfer and disposal of financial and disposal. non-financial assets are established and information is included in the annual financial statements presented to Parliament. Ongoing and planned reforms The DNP is currently carrying out familiarization training of focal persons in the dzongkhags who will be responsible for the management of the web-based inventory system. With this, it is expected that the overall inventory system containing the records of non-financial assets of the Government would be more dynamic and up to date. The Government Procurement and Property Management Division under the DNP intends to have the web-based inventory system operational during the current financial year. All procurement will then be directly entered in the system and the coverage of the management and statistical reports on non-financial assets is expected to improve substantially. PI-13: Debt management This indicator assesses the management of domestic and foreign debt and guarantees. It seeks to identify whether satisfactory management practices, records and controls are in place to ensure efficient and effective arrangements. It contains three dimensions and uses the M2 (AV) method for aggregating scores. 3. Assessment of PFM Performance 55 Poor management and reporting on debt may create unnecessarily high debt service costs and can create significant fiscal risks. Governments that fail to monitor these financial liabilities are unlikely to be able to deliver planned services. The responsibility for management and reporting of debt in Bhutan is vested with the Debt Management Division (DMD) of the Department of Public Accounts (DPA) with support from the Treasury Management Division (TMD) in respect of domestic debt and Public Enterprise Division (PED) for loan guarantees, all part of the Ministry of Finance. The Debt Management Division is divided into a Front Office, Middle Office and Back Office. For the first time, the Royal Audit Authority carried out an audit of public debt management in 2014 for the period covering FY 2008/09 to FY 2012/13 (Tenth Five Year Plan). The audit report was discussed in the 5th Session of the Parliament in May 2015 and provided numerous recommendations for overall improvement of public debt management in Bhutan. One of the key recommendations is the need for a Public Debt Policy for Bhutan. The drafting of Public Debt Policy is complete and is presently under consideration by the Government. Dimension 13.1: Recording and reporting of debt and guarantees The DMD uses the CS-DRMS (Commonwealth Secretariat-Debt Recording and Management System)26 for recording and managing external debt. The DMD uses the core functionalities of CS-DRMS to maintain portfolio including on-lending and record transactions of disbursement and debt service payments, but other features such as portfolio analysis, scenario analysis, forecast etc. are not used and are done manually. Domestic debt in the form of Treasury Bills is recorded by the Treasury Management Division (TMD) using spreadsheets and this is updated at the time of every issue or redemption. Efforts are under way to record details of T-Bills transaction in the CS-DRMS. Debt records are complete, accurate and reconciled on a monthly basis. DMD uses the Period End Processing utility in CS-DRMS for reconciling the external debt data for each creditor. The external debt reports are generated through CS-DRMS at least quarterly for submission to the Royal Monetary Authority, National Statistical Bureau and other relevant agencies. The DMD also publishes a quarterly Public Debt Report that contains all information on domestic and external debt. The most recent report for the quarter ended December 2015 was finalized in January 2016. Presently, this report is only for internal consumption and is not made publicly available. Debt data are also used as an input to ascertain macro variables during the Medium Term Fiscal Framework (MTFF) exercise for the Ministry of Finance. As a member of the World Bank Group, Bhutan submits debt data on public and publicly guaranteed debt on a loan by loan basis for the DRS (Debtor Reporting System). Debt data stock, debt service and operations are available in the Annual Budget, Annual Financial Statements (AFS) and also in the annual Statistical Yearbook of Bhutan. Domestic and foreign debt records are complete, accurate and updated and reconciled on a monthly basis. Integrity of debt data is fairly high and comprehensive. Management and statistical reports covering debt, service, stock and operations are produced at least quarterly. 26 CS-DRMS is a public debt management system developed by Commonwealth Secretariat and used in a number of countries. CS-DRMS is capable of forecasting, analyzing and reporting of debt related data in addition to recording debt. 56 Bhutan: Public Financial Management Performance Report Dimension 13.2: Approval of debt and guarantees The Constitution of the Kingdom of Bhutan and the Public Finance Act 2007 provide clear and transparent criteria and fiscal targets for contracting of loans and issuance of guarantees. The Constitution, Article 14 provides that: Section 4 - “The Government, in the public interest, may raise loans, make grants or guarantee loans in accordance with the law”; section 5 - “The Government shall exercise proper management of the monetary system and public finance. It shall ensure that the servicing of public debt will not place an undue burden on future generations”; and section 6 - “The Government shall ensure that the cost of recurrent expenditures is met from internal resources of the country.” The primary legislation that governs public debt contracting is the Public Finance Act, 2007. The contracting of loans and issuance of guarantees are always approved by a single responsible government authority, i.e. the Minister of Finance. The Public Finance Act, Chapter III read with Chapter VII, empowers the Minister of Finance to approve borrowings and issue guarantees, subject to the approval of the Cabinet. Loan guarantees are issued by the Public Enterprises Division (though no guarantees have been issued since 2008). The Public Finance Act specifies the purposes for which loans may be raised. zz To finance budget deficits; zz To refinance a maturing debt or a loan paid before the redemption date; zz To maintain credit balances in the bank accounts; zz For on-lending to State Enterprises and other legal entities; and zz Any other purposes approved by the Lhengye Zhungtshog (Cabinet) State enterprises and local authorities can borrow only with the approval of the Minister of Finance. Similarly, the Minister of Finance is the sole authority for issuing guarantees for performance of any budgetary body, state enterprise or organization. The controls over the levels for contracting of loans and issuance of guarantees by RGoB are also articulated in the annual Budget Report, which is presented to the Parliament by the Finance Minister. These are made against transparent criteria and fiscal targets. The level of borrowing is also guided by the Five Year Plan (FYP) outlay. For instance, the annual Budget Report for FY 2014/15 provides the following criteria and targets: zz For sustainable fiscal balance (i) Domestic revenue to finance some portion of the capital expenditure besides covering current expenditure fully; (ii) Contain fiscal deficit at an average of 3% of GDP during the plan period. zz For sustainable resource gap: (i) Avail external borrowings only for socio-economic development programs and projects; (ii) Loan money shall not be used for operation and maintenance, purchase of vehicles, trainings, study visits, road shows, etc.; (iii) Implementation of externally financed projects to commence only upon receipt of funds from the development partners; (iv) Realistic estimates to be prepared to avoid cost overruns, fund release must be obtained prior to implementation; (v) Permit changes in scope of works only after careful technical and financial analysis based on the resources. Similarly, the annual Budget Report for FY 2015/16 includes the following criteria and targets: zz Maintain fiscal deficit within 3.2% of GDP; zz Generate surplus domestic revenue to increasingly cover part of capital expenditure; 3. Assessment of PFM Performance 57 zz Maintain non-hydro debt below 35% of GDP; and zz Subsidies provided to agencies with social mandates for capital works and to cover revenue deficit. The contracting of loans is made against transparent criteria and overall fiscal targets at the portfolio level, as set in the medium-term debt strategy. A Medium Term Debt Strategy (MTDS) for FY2013/14 – FY2017/18 has been developed and includes an action plan of implementation. The MTDS has set targets in terms of various debt indicators to be achieved at the end of 11th FYP. One example of such targets is that the non-hydro debt will be maintained below 26% of GDP at the end of 11th FYP. At the individual loan level, some guidelines are available for assessment of guarantees in PED and operational guidelines for issue of Treasury bills. Two fiscal targets included in the Annual Performance Agreement (APA) of the Department of Public Accounts are: (i) maintain hydro-power debt to GDP ratio at 35% or below; (ii) maintain budgetary debt service to export ratio within LIC DSA threshold, under the overall target set in the debt strategy. Central government contracting of loans and issuance of guarantees are approved by the Minister of Finance, subject to approval by the Cabinet and are made against transparent criteria and fiscal targets. Dimension 13.3: Debt management strategy The Ministry of Finance has prepared a Medium-term Debt Strategy, as a separate document, for the first time in February 2013 covering the period FY 2013/14 to FY 2017/18. It covers all existing central government debt (both external and domestic) including its projection and sets target levels for various debt indicators to be achieved towards the end of FY2017/18 (including interest rate, refinancing and exchange rate). The Strategy was prepared under the guidance of the Macroeconomic Framework Coordination Technical Committee and approved by the Minister of Finance. Though the document states that the Strategy will be reviewed and updated annually, the intent is to update it at least every three years. At present, the document is not published. The primary objective of debt management in Bhutan is clearly stated in the Strategy to minimize the cost of borrowing with a clear focus on maximizing concessional borrowing from multilateral and bilateral creditors. In the context of Bhutan, with its limited financing choices, the Strategy provides a clear description of the market risks (currency, interest and refinancing risks) and presents the country specific context for the debt portfolio, especially in relation to the hydropower debts with the Government of India (GoI). Since the domestic debt market is almost non-existent in Bhutan, the strategy highlights the issues and challenges, and outlines a roadmap for the gradual development of capital market in Bhutan. A medium-term debt strategy covering all existing debt is available with a horizon of five years, as a separate document and planned for annual updating, though in actual practice the update will happen every three years. The strategy is approved by the Minister of Finance and sets targets for indicators of interest-rate, refinancing and exchange rate risk. The document is not published. Score Scoring Method M2 (AV). Minimum Requirements 13.1: Recording and reporting of debt and guarantees A Domestic and foreign debt and guaranteed debt records are complete, accurate, updated and reconciled monthly. Comprehensive management and statistical reports covering debt service, stock and operations are produced at least quarterly. B Domestic and foreign debt and guaranteed debt records are complete, accurate and updated quarterly. Most information is reconciled quarterly. Comprehensive management and statistical reports covering debt service, stock and operations are produced at least annually. 58 Bhutan: Public Financial Management Performance Report Score Scoring Method M2 (AV). Minimum Requirements C Domestic and foreign debt and guaranteed debt records are updated annually. Reconciliations are performed annually. Areas where reconciliation requires additional information to be complete are acknowledged as part of records documentation. D Performance is less than required for a C score. 13.2: Approval of debt and guarantees A Primary legislation grants authorization to borrow, issue new debt and loan guarantees on behalf of the central government to a single responsible debt management entity. Documented policies and procedures provide guidance to borrow, issue new debt and undertake debt-related transactions, issue loan guarantees and monitor debt management transactions by a single debt management entity. Annual borrowings must be approved by government or the legislature. B Primary legislation grants authorization to borrow, issue new debt and loan guarantees on behalf of the central government to entities specifically included in the legislation. Documented policies and procedures provide guidance for undertaking borrowing, other debt-related transactions and issue loan guarantees to one or several entities. These transactions are reported to, and monitored by, a single responsible entity. Annual borrowings must be approved by government or the legislature. C Primary legislation grants authorization to borrow, issue new debt and loan guarantees on behalf of the central government to entities specifically included in the legislation. Documented policies and procedures provide guidance for undertaking borrowings, other debt-related transactions and issue loan guarantees to one or several entities. These transactions are reported to, and monitored by, a single responsible entity. D Performance is less than required for a C score. 13.3: Debt management strategy A A current medium-term debt management strategy covers existing and projected government debt, with a horizon of at least 3 years, is publicly reported. The strategy includes target ranges for indicators such as interest rates, refinancing, and foreign currency risks. Annual reporting against debt management objectives is provided to the legislature. The government’s annual plan for borrowing is consistent with the approved strategy. B A current medium-term debt management strategy, covering existing and projected government debt, with a horizon of at least 3 years is publicly reported. The strategy includes target ranges for indicators such as interest rates, refinancing, and foreign currency risks. C A current medium-term debt management strategy covers existing and projected government debt and is publicly available. The strategy indicates at least the preferred evolution of risk indicators such as interest rates and refinancing, and foreign currency risks. D Performance is less than required for a C score. Indicator/Dimension Score Brief justification for the score PI-13: Debt management B Scoring Method M2 Recording and 13.1:  A Domestic and foreign debt records are complete, accurate and updated reporting of debt and and reconciled on a monthly basis. Integrity of debt data is fairly high guarantees. and comprehensive management and statistical reports covering debt, service, stock and operations are produced at least quarterly. Approval of debt and 13.2:  A Public Finance Act is the primary legislation that grants authorization guarantees. to borrow and issue new debt and guarantees to the Minister of Finance, subject to approval by the Cabinet, and are made against transparent criteria and fiscal targets. Debt management 13.3:  D A medium-term debt strategy covering all existing and projected strategy. debt is available with a horizon of five years, as a separate document and planned for periodic updating. The strategy is approved by the Minister of Finance and sets targets for interest rate, refinancing and exchange rate risk. The document is not publicly available. 3. Assessment of PFM Performance 59 Ongoing and planned reforms The Government is considering making the quarterly debt reports publicly available on the website of MoF very soon. A Public Debt Policy including clear direction of fixing limit for borrowing for RGoB is expected to be finalized soon. Pillar IV – Policy-based fiscal strategy and budgeting 3.4  (Performance indicators 14 to 18) PI-14: Macroeconomic and fiscal forecasting This indicator measures the ability of a country to develop robust macroeconomic and fiscal forecasts, which are crucial to developing a sustainable fiscal strategy and ensuring greater predictability of budget allocations. It also assesses the government’s capacity to estimate the fiscal impact of potential changes in economic circumstances. It contains three dimensions and uses M2 (AV) for aggregating dimension scores. Dimension 14.1: Macroeconomic forecasts Medium term macro projections are carried out on a quarterly basis and are used for fiscal planning and budgeting processes. The policy level Macroeconomic Framework Coordination Committee (MFCC) and the technical level Macroeconomic Framework Coordination Technical Committee (MFCTC) are responsible for these quarterly macro projections. The Committees are represented by all the key economic agencies like Royal Monetary Authority, Ministry of Finance, Ministry of Economic Affairs, Gross National Happiness Commission, National Statistical Bureau, Tourism Council of Bhutan and Ministry of Labour and Human Resources. Any projections of economic indicators are done on a set of assumptions that are clearly stated and defined by the concerned member agency of the Committee. These assumptions are conveyed while explaining the variables, which are presented in the annual National Budget Report. The Committee may present various scenarios for policy decision to the Cabinet, but only the baseline scenario is reported in the annual National Budget Report. Dimension 14.2: Fiscal forecasts The Government (Macroeconomic Framework Coordination Committee (MFCC)) prepares forecasts of the main fiscal indicators, including revenues (tax, non-tax, grants), aggregate expenditure and the budget balance, for the budget year and two following fiscal years. These forecasts, together with the underlying assumptions, but not an explanation of the main differences from the previous year’s budget, are included in the budget report submitted to the legislature. Dimension 14.3: Macro-fiscal sensitivity analysis The Government prepares for its internal use a range of fiscal forecast scenarios based on alternative macroeconomic assumptions. However, the budget documents do not include a discussion of forecast sensitivities, with the exception of sensitivity of revenues to hydropower projects coming on line. A debt sustainability analysis is produced every two years along with the IMF Article IV report with support of the IMF/WB. 60 Bhutan: Public Financial Management Performance Report Score Scoring Method M2 (AV). Minimum Requirements 14.1: Macroeconomic forecasts A The government prepares forecasts of key macroeconomic indicators which, together with the underlying assumptions, are included in budget documentation submitted to the legislature. These forecasts are updated at least once a year. The forecasts cover the budget year and the two following fiscal years. The projections have been reviewed by an entity other than the preparing entity. B The government prepares forecasts of key macroeconomic indicators which, together with the underlying assumptions, are included in budget documentation submitted to the legislature. These forecasts cover the budget year and the two following fiscal years. C The government prepares forecasts of key macroeconomic indicators for the budget year and the two following fiscal years. D Performance is less than required for a C score. 14.2: Fiscal forecasts A The government prepares forecasts of the main fiscal indicators, including revenues (by type), aggregate expenditure and the budget balance, for the budget year and two following fiscal years. These forecasts, together with the underlying assumptions and an explanation of the main differences from the forecasts made in the previous year’s budget, are included in budget documentation submitted to the legislature. B The government prepares forecasts of the main fiscal indicators, including revenues (by type), aggregate expenditure and the budget balance, for the budget year and two following fiscal years. These forecasts, together with the underlying assumptions, are included in budget documentation submitted to the legislature. C The government prepares forecasts of revenue, expenditure and the budget balance for the budget year and the two following fiscal years. D Performance is less than required for a C score. 14.3: Macro-fiscal sensitivity analysis A The government prepares a range of fiscal forecast scenarios based on alternative macroeconomic assumptions, and these scenarios are published, together with its central forecast. B The government prepares for its internal use a range of fiscal forecast scenarios based on alternative macroeconomic assumptions. The budget documents include discussion of forecast sensitivities. C The macro-fiscal forecasts prepared by the government include a qualitative assessment of the impact of alternative macroeconomic assumptions. D Performance is less than required for a C score. Indicator/Dimension Score Brief justification for the score Macroeconomic and fiscal PI-14:  B Scoring Method M2 forecasting 14.1: Macroeconomic forecasts. A A government committee prepares 3-year forecasts of key macroeconomic indicators which, together with the underlying assumptions, are included in the Budget Report submitted to the legislature. 14.2: Fiscal forecasts. B The Government prepares 3-year forecasts of the main fiscal indicators. These and the underlying assumptions are included in the Budget Report. 14.3: Macro-fiscal sensitivity analysis. C The Government prepares for its internal use a range of fiscal scenarios based on alternative macroeconomic assumptions, but not a sensitivity analysis of the impact of alternative assumptions. 3. Assessment of PFM Performance 61 PI-15: Fiscal strategy This indicator provides an analysis of the capacity to develop and implement a clear fiscal strategy. It also measures the ability to develop and assess the fiscal impact of revenue and expenditure policy proposals that support the achievement of the government’s fiscal goals. It contains three dimensions and uses the M2 (AV) method for aggregating dimension scores. 15.1: Fiscal impact of policy proposals The Government prepares estimates of the fiscal impact of all proposed changes in revenue and expenditure policy for the budget year and two following fiscal years. However, only the estimates for the budget year of the fiscal impact of proposed changes in revenue and expenditure policy are submitted to the legislature. With regard to revenue, if there are any proposed changes in the rates or structure of any taxes, the tax measures are submitted to the Parliament. In FY 2014-15, various tax measures were presented to the Parliament in the National Budget report. In addition to this, any changes with regard to the revenue increase or decrease are also indicated in the National Budget reports. For the expenditure policy proposals, all the significant proposals for both current and capital expenditure are fully costed for the budget year and are included in the National Budget report submitted to the legislature. For example, introduction of helicopter services in 2015 by the Government was included in the expenditure proposal (National Budget Report for FY 2015-16) which was submitted to the legislature. The overall fiscal balance is deduced taking into account all these proposed changes both in the revenue and expenditure. 15.2: Fiscal strategy adoption The 11th Five Year Plan (July 2013-June 2018) sets fiscal targets such as increasing the coverage of public expenditures by domestic revenues to 85% by June 2018, and limiting on average the fiscal deficit to 3% or less. In addition, the Constitution specifies that the recurrent spending should be funded out of internal resources. The Public Finance Act, section 7, also stipulates that recurrent expenditures should be kept within internal resources. The Budget report 2015/16 reaffirms the commitment to maintaining the fiscal deficit to 3% on average for the Budget year, and stresses that the target of 85% of coverage of public expenditures by domestic revenues is unlikely to be achieved. No fiscal target is discussed relating to revenue or expenditure, nor any change in net financial assets. A medium-term debt management strategy has been prepared with support from ADB. A debt policy is under discussion, setting a threshold for debt stocks. 15.3: Reporting on fiscal outcomes The Budget report 2015/16 reaffirms the commitment to maintaining the fiscal deficit to 3% for the budget year. It explains that the target of 85% of coverage of public expenditures by domestic revenues is unlikely to be achieved because of the delay in the commissioning of major hydropower projects. Chapter 2 of the Budget report discusses in detail the fiscal outcomes of the last completed fiscal year and any deviations from the objectives and targets set. 62 Bhutan: Public Financial Management Performance Report Score Scoring Method M2 (AV). Minimum Requirements 15.1: Fiscal impact of policy proposals A The government prepares estimates of the fiscal impact of all proposed changes in revenue and expenditure policy for the budget year and two following fiscal years, which are submitted to the legislature. B The government prepares estimates of the fiscal impact of all proposed changes in revenue and expenditure policy for the budget year and two following fiscal years. C The government prepares estimates of the fiscal impact of all proposed changes in revenue and expenditure policy for the budget year. D Performance is less than required for a C score. 15.2: Fiscal strategy adoption A The government has adopted, submitted to the legislature and published a current fiscal strategy that includes explicit time-based quantitative fiscal goals and targets together with qualitative objectives for at least the budget year and the two following fiscal years. B The government has adopted and submitted to the legislature a current fiscal strategy that includes quantitative or qualitative fiscal objectives for at least the budget year and the two following fiscal years. C The government has prepared for its internal use a current fiscal strategy that includes qualitative objectives for fiscal policy. D Performance is less than required for a C score. 15.3: Reporting on fiscal outcomes A The government has submitted to the legislature and published with the annual budget a report that describes progress made against its fiscal strategy and provides an explanation of the reasons for any deviation from the objectives and targets set. The report also sets out actions planned by the government to address any deviations, as prescribed in legislation. B The government has submitted to the legislature with the annual budget a report that describes progress made against its fiscal strategy and provides an explanation of the reasons for any deviation from the objectives and targets set. C The government prepares an internal report on the progress made against its fiscal strategy. Such a report has been prepared for at least the last completed fiscal year. D Performance is less than required for a C score. Indicator/Dimension Score Brief justification for the score PI-15: Fiscal strategy B Scoring Method M2 Fiscal impact of policy 15.1:  B The Government prepares estimates of the fiscal impact of all proposals. proposed changes in revenue and expenditure policy for the budget year and two following fiscal years, but only the estimates for the budget year of the fiscal impact of proposed changes are submitted to the legislature. 15.2: Fiscal strategy adoption. C The Government has prepared a fiscal strategy covering the next three years that includes quantitative objectives for fiscal policy, but has not submitted it to the legislature.  eporting on fiscal 15.3: R B Chapter 2 of the 2015/16 Budget report discusses the fiscal outcomes. outcomes of the last completed fiscal year and any deviations from the objectives and targets set, and explains that the target of 85% of coverage of public expenditures by domestic revenues is unlikely to be achieved because of the delay in the commissioning of major hydropower projects. 3. Assessment of PFM Performance 63 PI-16: Medium-term perspective in expenditure budgeting This indicator examines the extent to which expenditure budgets are developed for the medium term within explicit medium term budget expenditure ceilings. It also examines the extent to which annual budgets are derived from medium term estimates and the degree of alignment between medium term budget estimates and strategic plans. It contains four dimensions and uses the M2 (AV) method for aggregating dimension scores. 16.1: Medium term expenditure estimates The annual budget report presents estimates for the budget year and the two following fiscal years allocated by economic classification (Section 4.2 of the National Budget 2015-16). The other main elements of annual budget report are provided in PI-5 above. 16.2: Medium term expenditure ceilings Aggregate expenditure ceilings for the budget year and for the two following years are approved by the Government before the first budget circular is issued. Ministry level ceilings are approved for the budget year only. 16.3: Alignment of strategic plans and medium-term budgets Medium-term strategic plans are prepared for some ministries. Some expenditure policy proposals in the annual budget estimates align with the strategic plans. While all government agencies prepare medium- term plans to feed into the five-year plan, strategic plans prepared after the finalization of the five year plans follow new priorities arising from the elected government. That leads to some disconnect between sector strategies and costing and the reality of expenditure policy proposals (e.g. the education blueprint). 16.4: Consistency of budgets with previous year estimates The budget report provide an explanation of most changes to expenditure estimates between the first year following the budget year of the previous medium term budget and the estimate for the budget year of the new medium term budget at the aggregate level (Chapter 2 of the Budget report FY 2015/16). Score Scoring Method M2 (AV). Minimum Requirements 16.1: Medium-term expenditure estimates A The annual budget presents estimates of expenditure for the budget year and the two following fiscal years allocated by administrative, economic and program (or functional) classification. B The annual budget presents estimates of expenditure for the budget year and the two following fiscal years allocated by administrative and economic classification. C The annual budget presents estimates of expenditure for the budget year and the two following fiscal years allocated by administrative or economic classification. D Performance is less than required for a C score. 16.2: Medium term expenditure ceilings A Aggregate and ministry-level expenditure ceilings for the budget year and the two following fiscal years are approved by government at least before the first budget circular is issued. B Aggregate expenditure ceilings for the budget year and the two following fiscal years, and ministry- level ceilings for the budget year, are approved by government at least before the first budget circular is issued. 64 Bhutan: Public Financial Management Performance Report Score Scoring Method M2 (AV). Minimum Requirements C Aggregate expenditure ceilings for the budget year and the two following fiscal years are approved by the government at least before the first budget circular is issued. D Performance is less than required for a C score. 16.3: Alignment of strategic plans and medium-term budgets A Medium-term strategic plans are prepared and costed for most ministries. Most expenditure policy proposals in the approved medium-term budget estimates align with the strategic plans. B Medium-term strategic plans are prepared for the majority of ministries, and include cost information. The majority of expenditure policy proposals in the approved medium term budget estimates align with the strategic plans. C Medium-term strategic plans are prepared for some ministries. Some expenditure policy proposals in the annual budget estimates align with the strategic plans. D Performance is less than required for a C score. 16.4: Consistency of budgets with previous year estimates A The budget documents provide an explanation of all changes to expenditure estimates between the two fiscal years following the budget year of the previous medium term budget and the estimate for the budget and first following fiscal year of the new medium term budget at the ministry level. B The budget documents provide an explanation of most changes to expenditure estimates between the first year following the budget year of the previous medium term budget and the estimate for the budget year of the new medium term budget at the ministry level. C The budget documents provide an explanation of some of the changes to expenditure estimates between the first year following the budget year of the previous medium term budget and the estimate for the budget year of the new medium term budget at the aggregate level. D Performance is less than required for a C score. Indicator/Dimension Score Brief justification for the score Medium-term perspective in PI-16:  C+ Scoring Method M2 expenditure budgeting 16.1: Medium-term expenditure estimates. C The annual budget report presents estimates for the budget year and the two following fiscal years allocated by economic classification. 16.2: Medium-term expenditure ceilings. B The Government approves expenditure ceilings for the budget year and for the two following years before the first budget circular is issued, but ministry ceilings are approved for the budget year only. Alignment of strategic plans and 16.3:  C Strategic plans are prepared by some ministries, but medium-term budgets. medium-term budgets diverge from fixed strategic plans due to changing policies and priorities. Consistency of budgets with previous 16.4:  C The budget report provides an explanation of most year estimates. changes to expenditure estimates from one year to the next at the aggregate level. PI-17: Budget preparation process This indicator measures the effectiveness of participation by relevant stakeholders in the budget preparation process, including the political leadership, and whether that participation is orderly and timely. It contains three dimensions and uses the M2 (AV) method for aggregating dimension scores. 3. Assessment of PFM Performance 65 17.1: Budget calendar Dimensions 17.1 and 17.2 are assessed by reference to the last budget submitted to the legislature at the time of this assessment (November 2015), which was for FY 2015/16. The FRR 2001 requires the Budget Call Circular to be issued at the latest by end of December or first week of January. For the last Budget submission, the Budget circular was issued on January 7, 2015 by the Department of National Budget, Ministry of Finance for the 2015/2016 Budget preparation. The Circular provided guidelines for budget preparation including budget ceilings for each agency and the agencies have around eight weeks to prepare their budget proposal. All budgetary units completed their estimates on time (March 2, 2015). 17.2: Guidance on budget preparation The Budget Call Circulars for the FY 2015/2016 were comprehensive and clear. They were approved by the Cabinet before being sent to the budgetary units. The circulars reflected ministry ceilings. 17.3: Budget submission to the legislature Article 47 of the Public Finance Act states that the “The Minister of Finance shall present to the Parliament the Government’s Budget Appropriation Bill no later than 5 days preceding the budget year”. The budget is expected to be approved by the Parliament before the start of the financial year on July 1. The Minister of Finance presented the Government’s Budget Appropriation Bill for 2015/16 to Parliament on May 25, 2015. For 2014/15 it was presented on June 6, 2014, but for 2013/14 it was not presented until September 17, 2013, due to elections intervening. Only for FY 2015/16 has Parliament had over a month to scrutinize the budget proposals. Score Scoring Method M2 (AV). Minimum Requirements 17.1: Budget calendar A A clear annual budget calendar exists, is generally adhered to and allows budgetary units at least six weeks from receipt of the budget circular to meaningfully complete their detailed estimates on time. B A clear annual budget calendar exists, and is largely adhered to. The calendar allows budgetary units at least four weeks from receipt of the budget circular. Most budgetary units are able to complete their detailed estimates on time. C An annual budget calendar exists and some budgetary units comply with it and meet the deadlines for completing estimates. D Performance is less than required for a C score. 17.2: Guidance on budget preparation A A comprehensive, and clear budget circular, or circulars, covering total budget expenditure for the full fiscal year, is issued to budgetary units, which reflects ministry ceilings approved by Cabinet (or equivalent) prior to the circular’s distribution to budgetary units. B A comprehensive, and clear budget circular, or circulars, covering total budget expenditure for the full fiscal year, is issued to budgetary units, which reflects ministry ceilings submitted to the Cabinet (or equivalent). The approval of ceilings takes place after the circular’s distribution to budgetary units, and before budgetary units have completed their submission. C A budget circular, or circulars, is issued to budgetary units, including ceilings for administrative or functional areas. Total budget expenditure is covered for the full fiscal year. The budget estimates are reviewed and approved by Cabinet after they have been completed in every detail by budgetary units. D Performance is less than required for a C score. 66 Bhutan: Public Financial Management Performance Report Score Scoring Method M2 (AV). Minimum Requirements 17.3: Budget submission to the legislature A The executive has submitted the annual budget proposal at least 2 months before the start of the fiscal year in each of the last three years. B The executive has submitted the annual budget proposal at least 2 months before the start of the fiscal year in two of the last three years and submitted it before the start of the FY in the third year. C The executive has submitted the annual budget proposal at least 1 month before the start of the fiscal year in two of the last three years. D Performance is less than required for a C score. Indicator/Dimension Score Brief justification for the score PI-17: Budget preparation process B Scoring Method M2 17.1: Budget calendar. A A clear budget calendar exists and is substantially adhered to. It allows budget units around 8 weeks to complete their detailed estimates. 17.2: Guidance on budget preparation. A The budget circular is comprehensive and clear and reflects ministry expenditure ceilings approved by the Cabinet.  udget submission to the 17.3: B D The annual budget proposal was not presented to legislature. Parliament at least one month before the start of 2 of the last 3 FYs. PI-18: Legislative scrutiny of budgets This indicator assesses the nature and extent of legislative scrutiny of the annual budget. It considers the extent to which the legislature scrutinizes, debates and approves the annual budget, including the extent to which the legislature’s procedures for scrutiny are well-established and respected and the existence of rules for in-year amendments to the budget without ex-ante approval by the legislature. It contains four dimensions and uses the M1 (WL) method for aggregating dimension scores. Assessment of the first three dimensions is based on the budget for FY 2014/15; dimension 18.4 is based on the budgets for FY 2012/13, 2013/14 and 2014/15. Dimension 18.1: Scope of budget scrutiny Bhutan has a functioning Parliament consisting of the Druk Gyalpo (His Majesty the King of Bhutan), the National Council and the National Assembly. The Constitution of Bhutan mandates that an Annual Budget, with a report on the budget of the previous financial year, shall be presented to the National Assembly by the Finance Minister. The National Assembly Act of Bhutan, 2008 and the National Council Act of Bhutan, 2008 read with the Rules of Procedure of the National Assembly of Bhutan (2014) contain the provisions for passing of Money Bills, that is, the Budget. The National Assembly “shall be at liberty to discuss the budget as a whole or any principles of Government policy and administration as indicated in and by the budget”. After it is passed in the National Assembly, the Budget is presented by the Finance Ministry to the National Council. The latter can pass the bill, with or without recommendations, within five days from presentation (else it is deemed to have been passed). The recommendations are deliberated in the National Assembly, which can accept or reject them. The Budget has to be passed in the same session of Parliament. The Budget after it is passed is submitted to the Druk Gyalpo for assent, when it comes into force. 3. Assessment of PFM Performance 67 The Public Finance Act, 2007 requires preparation of a Budget Policy and Fiscal Framework Statement (outlining the Government’s framework for the new budget) and the Government’s Budget Appropriation Bill (Government’s financial performance intentions) to be presented to Parliament. The Budget Manual requires preparation of a Medium Term Framework as a three-year rolling budget. Budget documents in the form of a Budget Report, as provided in the Budget Manual, including annual financial statements, are presented to the National Assembly for legislative approval. The Budget Report contains the actual fiscal performance of the two years previous to the budget year, the revised estimates of the year previous to the budget year and the estimates for the budget year. It also includes a macro-economic performance and outlook, and performance of the central bank, the state owned enterprises, the trust funds and the hydropower sector. Medium term macroeconomic performance and outlook has projections for the next three years including the budget year - this includes medium-term fiscal framework projections and debt stock. The National Assembly deliberates on the sectoral allocations but the focus is on providing opinion and explanations on the budget followed by voting of the budget. The National Council also deliberates on the Budget (it has five days to review the Budget) and can pass the Budget with or without recommendations. For instance, the 2013/14 budget was deliberated in the National Council which made many recommendations and these were discussed in the National Assembly. Till the financial year 2014/15, the National Assembly had only four days for budget review including two days for discussions on the budget in the House, after it was presented by the Finance Minister27. Subsequently, a nine- member legislative Finance Committee has been constituted in 2015 (as a permanent committee) - this was facilitated by an amendment to the National Assembly Act allowing the budget to be referred to a Legislative Committee. The budget for 2015/16 was the first budget to be referred to the Committee for review28. The Committee reported on the budget for 2015/16 and made recommendations, which were discussed in the National Assembly29. The Budget Report covers expenditures and revenues, fiscal policies and medium-term fiscal framework and priorities. However, review by legislature is limited to reviewing details of expenditure and revenue at a stage when detailed proposals have been finalized. Dimension 18.2: Legislative procedures for budget scrutiny Legislative review of the Budget is established in the Constitution of Bhutan, the National Assembly and National Council Acts and in the Public Finance Act. The amended Rules of Procedure of the National Assembly of Bhutan provide terms of reference of the Finance Committee. The Finance Committee was constituted in May 2015 as a specialized committee to review the budget with effect from FY 2015/16, but specific rules for the Finance Committee have not yet been established. Moreover, there are no procedures for negotiation or public consultation. The existing procedures for legislative review are respected. Dimension 18.3: Timing of budget approval The budget is presented to Parliament in May/June each year. After the Budget is passed by Parliament, it is submitted to His Majesty Druk Gyalpo for assent and then the Budget Appropriation Bill comes 27 For 2014/15, the budget was presented on Jun 6, 2014, discussions were held on Jun 9-10, 2014 and adopted on Jun 10, 2014. 28 For 2015/16, the budget was presented before the National Assembly on May 26, 2015 and refereed to the Finance Committee. The National Assembly discussed the budget and the report of the Finance Committee on June 8-9, 2015 and adopted the budget on June 9, 2015. 29 The Finance Committee made 11 recommendations of which the National Assembly resolved 8. 68 Bhutan: Public Financial Management Performance Report into force. For the purposes of PEFA assessment, the date of approval is taken as the date of approval by the National Assembly (see table below). In two of the last three years (2012/13 and 2014/15), the Parliament approved the budget before the start of the fiscal year. For 2013/14, the budget was passed with delay of over two months due to late formation of the Government after the general elections. For FY 2014/15 and 2015/16, the budget was approved before the start of the financial year. Date of approval of budget by National Date of Assent to Budget Appropriation Bill Budget Year Assembly by His Majesty Druk Gyalpo 2013/14 September 18, 2013 September 26, 2013 2014/15 June 10, 2014 July 8, 2014 2015/16 June 9, 2015 June 19, 2015 Dimension 18.4: Rules for budget adjustments by the executive There are legal and procedural rules that govern in-year budget amendments by the executive. The Public Finance Act allows re-appropriation and the provisions are contained in the Budget Manual. Budgetary units are allowed to re-appropriate their budget i.e. transfer from one budget head to another, with approval of delegated authorities, but without ex-ante approval of Parliament. A re-appropriation can be done within the approved ceiling, but not on the following items (as per amendment to Budget Manual in 2010). zz from capital to current; zz to new object codes. No expansion of total expenditure can be made without prior legislative approval. The Ministry of Finance (MoF) is authorized to determine which objects of expenditure will be amenable to re-appropriation. The MoF can also make “technical adjustments” in respect of incorporation of unbudgeted activity/code, incorporation of external projects, and transfers from reserves. The delegation of financial powers contained in the Financial Management Manual specifies the approving authorities for re-appropriation: zz Finance Minister can approve re-appropriations within the same program up to Nu. 3.0 million per occasion. zz Finance Secretary can approve re-appropriations within the same program up to Nu. 1.5 million and this power can be delegated to the Director, Department of National Budget. The Schedule of Delegation of Financial Powers in the FMM specifies the powers of re-appropriations and these were liberalized in 2010. Near full powers have now been delegated down to dzongkhag level in respect of re-appropriation from one object code to another existing object code within the same activity; from one activity to another existing activity within the program or sub-program; from one sub- program to another existing sub-program within the same program; from one program to another existing program; and from one sub accounting unit to another in the same dzongkhag. These powers cannot be delegated. The changes are incorporated in the revised estimates and presented to Parliament as a supplementary bill. Clear rules exist for in-year budget amendments by the executive with strict limits, extent and nature of amendments and are consistently respected. This is supported by the fact that RAA annual audit report for FY2014 reports an amount of Nu. 0.664 million against violation of budgetary norms. 3. Assessment of PFM Performance 69 Score Scoring Method M1 (WL). Minimum Requirements 18.1: Scope of budget scrutiny A The legislature’s review covers fiscal policies, medium term fiscal forecasts and medium term priorities as well as details of expenditure and revenue. B The legislature’s review covers fiscal policies and aggregates for the coming year as well as details of expenditure and revenue. C The legislature’s review covers details of expenditure and revenue. D Performance is less than required for a C score. 18.2: Legislative procedures for budget scrutiny A The legislature’s procedures to review budget proposals are approved by the legislature in advance of budget hearings and are respected. The procedures include arrangements for public consultation and internal organizational arrangements, such as specialized review committees, technical support and negotiation procedures. B The legislature’s procedures to review budget proposals are approved by the legislature in advance of budget hearings and respected. The procedures include arrangements such as specialized review committees, technical support and negotiation procedures. C The legislature’s procedures to review budget proposals are approved by the legislature in advance of budget hearings and respected. D Performance is less than required for a C score. 18.3: Timing of budget approval A The legislature has approved the annual budget before the start of the year in each of the last three fiscal years. B The legislature has approved the annual budget before the start of the year in two of the last three fiscal years, with a delay of up to one month in the third year. C The legislature has approved the annual budget within one month of the start of the year in two or more of the last three fiscal years. D Performance is less than required for a C score. 18.4: Rules for budget adjustments by the executive A Clear rules exist for in-year budget adjustments by the executive, set strict limits on extent and nature of amendments and are respected in all instances. B Clear rules exist for in-year budget adjustments by the executive, and are respected in most instances. Extensive administrative reallocations may be permitted. C Clear rules exist which may be respected in some instances OR they may allow extensive administrative reallocation as well as expansion of total expenditure. D Performance is less than required for a C score. Indicator/Dimension Score Brief justification for the score  egislative scrutiny of budgets PI-18: L C+ Scoring Method M2 18.1: Scope of budget scrutiny. C Legislative review of the budget for 2014/15 was limited, but included review of expenditure and revenue. From 2015/16, a Finance Committee has been constituted. Legislative procedures for budget 18.2:  C The legislature’s procedures for budget review are firmly scrutiny. established, including review by a recently established specialized committee and are respected, but are not comprehensive as there are no procedures for negotiations or public consultations and for the working of the Finance Committee. 70 Bhutan: Public Financial Management Performance Report Indicator/Dimension Score Brief justification for the score 18.3: Timing of budget approval. C The legislature has approved the annual budget before the start of the year for FY 2015/16, within one month of start of financial year for FY 2014/15 and with a delay of over 2 months in FY2013/14 (election year). 18.4:  Rules for budget adjustments by the A Clear rules exist for in-year budget adjustments by executive. the executive, set strict limits on extent and nature of amendments and are always respected. Pillar V – Predictability and control in budget execution 3.5  (Performance indicators 19 to 26) PI-19: Revenue administration This indicator relates to the entities that administer central government revenues, which may include tax administration, customs administration, social security contribution administration, as well as agencies administering revenues from other significant sources such as natural resources extraction: which may include public enterprises that operate as regulators and holding companies for government interests, in which case the assessment will require information to be collected from entities outside the government sector. A government’s ability to collect revenues, which are due, is an essential component of any PFM system, and is also an area where there is direct interaction between individuals and enterprises on the one hand and the state on the other. Both parties have responsibilities: the government must provide those responsible for providing revenues with a clear understanding of their obligations and the procedures to be followed, while ensuring that mechanisms are in place to enforce compliance from those required to contribute the revenues due. The indicator assesses the procedures used to collect and monitor central government revenues. It contains four dimensions and uses M2 (AV) method for aggregating dimension scores. Dimension 19.1: Rights and obligations for revenue measures Information on taxpayers’ duties and rights and procedures are publicly available. All the taxation legislation: Income Tax Act 2001 and the Rules; Sales Tax, Customs and Excise Act 2000 and Rules and any amendment to the Act and rules thereof are publicly available on the Ministry of Finance website (mof.gov.bt) and also copies of Act and Rules can be purchased. The Department of Revenue and Customs (DRC) issues notifications in the media regarding any changes in the legislation and procedures and also from time to time notifies taxpayers on the tax filing due dates. Regarding the non-tax revenue, information is available in the laws of the respective agencies and on their websites and changes are notified in the media from time to time. For example regarding royalty on mines and minerals, it is covered in the Mines and Minerals Management Act: information on royalty on forestry products is available with the Ministry of Agriculture and Forests. Thus comprehensive legislation and regulations on liabilities and duties and rights are available to the public. The concerned agencies are responsible for disseminating information through the media where necessary. Within DRC/MOF presently, there are three tiers established for taxpayers to appeal if they disagree with the demand notices issued by the regional revenue and customs office after assessment. The first 3. Assessment of PFM Performance 71 tier is at RRCO level (regional tax appeal committee, RTAC) followed by head office level (DRC Appeal Committee) and then at the ministry level (Ministry of Finance- Appeal Board). Taxpayers are required to submit appeals to RTAC within 30 days from the date of issue of the demand notice. If they disagree with the decision of the RTAC, taxpayers can appeal to the DRC Appeal Committee within 30 days for further review. Otherwise the decision of the RTAC is final. Further if the taxpayer disagrees with the decision of DRC Appeal Committee, taxpayer can appeal to the MoF Appeal Board within 60 days from the date of decision of the DRC Appeal Committee. Finally, the taxpayer has an option to appeal to the law courts. However, taxpayers are not barred from filing appeals directly to the law court. During 2014, a total of 2,039 appeal cases were received by the RRCOs, registering a growth of 875% over the previous year’s total of 209 cases. Out of the 2,039 cases, 63 cases were forwarded to DRC. BIT taxpayers registered most appeal cases with 1,328 cases followed by CIT with 510 cases and PIT with 201 cases (see Table 3.5.19.1 below). Table 3.5.19.1: Tax Appeals Data Particulars PIT CIT BIT Total Filers 71559 286 29623 101,468 No. of tax appeals 201 510 1328 2039 Appeals resolved at RRCO level 112 308 963 1383 No of appeals forwarded to HQ 10 23 30 63 Appeals forwarded to Appeals Board 1 5 3 9 Source: DRC. Tax and non-tax revenue accounts for about 72% of total revenue for which up-to-date information and administrative procedures are readily available to the taxpayers and for which there is an established appeal system. Non-tax revenue agencies include Department of Forest, Ministry of Home and Culture Affairs, Department of Geology and Mines, Road Safety and Transport Authority and Department of Trade. Dimension 19.2: Revenue risk management Most revenue is raised through taxes and the major taxes are corporate income tax, business income tax and personal income tax (direct taxes) and sales tax, import duty and excise duty (indirect taxes). All these major taxes are filed on self-assessment basis. In case of direct taxes, taxes are filed on self- assessment basis by those businesses that maintain books of accounts. For small or micro business units which do not maintain any books of accounts, taxes are collected on estimated assessments. However, opportunities are always given to such taxpayers to self-declare their tax liability. DRC is responsible for administering and monitoring collection of all domestic revenue, both tax and non-tax revenue. The department has eight regional offices where the taxpayers file declarations and make payment of taxes, and more than 80 revenue collecting agencies in all the districts responsible for collecting the non-tax revenue. Income tax assessment and audits are carried out based on risk indicators like the nature and size of the business, compliance record, last tax assessment conducted, units declaring losses, units claiming substantial tax refund, tax potential, etc. In case of indirect taxes some of the indicators used are Regional Intelligence Liaison Office alert (World Customs Organization), based on tax rates declared on invoice and declaration forms to avoid deflection and evasion, country of origin etc. 72 Bhutan: Public Financial Management Performance Report Risk management methods are also used at the time of taxpayer registration since the source of Taxpayer Number (TPN) is the Income Tax Division. Adequate measures are taken to ensure that no TPN duplicates are created in the system. Similarly, risk management methods are also used in payment and refund of taxes. In order to mitigate the risk of losing revenue, all the taxpayers who submit tax returns based on self-assessment are either desk-assessed or field-assessed. Based on the merit of each case, tax investigations are also conducted to mitigate risk and also to reduce the chances of any fraudulent practices. Internally, in order to mitigate risk of misuse, tax assessments are carried out. The DRC has an electronic database registration system and a TPN is assigned to each taxpayer. The TPN is used for corresponding with taxpayers. Further, every revenue collecting agency has a unique agency code and is registered in the system. There is basic general understanding of risk management across all types of taxes and tax audits are carried out for all the units with high revenue potential and high risk of revenue leakage. Further, assessment or tax audit is done based on specific risk indicators to ensure effective and efficient use of limited resources for mobilization of domestic revenue. However, there is need for further capacity development of officials to be able to assess the efficiency of risk management methods and measures to mitigate risk. For more than 75% of government revenue, specific risk indicators are used especially for income tax, but for indirect taxes risk management is not comprehensive. There is need for further capacity development of officials to be able to assess the effectiveness of risk management methods and of measures to mitigate risk. Dimension 19.3: Revenue audit and investigation DRC is guided by the Income Tax Act 2001; Sales Tax, Customs and Excise Act 2000; revenue accounting manual and subsidiary rules and regulations. To deter evasion and non-compliance, Chapter 5 of the Income Tax Act and Chapter 4 of the Sales Tax, Customs and Excise Act of the Kingdom of Bhutan cover the levy of fines and penalties for non-compliance: zz concealment of income (twice the tax amount evaded in the case of income tax); zz under-invoicing, non-declaration or concealment (fine of 50% of the value of the goods in addition to the amount of sales tax, customs and excise duty); zz late payment of taxes (for both direct and indirect taxes, 24% penal interest per annum is imposed on the amount due for the time it is outstanding); zz non-filing of tax return (100% of the gross income); zz failure to maintain books of accounts and documents (fine ranging from Nu. 1000 to Nu. 100,000 for both direct and indirect tax); and zz failure to comply with a notice (fine ranging from Nu. 500 to Nu. 5000 for both direct and indirect tax). The chapter also includes provisions for prosecution and imprisonment. Chapter 3 of the Sales Tax, Customs and Excise Act covers detention, seizure and confiscation of goods for non-compliance with the rules. 3. Assessment of PFM Performance 73 As per the Income Tax Act, a desk assessment must be completed within 90 days and field assessment within two years from the due date of filing. Desk assessment is carried out 100% to determine whether further assessment is required and risk analysis to determine if the unit needs to be identified for field assessment. Detailed audit planning and execution are reported in the performance indicator report of each division (for income tax, customs and sales tax). Table 3.5.19.2 shows the Tax Audits planned and executed. Table 3.5.19.2: Tax audits planned and executed Direct Tax Indirect Tax Overall Executed/ Year Audit Audit Audit Audit Audit Audit planned Planned Executed Planned Executed Planned Executed 2012-2013 57611 56517 417 207 58028 56724 98% 2013-2014 62265 61112 424 273 62689 61385 98% 2014-2015 72988 71895 477 251 73465 72146 98% Source: DRC. Detailed assessment reports and data on decisions on penalties are maintained by the respective divisions. Final decisions are conveyed to the taxpayers and penalties are realized. While the DRC and its regional offices are directly responsible for assessment and collection of the taxes, other revenue collecting agencies, governmental departments and agencies, are directly responsible for assessment, collection and deposit of non-tax revenue and other taxes. However, DRC is responsible for monitoring the collection and deposit of both tax and non-tax revenues. Thus all revenue collecting agencies are accountable to the respective regional revenue and customs offices, which are in turn accountable to the DRC Head Office. The Head Office conducts audits of its regional offices and regional offices conduct audits of the collecting agencies under their jurisdiction to strengthen their internal control systems. Audit of all government agencies is conducted by the Royal Audit Authority. Dimension 19.4: Management of revenue arrears In DRC, “revenue arrears” refers to the difference between collections and deposits, i.e. revenue in the pipeline. These are reported in the Annual Financial Statement (AFS) published by the Department of Public Accounts. Basically, these revenue arrears pertain to non-deposit of government revenues within the stipulated FY. In addition, there are arrears due to assessments not being collected when they are due. Normally arrears are detected during compilation and reconciliation of national revenue and certain cases are detected through audits. The DRC is responsible to follow up and recover the revenue arrears. Penal interest of 24% is levied for late deposit of revenue. Where cases are not resolved and there is disagreement the cases are also forwarded to the law court. However with regard to tax arrears, information is reported and published annually in the performance indicator report and detailed records are maintained with the respective regional offices. The stock of arrears at June 30, 2014 is presented below in Table 3.5.19.3: 74 Bhutan: Public Financial Management Performance Report Table 3.5.19.3: Tax arrears Stock of Arrears at end Total Collection Arrears/collection % of year (Nu. million) (Nu. million) Direct Tax FY 2013/14 89.74 23,244.61 0.4% Other arrears June 30, 2014 7.01 23,244.61 0.03% Total arrears 96.75 23,244.61 0.4% Arrears more than 12 months old 9.93 Source: DRC. Score Scoring Method M2 (AV). Minimum Requirements 19.1: Rights and obligations for revenue measures A Entities collecting most revenues use multiple channels to provide payers with easy access to comprehensive and up-to-date information on the main revenue obligation areas and on rights including, as a minimum, redress processes and procedures. B Entities collecting the majority of revenues provide payers with access to comprehensive and up-to- date information on the main revenue obligation areas and on rights including, as a minimum, redress processes and procedures. C Entities collecting the majority of revenues provide payers with access to information on the main revenue obligation areas and on rights including, as a minimum, redress processes and procedures. D Performance is less than required for a C score. 19.2: Revenue risk management A Entities collecting most revenues use a comprehensive, structured and systematic approach for assessing and prioritizing compliance risks for all categories of revenue and, as a minimum for their large and medium revenue payers. B Entities collecting the majority of revenues use a structured and systematic approach for assessing and prioritizing compliance risks for some categories of revenue and, as a minimum, for their large revenue payers. C Entities collecting the majority of revenues use approaches that are partly structured and systematic for assessing and prioritizing compliance risks for some revenue streams. D Performance is less than required for a C score. 19.3: Revenue audit and investigation A Entities collecting most revenue undertake audits and fraud investigations managed and reported on according to a documented compliance improvement plan, and complete all planned audits and investigations. B Entities collecting the majority of revenue undertake audits and fraud investigations managed and reported on according to a documented compliance improvement plan, and complete all planned audits and investigations. C Entities collecting the majority of government revenue undertake audits and fraud investigations using a compliance improvement plan and complete the majority of planned audits and investigations. D Performance is less than required for a C score. 19.4: Revenue arrears monitoring A The stock of revenue arrears at the end of the last completed fiscal year is below 10% of the total revenue collection for the year, and the revenue arrears older than 12 months are less than 25% of total revenue arrears for the year. B The stock of revenue arrears at the end of the last completed fiscal year is below 20% of the total revenue collection of the year and the revenue arrears older than 12 months are less than 50% of total revenue arrears for the year. C The stock of revenue arrears at the end of the last completed fiscal year is below 40% of the total revenue collection for the year and the revenue arrears older than 12 months are less than 75% of total revenue arrears. D Performance is less than required for a C score. 3. Assessment of PFM Performance 75 Indicator/Dimension Score Brief justification for the score PI-19: Revenue administration B+ Scoring Method M2  ights and obligations for revenue 19.1: R B Entities, which collects majority of the revenue, provides measures. payers with comprehensive information on main of revenue obligations and on their rights including rights of redress. 19.2: Revenue risk management. B The DRC uses a structured and systematic approach for assessing and prioritizing compliance risks for some categories of revenue and, as a minimum, for their large revenue payers.  evenue audit and investigation. 19.3: R A Entities collecting most revenue undertake audits and fraud investigations managed and reported on according to a documented compliance improvement plan, and complete over 90% of planned audits and investigations. 19.4: Revenue arrears monitoring. A Revenue arrears is 0.38% of the total revenue collection. Reported revenue arrears are two to seven years old. Ongoing and planned reforms DRC is planning and working to develop more comprehensive risk management processes and Post- Clearance Audit (PCA) and to institute a separate intelligence and investigation unit to strengthen audit and investigation processes. PI-20: Accounting for revenue This indicator assesses the procedures for recording and reporting revenue collections, consolidating revenues collected, and reconciling the tax revenue accounts. It covers both tax revenues and non-tax revenues collected by the central government, but not grants. This indicator contains three dimensions and uses M1 (WL) for aggregating dimension scores. Dimension 20.1 assesses the extent to which the Ministry of Finance or a body with similar responsibilities coordinates revenue administration activities and collects, accounts and reports timely information on collected revenue. Dimension 20.2 assesses the promptness of transfers of revenue collected to the Treasury or other designated agencies. It is essential to ensure that funds are available as soon as possible to support cash management and ultimately spending. This may involve either a system that obliges payments to be made directly into accounts controlled by the Treasury (possibly managed by a bank) or, where the responsible agency maintains its own collection accounts, by frequent and full transfers from those accounts to Treasury controlled accounts (time periods mentioned do not include delays in the banking system). Transfers of revenue collections to the Treasury should be effective and ensure that any revenue float is minimized. Ideally, all revenues should be transferred to the Treasury, but other agencies could be legally designated to receive earmarked revenues directly from the collecting entity (eg. autonomous extra-budgetary funds). Transfers to such designated agencies will be assessed in the same way as transfers to the Treasury. Dimension 20.3 assesses the extent to which aggregate amounts related to assessments/charges, collections, arrears and transfers to (and receipts by) the Treasury or other designated agencies take place regularly and are reconciled. This will ensure that the collection and transfer system functions as 76 Bhutan: Public Financial Management Performance Report intended and that the level of arrears and the revenue float are monitored and minimized. It is important that the difference between amounts assessed/levied and received by the Treasury or other designated agencies can be explained. The responsible entity would normally keep records on aggregate amounts levied, and transfers to the Treasury in its accounting system. The responsible entity should also keep records for each payer about amounts levied and paid, but this may be done in other data systems. The responsible entity should be able to aggregate such information, so that it can report how much of amounts levied is (a) not yet due, (b) in arrears (the difference between what is due and what has been paid in) and (c) collected by the responsible agency but not yet transferred to the Treasury. For revenues from extractive industries, the Extractive Industries Transparency Initiative has developed standards for the disclosure and reconciliation of what companies pay and what governments receive. Dimension 20.1: Information on revenue collections The Department of Revenue and Customs (DRC) under the Ministry of Finance is responsible for monitoring the collection and deposit of all domestic revenues both tax and non-tax revenue. The monthly collection data is shared with the Treasury Division of the Department of Public accounts, Ministry of Finance. The DRC also submits a revenue collection report to the Ministry on a quarterly basis i.e October, January, April and June and half yearly basis. Additionally, collection reports are also shared (on an ad hoc basis) with the Ministry of Finance at their request. The DRC publishes an annual national revenue report detailing collections from all revenue sources. The annual national revenue report is a public document and copies are shared with all the government ministries and agencies. A soft copy is available at www.mof.gov.bt. Dimension 20.2: Transfer of revenue collections The functions and services of the department are automated or computerized using the Bhutan Automated Customs System (BACS) and Revenue Management System (RMS). BACS is mainly for indirect taxes such as customs and sales tax at the point of entry of goods, while RMS consist of the Tax Management System (TMS – for direct taxes) and Revenue Accounting System (RAS). All taxes and duties are paid directly to the regional revenue and customs office, and non-tax revenues are paid directly to the respective revenue collecting agencies. However, with the introduction of Revenue Administration Management Information System (RAMIS) and soft launching of RAMIS direct tax module from January 1, 2015 and soft launching of sales tax at the point-of-sale module and non-tax revenue module from July 1, 2015 the taxpayers are now also able to pay at the commercial banks or use an on-line payment system using internet banking facility. Further, income tax filers can now file their returns on-line and pay taxes on-line. All taxes, duties or any other revenues are deposited directly in the royal government revenue account maintained with the Bank of Bhutan and on a daily basis revenue is directly transferred to the government consolidated account (Treasury). Therefore, there is no delay in the transfer of revenue to treasury and it is very effective as the collections are transferred on a daily basis. Dimension 20.3: Revenue accounts reconciliation Daily collection report with one day lag is shared with Department of Public Accounts (DPA), Royal Monetary Authority, and Department of National Budget. Monthly and quarterly reconciled figures are 3. Assessment of PFM Performance 77 also shared with the treasury division, DPA within the first week of the end of the month and quarter. The reconciliation of revenue collection and deposit is done every day by the Department of Revenue & Customs in the Revenue Administration Management Information System (RAMIS) system. Through the process of monthly and quarterly reconciliation a picture of monthly and quarterly tax arrears becomes available to MoF though the DPA. In addition a statement reflecting the revenue arrears is shared with the Department of Public Accounts on an annual basis to be incorporated in the Annual Financial Statement within 8 weeks of the end of the fiscal year. The Public Finance Act 2007 mandates that a summary of revenue statement and arrears be submitted at the end of the financial year to the Department of Public Accounts. As the Annual financial statement is published annually therefore it contains revenue information for the fiscal year. Score Scoring Method M1 (WL). Minimum Requirements 20.1: Information on revenue collections A A central agency obtains revenue data at least monthly from entities collecting all central government revenue. This information is broken down by revenue type and is consolidated into a report. B A central agency obtains revenue data at least monthly from entities collecting most central government revenue. This information is broken down by revenue type and consolidated into a report. C A central agency obtains revenue data at least monthly from entities collecting the majority of central government revenue and consolidates the data. D Performance is less than required for a C score. 20.2: Transfer of revenue collections A Entities collecting most central government revenue transfer the collections directly into accounts controlled by the Treasury, or transfers to the Treasury and other designated agencies are made daily. B Entities collecting most central government revenue transfer the collections to the Treasury and other designated agencies at least weekly. C Entities collecting most central government revenue transfer the collections to the Treasury and other designated agencies at least every two weeks. D Performance is less than required for a C score. 20.3: Revenue accounts reconciliation A Entities collecting most central government revenue undertake complete reconciliation of assessments, collections, arrears, and transfers to Treasury and other designated agencies at least quarterly within four weeks of the end of quarter. B Entities collecting most central government revenue undertake complete reconciliation of assessments, collections, arrears, and transfers to Treasury and other designated agencies at least half-yearly within 8 weeks of the end of the half-year. C Entities collecting most government revenue undertake complete reconciliation of collections and transfers to Treasury and other designated agencies at least annually within 2 months of the end of the year. D Performance is less than required for a C score. Indicator/Dimension Score Brief justification for the score PI-20: Accounting for revenue B+ Scoring Method M1 20.1: Information on revenue collections. A Information on revenue collection is reported monthly to MoF and is summarized into a report. 20.2: Transfer of revenue collections. A Transfers to the Treasury and other designated agencies are made daily. 20.3: Revenue accounts reconciliation. B Complete reconciliation of assessments, collections, arrears, and transfers to the Treasury is made monthly, quarterly and annually within 8 weeks of end of period. 78 Bhutan: Public Financial Management Performance Report Ongoing and planned reforms A new web-based integrated system (Revenue Administration Management Information System - RAMIS) for both direct and indirect taxes is being developed. This will facilitate daily reconciliation since the concept of one centralized RGR account is introduced and the multiple RGR account system is discontinued. But RAMIS is a new system with stability issues and reporting is yet to be finalized. PI-21: Predictability of in-year resource allocations This indicator assesses the extent to which the central ministry of finance is able to forecast commitment and cash requirements and provide reliable information on the availability of funds to budgetary units for service delivery. It contains four dimensions and uses the M2 (AV) method for aggregating dimension scores. Dimension 21.1: Consolidation of cash balances The Constitution of Bhutan provides that all public monies (other than those allocated for specific purposes as per law) shall be deposited in a Consolidated Fund Account (CFA). The CFA is maintained with the Royal Monetary Authority (RMA), which is the designated depository for all budgetary operations of RGoB. The GCA, as the Treasury Single Account, is a set of linked accounts comprising three Government subsidiary bank accounts, viz. Government Revenue Account, Government Budget Fund Account and Non-Revenue Receipts & Deposits Account (Public Finance Act). These accounts are maintained in the Bank of Bhutan Ltd. as the agent bank for facilitating receipt and management of government funds in the CFA. The withdrawals of government funds by the budgetary bodies are made through the Letter of Credit Account (LC) and Project Letter of Credit Account (PLC) mechanism and charged to the total receipts of subsidiary bank accounts. The agent bank passes the net proceeds of these accounts representing the total funds available to the CFA, the principal account of the Government, on a daily basis. The MoF is the sole authority for authorizing bank accounts for all budgetary bodies and is the designated “steward” for all government bank accounts. It also has the responsibility of setting rules and procedures for the operations and accounting of government bank accounts. A budgetary body is prohibited from operating a bank account without the approval of the MoF (Public Finance Act). Guidelines for operation of bank accounts are detailed in the Financial Rules and Regulations (FRR). The Public Finance Act, FRR and Local Government Act, 2009 allow operation of Current Deposits (CD) accounts with Gewogs and Communities, Revolving Funds, Trust Funds, Endowment Funds, foreign currency accounts and bank accounts abroad by budgetary bodies for specific purposes. The consolidation of Trust Funds, bank accounts maintained by virtue of specific provisions in agreements with donors or others, Refundable Deposits Account30, Audit Recoveries Account31 and Escrow Accounts to be held outside the CFA are set out in the PFA and FRR. The balances of these accounts at the end of each financial year are reported in the Annual Financial Statements of the Government. The table below summarizes the bank accounts maintained outside the CFA and disclosed in the AFS as of June 30, 2014. Table 3.5.21.1 shows the Government Bank Accounts outside the Consolidated Fund Account. 30 Maintained with RMA/agent bank for specific purpose money not available for appropriation such as refundable security deposits, earnest money or any other type of refundable receipts. 31 Operated by the RAA for the deposit and management of audit recoveries remitted to it on its instance. 3. Assessment of PFM Performance 79 Table 3.5.21.1: Government bank accounts outside the Consolidated Fund Account Balance as of June 30, 2014 Name of Account Currency No. of accounts (Nu. in million) Refundable Deposits Account Nu. 717.528 1 Bhutan Health Trust Fund Nu. 881.977 1 Bhutan Trust Fund for Environment USD 45.823 1 Conservation Cultural Trust Fund Nu. 52.106 1 Bhutan Information Communication and Nu. 193.31 1 Media Authority Revolving fund Nu. 32.729 7 Gewogs Current Deposit Account Nu. 22.081 205 Municipal Current Deposit Account Nu. 233.970 15 Judiciary Current Deposit Account Nu. 27.157 18 Other Current Deposit Accounts32 Nu. 530.701 95 Grand Total Nu. 2,691.559 339 + USD 45.823 million Source: Annual Financial Statements, FY 2013/14. Closing cash balances of the budgetary bodies are captured and reported through Public Expenditure and Management System (PEMS) and known on a daily basis. The year-end closing cash balances are surrendered to the Department of Public Accounts (DPA) within July of the following financial year and are deposited in the Government Budget Fund Account. The bank/cash balances are consolidated on a daily basis, but some extra-budgetary funds remain outside the arrangements. Dimension 21.2: Cash forecasting and monitoring A full year cash flow forecast is prepared based on the domestic revenue forecast prepared by the Department of Revenue and Customs (DRC), the Budget Utilization Plan (BUP) submitted by the budgetary bodies through PEMS and expected inflow of program grants. The bottom-up approach for preparing the BUP has been implemented from the financial year 2014/15 through the Budget Utilization Plan module in PEMS33. All budgetary bodies are required to submit their annual BUP to the Department of Public Accounts (DPA) within one month from the receipt of budget approval through PEMS. Subsequently, budgetary bodies are required to update the BUP on a quarterly basis for the remaining period of the financial year and submit updates to DPA. These take into account the actual cash inflows and outflows for the previous period. Fund release requests by the budgetary bodies are submitted online and fund releases are made based on BUP. Fund releases for the externally funded activities are provided based on the fund balance available with the Government. The review of cash flow forecasts and Treasury Bills is managed by the Cash Coordinating Committee (CCC), comprising members from the Department of National Budget, RMA and DRC. For the full year BUP, the cash flow forecast is reviewed in early July of the fiscal year. However, subsequent quarterly reviews are done at the start or within the quarter, based on GCA fund position. 32 These include the Audit Recoveries Account, Escrow Account, Endowment Fund etc. 33 Prior to 2014/15, attempt was made to prepare the cash forecasts through spreadsheets. 80 Bhutan: Public Financial Management Performance Report A cash flow forecast is prepared for the fiscal year and updated at least quarterly taking into account the actual inflows and outflows. Dimension 21.3: Information on commitment ceilings The expenditure release process depends on the source of financing: a) RGoB financing: Once the expenditure projections are endorsed by the MFCC, the commitment to finance programs from RGoB financing is determined. The Parliament approves the commitments. RGoB financing is reliable and MDAs can implement the programs as approved: the releases are based on the MDAs’ Budget Utilization Plans. b) External financing: The budget for programs financed by external donors is based on the commitments and agreements signed between the Development Partners (DPs) and RGoB. However, in the past, implementation was delayed due to late disbursement by the DPs resulting in huge under-utilization of the budget34. To correct this uncertainty and increase reliability of funds availability, the budget now includes provisions only for those projects for which fund disbursements are confirmed or the alternative of pre-financing from RGoB is arranged, including projects under implementation. As and when the external grants are available, these are released to the concerned agency through Supplementary Authorization, routed through the PEMS, based on approval of the GNHC and MoF. This is a continuous process. The Public Finance Act (section 60 amended) allows the Minister of Finance to authorize supplementary appropriation without recourse to Parliament for expenditures financed by donors or co-financed jointly with RGoB provided all approvals are available. These appropriations are included in the annual Supplementary Appropriation Bill that is presented in Parliament. The original budget is passed by the Parliament ahead of the start of the fiscal year and the budget notification for its implementation is circulated in the first week of the fiscal year. The MDAs prepare their work plans and submit their budget utilization plans to the Department of Public Accounts, on which disbursement is made. Funds are released to the budgetary bodies though Letter of Credit/Project Letter of Credit (LC/PLC) authorizations to the respective LC/PLC accounts and payments are made individually by the budgetary bodies within their approved budgets. Fund releases for the RGoB-funded activities are based on the BUPs, which are prepared and submitted by the budgetary bodies based on their approved budget. For externally funded activities fund releases are based on fund balances with the Government. The budgetary bodies have to complete monthly accounts in PEMS for obtaining subsequent fund releases. The departments are able to plan and commit expenditure for at least six months in advance in accordance with the budgeted appropriations and cash/commitment releases. Dimension 21.4: Significance of in-year budget adjustments Adjustments to budget allocations decided above the level of the ministries are made through Supplementary Appropriations which include supplementary authorizations already granted by MoF in 34 For instance, during 2013/14, external grants were budgeted for Nu. 8,109.513 million, but actual donor disbursements were Nu. 14,236.353 million. During 2014/15, external grants were budgeted for Nu. 7,360.231 million but revised to Nu. 11,153.268 million. 3. Assessment of PFM Performance 81 respect of external grants. Sections 55 to 65 of the Public Finance Act (PFA) 2007 contain both authority and limitations for making adjustments to the budget allocations that are approved by the Parliament, as detailed below: zz Any Supplementary Budgets beyond the total approved amount can only be approved by Parliament in accordance with the Public Finance Act. zz Budgetary bodies seek supplementary appropriations only when circumstances significantly change, and the Lhengye Zhungtshog (the Cabinet) has endorsed the change. zz Budgetary bodies are not allowed to make commitments or incur expenditure against anticipated supplementary budget proposals, but only after the Budget Appropriations Bill has been passed by the Parliament. Additionally, expenditure beyond that appropriated or for which there is no appropriation can be authorized by the Minister of Finance without recourse to Parliament under two circumstances, as below. These cases have to be included in the supplementary bill for ex-post approval. zz for expenditures that are financed by donors or co-financed jointly with the Government for a development project that has all the required government approvals and such finance is based on agreement between the donors and the government. zz expenditure to be defrayed in case of an emergency or disaster and which cannot be postponed without detriment to the public interest. The Minister of Finance presents to Parliament Supplementary Budget Appropriation Bills, outlining changes in appropriations and resource estimates with full justification for the revisions. Only one such Bill is submitted to Parliament in the summer session of Parliament along with the budget for the next year and follows the same procedure as the main budget. The Supplementary Bill also includes rationalization and technical adjustments for ex-post endorsement. Rationalization/ Original Budget Supplementary Revised Budget Year Technical Adjustments Nu. million Budget Nu. million Nu. million Nu. million 2013/14 39,528.156 5,157.626 (-) 1,578.904 43,106.878 2014/15 40,355.837 4,339.507 (-) 534.813 44,160.531 Significant in-year adjustments to budget allocations take place only once a year above the level of the MDAs and are done in a transparent and predictable way. Score Scoring Method M2 (AV). Minimum Requirements 21.1: Consolidation of cash balances A All bank and cash balances are consolidated on a daily basis. B All bank and cash balances are consolidated on a weekly basis. C Most cash balances are consolidated on a monthly basis. D Performance is less than required for a C score. 21.2: Cash forecasting and monitoring A A cash flow forecast is prepared for the fiscal year, and is updated monthly on the basis of actual cash inflows and outflows. 82 Bhutan: Public Financial Management Performance Report Score Scoring Method M2 (AV). Minimum Requirements B A cash flow forecast is prepared for the fiscal year and updated at least quarterly on the basis of actual cash inflows and outflows. C A cash flow forecast is prepared for the fiscal year. D Performance is less than required for a C score. 21.3: Information on commitment ceilings A Budgetary units are able to plan and commit expenditure for at least six month in advance in accordance with the budgeted appropriations and cash/commitment releases. B Budgetary units are provided reliable information on commitment ceilings at least quarterly in advance. C Budgetary units are provided reliable information on commitment ceilings at least one month in advance. D Performance is less than required for a C score. 21.4: Significance of in-year budget adjustments A Significant in-year adjustments to budget allocations take place no more than twice in a year and are done in a transparent and predictable way. B Significant in-year adjustments to budget allocations take place no more than twice in a year and are done in a fairly transparent way. C Significant in-year budget adjustments to budget allocations are frequent, and are partially transparent. D Performance is less than required for a C score. Indicator/Dimension Score Brief justification for the score PI-21: Predictability of in-year B+ Scoring Method M2 resource allocation Consolidation of cash 21.1:  B The bank/cash balances are consolidated on a daily basis, but balances. some extra-budgetary funds remain outside the arrangements. Cash forecasting and 21.2:  B A cash flow forecast is prepared for the fiscal year and updated monitoring. at least quarterly taking into account the actual inflows and outflows. Information on commitment 21.3:  A The departments are able to plan and commit expenditure for ceilings. at least six months in advance in accordance with the budgeted appropriations and cash/commitment releases. Significance of in-year budget 21.4:  A Significant in-year adjustments to budget allocations takes place adjustments. only once a year above the level of the MDAs and are done in a transparent and predictable way. PI-22: Expenditure arrears This indicator measures the extent to which there is a stock of arrears, and the extent to which any arrears are monitored. It contains two dimensions and uses the M1 method for aggregating dimension scores. Dimension 22.1: Stock of expenditure arrears The Finance and Accounting Manual (FAM) of the FRR 2001, Clause 4.1.6 General Procedure for Processing of Claims, requires a Head of Office or an officer authorized by him with powers to draw 3. Assessment of PFM Performance 83 and disburse government money to maintain a Bills Inward Register. All claims received or prepared in an office should be registered in the Bills Inward Register; and the register should be reviewed once a month by the Head of Office and the result of the review recorded in the register. Action on settlement or return of any claim received in an office is required to be completed within 30 days of receipt of the claim. The Cabinet has issued directions in 1999 and 2000 to the affect that all Drawing and Disbursing Officers as well as National Finance Service Personnel to ensure that all claims/bills are cleared within one month of their receipt. However there is no reporting to MoF of the status of claims or arrears. Arrears at any point of time are not centrally known. FAM requires that employee monthly pay bills be prepared and kept ready at least three days before the closing of the month. A party whose payments are in arrears can also claim penalty interest from the government agency that defaults on the payment. There are no arrears on debt servicing. Dimension 22.2: Expenditure arrears monitoring A system has been prescribed for recording commitments or obligations, outside of the system of accounting, to track expenditure arrears at an individual level. No exercise has been undertaken, at a central level, to collate the data on expenditure arrears, if any, and determine the stock of expenditure arrears any time during the last two years. Score Scoring Method M1. Minimum Requirements 22.1: Stock of expenditure arrears A The stock of expenditure arrears is no more than 2% of total expenditure in at least two of the last three completed fiscal years. B The stock of expenditure arrears is no more than 6% of total expenditure in at least two of the last three completed fiscal years. C The stock of expenditure arrears is no more than 10% of total expenditure in at least two of the last three completed fiscal years. D Performance is less than required for a C score. 22.2: Expenditure arrears monitoring A Data on the stock, age and composition of expenditure arrears is generated quarterly within four weeks of the end of each quarter. B Data on the stock and composition of expenditure arrears is generated quarterly within eight weeks of the end of each quarter. C Data on the stock and composition of expenditure arrears is generated annually at the end of each fiscal year. D Performance is less than required for a C score. Indicator/Dimension Score Brief justification for the score PI-22: Expenditure arrears D Scoring Method M2 22.1: Stock of expenditure arrears. D* For lack of information, the dimension is scored D*.  xpenditure arrears 22.2: E D A system has been prescribed for recording commitments monitoring. or obligations, outside of the system of accounting, to track expenditure arrears at an individual level. No exercise has been undertaken, at a central level, to collate the data on expenditure arrears, if any, and determine the stock of expenditure arrears any time during the last two years. 84 Bhutan: Public Financial Management Performance Report PI-23: Payroll controls This indicator is concerned with the payroll for public servants only: how it is managed, treatment of changes and consistency with personnel records management. Wages for casual labor and discretionary allowances that do not form part of the payroll system are included in the assessment of non-salary internal controls, PI-25. It contains four dimensions and uses the M1 (WL) method for aggregating dimension scores. Dimension 23.1: Integration of payroll and personnel records The Royal Civil Service Commission (RCSC) is the central personnel agency of RGoB responsible for the overall recruitment and appointment of civil servants in accordance with the Bhutan Civil Service Rules and Regulations (BCSR) 2012. The personnel records of civil servants are maintained by the RCSC in the form of hard copy personnel files and on a web-based system - the Civil Service Information System (CSIS). In addition, the service book (hard copy) for each civil servant is maintained by the Human Resource Division (HRD) of the respective budgetary body, staffed by officers from RCSC. The personnel records are updated in hard copy personnel files (by RCSC), service book (by HRD) and web-based CSIS (by RCSC and/or HRD). As RCSC is responsible for appointment of all civil servants in the country, it maintains a list of approved positions in each agency, which is reviewed at the time of new appointments to ensure that appointed staff are in accordance with the approved strength. The monthly payroll is processed in the Public Expenditure Management System (PEMS) by accounts personnel at each budgetary body who are also responsible for regularly updating the payroll data based on the orders issued by the HRD or RCSC. All employees receive their pay and allowances through direct bank transfers. Presently, there is no integration between the personnel records in CSIS and payroll data in PEMS. Also, neither one-time nor any periodic reconciliation exercise has been undertaken between the two systems. The payroll and personnel records are not integrated and no reconciliation between the two sets of records has been undertaken. Dimension 23.2: Management of payroll changes The Finance and Accounting Manual states that “all modifications in the establishment including leave, absence, new appointment etc. communicated to the accounting units up to the 20th of the month shall be incorporated in the payroll for the same month; modifications communicated after the 20th of the month shall be incorporated in the succeeding month’s payroll”. The pay is disbursed fully on the last working day of each month, with the exception for the last month of the fiscal year where the HoD and DDOs decide on a day not more than 10 days in advance of the close of the month for disbursement of salaries. Changes to the personnel records and payroll data are made based on the orders issued by the HRD or RCSC. As the two systems (CSIS and PEMS) are not integrated, changes are made separately to the personnel records (responsibility with HRD/RCSC) and payroll data in PEMS (responsibility with accounts personnel at the budgetary body). 3. Assessment of PFM Performance 85 The required changes to the personnel records and payroll are updated monthly and in time for the following month’s payments in accordance with the rules laid down in FAM. Retroactive adjustments are rare. RAA has not made any observations in this regard. Dimension 23.3: Internal control of payroll Changes in the payroll system are based on the information provided by HRD/RCSC in the form of orders and office communications. RCSC/HRD issue appointment orders (for any new recruitments), transfer orders and separation orders. These orders are the basis for the accounts personnel to make changes in the payroll records and make salary-related payments. The RCSC conducted a nationwide information correction exercise in all ten ministries, twenty dzongkhags, four thromdes and thirty autonomous agencies from August to November 2014 to correct individual personnel records and update missing information. Further, in December 2014, all civil servants were requested to confirm the accuracy of their data on CSIS. As of June 2015, 67% accuracy in the data was reported. The target is to achieve 95% level accuracy by June 30, 2016 (Annual Administrative Report of RCSC). A unique Employee Identity Number (EID) is issued by RCSC/HRD to every employee which is used as primary key in the payroll module of PEMS and CSIS. Additionally the Citizenship Identity Card Number (CID) for Bhutanese citizens and the Work Permit Number for non-Bhutanese nationals are also used when registering employees in the CSIS and PEMS. In the payroll module of PEMS there are two categories of users - system administrator and user. The accountant (user) at the agency level is responsible for adding/removing employees from the payroll based on the information received from the RCSC/HRD. Master-level changes (for instance, pay grade revisions) are done by the system administrator (at DPA) across the application which becomes available to the users at the agency level. Though there is maker-checker control in the payroll module of PEMS in respect of changes in the employee level data, this is not being followed in most budgetary bodies, especially in smaller agencies because of the limited number of personnel, finance and non-finance. Further, non-finance personnel are not familiar with the PEMS and it is not practical for non-finance personnel to be assigned any role in PEMS. Therefore, in smaller agencies one person, usually the finance person, does everything. After payroll processing, a payroll voucher is generated through PEMS, which is reviewed and approved by superiors in hard copy; however this voucher does not contain details of individual employees. The audit reports of the RAA have raised concerns with regard to the payroll and the RAA has qualified its opinion for the last two years as follows: zz Qualification in 2012-13: There were cases of un-reconciled differences between employees’ and employers’ matching contribution, and instances of excess contributions remitted to NPPF were observed. Pending review and reconciliation of these differences, the auditor could not ascertain the exact extent of impact in the accounts. zz Qualification in 2013-14: Mismatch between employees’ contributions reported under the receipts and payments statements of the budgetary agencies and monthly Provident Fund schedules generated by the payroll module of the PEMS. Further, inconsistent number of employees under monthly PF schedules was observed. zz Audit report on Government Payroll and Provident Fund: In 2013-14 the RAA conducted an audit on the Government Payroll and Provident Fund pertaining to the years 2011/12, 2012/13 86 Bhutan: Public Financial Management Performance Report and 2013/14 and reported significant findings with respect to payroll controls. Based on the review, the auditor identified irregularities amounting to Nu. 9.6 million in payroll including some arising from duplicate payments. The auditor reported ‘huge discrepancies apparently emanating from control weaknesses in the Public Expenditure Management System (PEMS) in fixing and disbursing the personnel emoluments during transfer, training, extraordinary leave and separation of employees. Further, there were also cases of erroneous fixation of pay and remittances being made in contravention to the extant rules. These were the results of inadequacies and failure of controls in the PEMS posing question of system integrity’. Upon further review of the issues and assessment of the PEMS control environment, the auditor identified possible causes of such control issues, as follows: zz Lack of controls allowing preparation of payroll in the accounts module of PEMS without using the payroll module. zz Lack of real time data sharing. zz Lack of co-ordination between HRD and accounts personnel at agency level. zz Lack of monitoring at agency level and DPA. zz Weak controls to activate/deactivate employees at the time of transfer/resignation/superannuation resulting in double payments. It is important to note that the PEMS was initially developed without the payroll module and was included at a later stage. The MoF has taken cognizance of auditor’s observations and recommendations and is working on strengthening the system with the formation of a PEMS enhancement Technical Working Group within DPA. The group has been reviewing the PEMS and consulting with finance personnel in the line agencies. For instance, the Last Pay Certificate (LPC) to be issued at the time of transfer will be generated from the payroll module of PEMS (compared to a manual process earlier) with enhanced controls for marking an employee as active/inactive at the agency level. These initiatives are under test currently and the impact of the same will be noticed going forward. At the time of assessment, there are serious weaknesses in internal controls in PEMS payroll module. Dimension 23.4: Payroll audit RCSC has instituted HR audit in 2012 as mandated by the Civil Service Act of Bhutan (CSAB) 2010. To date HR audit has been conducted in 12 agencies including ministries, autonomous agencies and dzongkhags. During FY 2014/15, HR audit was carried out in the Ministry of Foreign Affairs and National Environment Commission. Once the on-going reforms are over, HR audit will be strengthened and will be one of the most important exercises undertaken periodically by the RCSC to ensure that HR actions are done in compliance with the BCSR and the CSAB. In 2013-14 the RAA conducted a specific audit of the Government Payroll and Provident Fund as a follow-up audit on the discrepancies in the remittances of GPF noted during the audit of the Annual Financial Statements of the Royal Government for the financial year ended 30th June 2013 and NPPF. As discussed above, nationwide correction surveys are being undertaken by RCSC since 2014 to update the personnel records and 67% accuracy in personnel data was reported of June 2015. The target is to achieve 95% level accuracy by June 2016. 3. Assessment of PFM Performance 87 There is no system of annual payroll audits in RGoB. The RAA undertook a detailed review of the payroll in 2013/14 across all central government agencies and reported its findings as a separate chapter in the Annual Audit Report. Also, regular surveys and HR audits are being undertaken by RCSC. Score Scoring Method M1 (WL). Minimum Requirements 23.1: Integration of payroll and personnel records A Approved staff list, personnel database and payroll are directly linked to ensure budget control, data consistency and monthly reconciliation. B The payroll is supported by full documentation for all changes made to personnel records each month and checked against the previous month’s payroll data. Staff hiring and promotion is controlled by a list of approved staff positions. C Reconciliation of the payroll with personnel records takes place at least every six months. Staff hiring and promotion is checked against the approved budget prior to authorization. D Performance is less than required for a C score. 23.2: Management of payroll changes A Required changes to the personnel records and payroll are updated at least monthly, generally in time for the following month’s payments. Retroactive adjustments are rare. If reliable data exists, it shows corrections in a maximum of 3% of salary payments. B Personnel records and payroll are updated at least quarterly and require a few retroactive adjustments. C Personnel records and payroll are updated at least quarterly and require some retroactive adjustments. D Performance is less than required for a C score. 23.3: Internal control of payroll A Authority to change records and payroll is restricted, results in an audit trail and is adequate to ensure full integrity of data. B Authority and basis for changes to personnel records and the payroll are clear and adequate to ensure high integrity of data. C Sufficient controls exist to ensure integrity of the payroll data of greatest importance. D Performance is less than required for a C score. 23.4: Payroll audit A A strong system of annual payroll audits exists to identify control weaknesses and ghost workers. B A payroll audit covering all central government entities has been conducted at least once in the last three completed fiscal years (whether in stages or as one single exercise). C Partial payroll audits or staff surveys have been undertaken within the last three completed fiscal years. D Performance is less than required for a C score. Indicator/Dimension Score Brief justification for the score PI-23: Payroll controls D+ Scoring Method M1 Integration of payroll and 23.1:  D The payroll and personnel records are not integrated and no personnel records. reconciliation between the two records has been undertaken. Management of payroll 23.2:  A The required changes to the personnel records and payroll are changes. updated monthly and in time for the following month’s payments in accordance with the rules laid down in FAM. Retroactive adjustments are rare. 23.3: Internal control of payroll. D There are serious weaknesses in internal controls in PEMS payroll module and significant observations are made by the auditor on the adequacy of controls to ensure integrity of the payroll data. 88 Bhutan: Public Financial Management Performance Report Indicator/Dimension Score Brief justification for the score 23.4: Payroll audit. C There is no system of annual payroll audits in RGoB. The RAA undertook a detailed review of the payroll in 2013-14 across all central government agencies and reported its findings as a separate chapter in the Annual Audit Report. Also, regular surveys and HR audits are being undertaken by RCSC. Ongoing and planned reforms Efforts are under way to develop an application program interface to integrate CSIS with other shared systems such as Census Information System for decentralized recruitments and Bhutan Civil Service Examination Systems. Initial dialogue is under way on the possibilities of integrating the CSIS with the payroll system in PEMS once the CSIS is fully updated. RCSC is in the final stage of validating and updating the CSIS and linking the information on CID from the Department of Registration, Ministry of Home and Cultural Affairs. Once it has completed updating the CSIS, users will not have to make any manual entries. This will save time and resources and improve data reliability, consistency and accuracy. PI-24: Procurement Significant public spending takes place through the public procurement system. A well-functioning procurement system ensures that money is used effectively in acquiring inputs and achieving value for money in the delivery of programs and services by a government. This indicator examines key aspects of procurement management, focusing on transparency of arrangements, emphasis on open and competitive procedures, monitoring of procurement results and access to appeal and redress arrangements. It contains four dimensions and uses the M2 (AV) method for aggregating dimension scores. The relevant time period is FY 2014/15. Dimension 24.1: Procurement monitoring At present a nationwide comprehensive procurement monitoring system for all type of contracts does not exist. The Ministry of Finance has already awarded the contract to Consulting Firm to design an e-Government Procurement system that shall cover all these aspects by the next year. However since Procurement of works covers almost 50% of the Government Procurement (during the 10th Five Year Plan (2008-2013), works accounts for 47% followed by services with 24% and goods with 18% as per Green Public Procurement in Bhutan-2015 report), the Construction Development Board maintains an online evaluation, monitoring and reporting system and a ciNet system through which data is maintained for Construction works contracts. Most Procuring Agencies have on their own initiative maintained such data on procurement of goods, works and services. While a centralized data system would provide for monitoring the efficiency and effectiveness of the procurement system, currently data maintained by Procuring agencies have been serving this purpose. Realizing the difficulties in doing so, the e-GP is being initiated by the Ministry of Finance. Dimension 24.2: Procurement methods Open competition is defined as the preferred or default method for procurement in the Procurement Rules and Regulations (PRR) 2009 (revised July 2015) Clause No. 4.2.2.1. A threshold value above which 3. Assessment of PFM Performance 89 open competition is the default method is defined in the PRR, which is above Nu. 1M in the case of procurement of Works, and above Nu. 0.2 M in case of Goods and Services. As per the data collected through e-tool database maintained by Construction Development Board covering 1430 contracts, all followed open competition. These 1430 contracts represents all high spending implementing agencies/ ministries. Hence the sample is statistically representable. The procurement of works account for majority of procurement in Bhutan and the e-tool allows for comprehensive web based advertisement and contract management system. The site is www.cdb.gov.bt. Due to lack of MIS for goods and service, for the assessment purpose goods and service data has not been considered. Just to have an idea, a small sample for the Ministry of Education (MoE) for goods and services and Thimphu Thromde for construction works was reviewed. Out of 26 contracts MoE had tendered out in 2014/15, 13 were done through limited bidding, which accounted for 13% of the total procurement value. In the case of Thimphu Thromde, out of 24 contracts, 6 were tendered out through limited bidding and 1 through limited enquiry/shopping, which accounted for 4% of the total procurement value. Limited bidding is a competitive method but for a shorter bidding period of 14 days. Based on these findings, it can be seen that except for those which exceed the threshold value defined in the PRR, all tenders are done through open competition. While a procurement monitoring system does not exist currently, the Ministry of Finance has already initiated e-GP system, which shall cover all these aspects. A Consulting firm hired by the Ministry is already working on phase-I of the e-GP system and the system development has been completed., From September 2016, the phase –I will be go live as pilot basis for three organizations. The phase-I among others will include business process re-engineering of the public procurement system in Bhutan, Registration on the system, Annual Procurement Plan, Tendering and e-learning. On completion of phase-I, the PPPD will have information and reports on the numbers of tenders processed, types of procurement and details on all other aspects of the tendering process. However since Procurement of works covers majority of Government Procurement spend, the e-Tool system for evaluation of works tenders maintains such data in respect of works contracts. Hard copy records of all contracts are maintained by the Procuring Agencies in accordance with the Financial and Accounting Manual 2001. The whole process of procurement including information from advertisement to payment and contract management is duly recorded in hard copy filing. This also includes the method of procurement. No issues or concerns on the reliability of these data on awarded contracts were referred to in the Annual Audit Report 2014. Though the sample data (i.e. 1430 works contract from CDB’s website) showed that more than 80% of total value of contracts followed competitive method but due to the absence of a comprehensive e-GP system this is difficult to substantiate this fact. CDB’s website does not capture data for the contract’s value less than Nu. 4 Million. However these small value contracts represents less than 10% of the total works expenditure. Hence the rating for this dimension is evaluated as “B”. Dimension 24.3: Public access to procurement information The Procurement Rules & Regulations (PRR), Standard Bidding Documents (SBDs) and related guidelines and manuals are available on the Public Procurement Policy Division (PPPD) website and accessible free of charge by all users. These standard documents were also printed and distributed to all Ministries, Dzongkhags and Gewogs in 2012. As required by the PRR, information on procurement opportunities are made available in the newspapers, on e-Tool system of the CDB for construction works, announced on the TV and also made available on the Procuring Agency’s website. Information on procurement opportunities, amendments to the bidding 90 Bhutan: Public Financial Management Performance Report documents and any other information can be seen on any government agency website. In addition, the notification on award of contracts is displayed on the notice board of the procuring agency concerned. However, proposal for preparing and making available procurement plans are still at a draft stage. Clause 64 of Rules and Procedures for Independent Review Body 2015 requires that after resolving a complaint, the Independent Review Body (IRB) Secretariat is required to publish on the website of the PPPD, such a summary of decisions made. The IRB was introduced recently and until date received only one complaint, which was resolved as per the IRB Rules and Procedures. The decisions of the IRB is published on the PPPD website. The Annual Audit Report 2014 does not mention any concerns on reliability of any of the above information published in the media or on the websites of the Procuring Agencies. Under this dimension, the requirements of (1) legal and regulatory framework for procurement 
(3) bidding opportunities, (4) contract awards and (5) data on resolution of procurement complaints are met and therefore this dimension is scored B. Dimension 24.4: Procurement complaints management An Independent Review Body and the Rules and Procedures of the Independent Review Body was introduced in July, 2015. Clause16 (I) of Rules and Procedures of the Independent Review Body 2015 ensures that no members of the IRB have conflict of interest pertaining to issues to be discussed and refrain from participation in the specific meetings if any and requires that members sign a confidentiality and Declaration of interest form (annexed in IRB Rules and Procedures) in every meeting. Clause 8.1.3 of the Procurement Rules and Regulations 2009 (revised July 2015) allows a supplier, contractor or service provider, in the event of a perceived breach of a duty imposed upon a Procuring Agency in respect of a specific procurement procedure, to submit a written complaint to the head of the procuring agency responsible for such procedure promptly and in any event within 10 days of the letter of intent to award the contract. However, Clause 32(IV) of Rules and Procedures of the Independent Review Body 2015 requires Bidders to pay a nominal registration fee of Nu. 5000. The intention is not to discourage Bidders to complain but to prevent (least to certain extent) baseless complaints. While developing the Rules and Procedures for Independent Review Body, the Bhutan Chamber of Commerce & Industry (BCCI) and Contractors’ Association of Bhutan (CAB) representing the interest of bidding community were actively involved as the main stakeholders at each stage of discussion. In fact, in the initial proposal the BCCI and CAB proposed Nu.10,000 as application fees but this was later reduced to Nu. 5000 by Ministry of Finance so as not to discourage genuine complaints. The Rules and Procedures of the Independent Review Body 2015 clearly define the processes for submission and resolution of complaints that are clearly defined and publicly available. The Rules and procedures also provide for the IRB to exercise the authority to suspend the procurement process; issue decisions within the timeframe specified in the rules/regulations; and issue decisions that are binding on all parties (without precluding subsequent access to an external higher authority). Until date, only one complaint was received after establishing the IRB in July 2015. The complaint was reviewed as per the Rules and Procedures of the IRB and the details and decisions taken by the IRB is posted on the PPPD website. Under this dimension, which is assessed as at the time of assessment, all the requirements of items (1) to (6) are met and therefore this dimension is scored as “A”. 3. Assessment of PFM Performance 91 Score Scoring Method M2 (AV). Minimum Requirements 24.1: Procurement monitoring A Databases or records are maintained for contracts including data on what has been procured, value of procurement and who has been awarded contracts. The data are accurate and complete for all procurement methods for goods, services and works. B Databases or records are maintained for contracts including data on what has been procured, value of procurement and who has been awarded contracts. The data are accurate and complete for most procurement methods for goods, services and works. C Databases or records are maintained for contracts including data on what has been procured, value of procurement and who has been awarded contracts. The data are accurate and complete for the majority of procurement methods for goods, services and works. D Performance is less than required for a C score. 24.2: Procurement methods The total value of contracts awarded through competitive methods in the last completed fiscal year, represents: A 80% or more of total value of contracts B 70% or more of total value of contracts C 60% or more of total value of contracts D less than required for a C score 24.3: Public access to procurement information Key procurement information to be made available to the public comprises: (1) Legal and regulatory framework for procurement. (2) Government procurement plans. (3) Bidding opportunities. (4) Contract awards (purpose, contractor and value). (5) Data on resolution of procurement complaints. (6) Annual procurement statistics. A Every key procurement information elements is complete and reliable for government units representing all procurement operations and made available to the public in a timely manner. B At least four of the key procurement information elements are complete and reliable for government units representing most procurement operations and made available to the public in a timely manner. C At least three of the key procurement information elements are complete and reliable for government units representing the majority of procurement operations and made available to the public. D Performance is less than required for a C score. 24.4: Procurement complaints management Complaints are reviewed by a body which: s not involved in any capacity in procurement transactions or in the process leading to contract award (1) I decisions. (2) Does not charge fees that prohibit access by concerned parties.  ollows processes for submission and resolution of complaints that are clearly defined and publicly (3) F available. (4) Exercises the authority to suspend the procurement process. (5) Issues decisions within the time frame specified in the rules/regulations. ssues decisions that are binding on every party (without precluding subsequent access to an external (6) I higher authority). A The procurement complaint system meets every criterion. B The procurement complaint system meets criterion (1), and three of the other criteria. C The procurement complaint system meets criterion (1), and one of the other criteria. D Performance is less than required for a C score. 92 Bhutan: Public Financial Management Performance Report Indicator/Dimension Score Brief Justification for the score PI-24: Procurement B Scoring Method M2 24.1: Procurement monitoring. C Records are maintained on works contracts showing what is procured, its cost, and who is awarded the contracts. These cover the majority of all procurement. 24.2: Procurement methods. B 70% or more of total value of contracts are awarded through competitive methods. Public access to procurement 24.3:  B Public has access to information on procurement rules and information. procedures, bidding opportunities and contract awards and data on resolution of procurement complaints.  rocurement complaints 24.4: P A The complaints system meets all six criteria. management. Ongoing and planned reforms The Ministry of Finance has awarded a contract to a consulting firm to design an e-Government procurement system in three phases. The first phase contract is signed and expected to be delivered by December 2016. PI-25: Internal controls on non-salary expenditure This indicator measures the effectiveness of general internal controls for non-salary expenditures. Additional, specific expenditure controls on public service salaries are considered in PI-23. It contains three dimensions and uses the M2 (AV) method for aggregating dimension scores. Dimension 25.1: Segregation of duties The manual and guiding documents (for instance, the Internal Control (IC) Framework and Financial Rules and Regulations 2001) issued by the Ministry of Finance establish the need for effective segregation of duties to reduce the risk of error or fraud. The IC Framework specifies that segregation ‘includes separating the responsibilities for authorizing transactions, processing and recording them, reviewing the transactions, and handling any related assets. No one individual should control all key aspects of a transaction or event’. The Financial Management Manual (FMM) states that ‘a system of internal control in an agency shall, among others, ensure that different stages of a transaction process are handled by different persons. In particular, the verifying officer, the sanctioning authority and the disbursement officer shall preferably be different persons’. Further, the Finance and Accounting Manual (FAM) clearly specifies the rules and regulations on the processing and recording of transactions and the different levels of operation. It stipulates that the following requirements shall be fulfilled for establishment of legitimacy of claims against the Government and making payments out of government funds: a. Existence of a sanction of expenditure; b. Recording of verification of claims; c. Preparation of disbursement voucher; d. Approval of expenditure; e. Payment. 3. Assessment of PFM Performance 93 The above requirements are handled by different people as follows: a. Sanctioning Officer: FAM clause 4.1.7.3 An officer to whom adequate financial powers have been delegated under the relevant rules shall issue a Sanction of Expenditure wherever practicable, on the basis of a proposal submitted by the head of a unit or section and verified by the head of the finance section. b. Verifying Officer: FAM clause 4.1.8.2. An officer delegated with the responsibilities for supervision and/or maintenance of records pertaining to particular activities or functions, shall verify any claims pertaining to those supplies or services delivered, utilities provided or works executed. He/she verifies any claim against the Government in order to establish that the goods or services have been received for the specific purposes and have been recorded in the relevant records. c. Preparer: Based on the above, finance personnel prepare a disbursement voucher for payment or journal voucher for adjustment to be made. d. Approving Officer: FAM defines it as the Head of Office or an Officer designated as the Drawing and Disbursing Officer (DDO) who approves all disbursement/journal vouchers for payment or adjustment. Likewise for all vouchers there are three levels namely preparation, verification and approval. The bank accounts of the budgetary bodies are jointly operated by the Head of Office/Head of Administration and Finance Division and the Finance Service Personnel and thus the cheques for all payments have to be signed by both officials. The budget in the Public Expenditure Management System (PEMS) is sourced from a different but integrated system called Multi-Year Rolling Budget (MYRB) which is updated and maintained by a Budget Officer who is different from the Accounts Officer who prepares vouchers and makes disbursement. Therefore, there is separation of functions between the accounts personnel who make disbursements based on budget allocations by the budget personnel. There is a Schedule of Delegation of Powers as Appendix I to the Financial Management Manual of the FRR 2001which specifies different types of delegation and the levels of delegation of financial powers at the level of the Head of Ministry, Secretariat, Autonomous Agency, Department and Dzongkhag. Segregation of duties is practiced by the officials and evidenced by their signatures on the vouchers and other hard copy documentation. However, the same is not replicated in PEMS, as the preparer of a transaction is allowed to verify and approve the same. For instance, the accountant makes the entry in the PEMS and can approve it himself/herself after obtaining the requisite approvals from the superiors on the hard copy documentation. Thus, evidence of adequate segregation is available in the hard copy files, but not in the audit trail available in PEMS. This risk is however mitigated as the cheque preparation (i.e. payment procedure) follows appropriate segregation of duties, thereby not posing an internal control risk. There is appropriate and clear segregation of duties and responsibilities laid down in the financial rules and regulations and practiced by various officials throughout the process. 94 Bhutan: Public Financial Management Performance Report Dimension 25.2: Effectiveness of expenditure commitment controls Article 61 of the Public Finance Act states that ‘budgetary bodies shall expend public money only in accordance with an appropriation under the Budget Appropriation Act’. Similarly, Articles 62 and 63 of the PFA prohibit a budgetary body from carrying out activities for which there is no provision in the Budget Appropriation Act or other lawful authority for making commitments that have financial implications beyond the limits authorized by the Budget Appropriation Act. Accordingly, system restrictions have been put in place in the Public Expenditure Management System (PEMS) which prevents booking of expenditure beyond the budget appropriation and releases of funds in the bank accounts of the budgetary bodies. Therefore, availability of budget appropriation and release of funds are the determining factors for incurring any expenditure or making commitments by the budgetary bodies. The PFA prohibits budgetary bodies from making any commitments that have financial implications beyond the limits authorized by the Budget Appropriation Act and therefore there is no question of outstanding commitments or over-spilling of commitments beyond the fiscal allocations. RGoB follows a system of issuing Letter of Credit Account (LC) and Project Letter of Credit Account (PLC) to prevent commitments from exceeding the projected cash availability. LC and PLC Accounts are the drawing sub-accounts of the Government Consolidated Account allotted to the budgetary bodies to facilitate withdrawals of funds for execution of budgetary activities. Through the LC/PLC, the DPA specifies the limit up to which drawing authorities of the budgetary bodies can withdraw funds for their budgeted expenditures. There is no physical cash in these LC and PLC accounts but only a notional drawing limit. Any cheques drawn against these accounts get charged to the Government Consolidated Account on a daily basis. All payments have to be accompanied by a disbursement voucher prepared from the PEMS, which has a system restriction on the availability of budget appropriation. Further, the budget in the PEMS is sourced from a different but integrated system called Multi-Year Rolling Budget (MYRB), which is updated and maintained by a Budget Officer who is different from the Accounts Officer who prepares vouchers and makes disbursement. Therefore, there is separation of functions between the accounts personnel who make disbursements based on the budget appropriations allocated by the budget personnel. The Royal Audit Authority (RAA) has not made any observations with respect to the effectiveness of the expenditure commitment controls. Comprehensive expenditure commitment controls are in place. Dimension 25.3: Compliance with payment rules and procedures The control over payments is built within the system as per the provisions of the existing financial rules and regulations and all budgetary bodies have to adhere to it. All possible checks and balances are built into the system to control and ensure that all payments are made in compliance with the rules and regulations. Some of the system controls are as follows: i. No payments can be processed without budget provision. ii. Even if there is budget provision, a payment cannot be processed if there is no fund released against the particular activity. 3. Assessment of PFM Performance 95 The RAA conducts annual audits that assess the effectiveness of controls and requires recovery of irregular payments. The audit process is a major component in ensuring the adequacy of the control system. The audit report for the year 2013-14 of the RAA presented to Parliament reported an amount of Nu. 634 million as under observation under the following categories as shown in Table 3.5.25.1. Table 3.5.21.1: Amount under observations (Non Payroll) in various Categories Category Amount under Observation (Non Payroll) in Nu. Million Violation of Laws and Rules 263.796 Shortfalls, Lapses and Deficiencies 135.898 Mismanagement 135.049 Fraud, Corruption and Embezzlement 98.844 Total Amount 633.587 Source: Audit Report for the year 2013-14 of the RAA. This amount represents 1.68% of RGoB’s expenditure (excluding payroll and its related expenses amounting to Nu. 37,627 million) for the year 2013/14. The percentage would be 2.72% if financial expenses of Nu. 14,374 million were also excluded. Compliance with the rules and regulations is high and more than 90% of payments are executed in accordance with regular rules and procedures as noted from the audit reports. Score Scoring Method M2 (AV). Minimum Requirements 25.1: Segregation of duties A Appropriate segregation of duties is prescribed throughout the expenditure process. Responsibilities are clearly laid down. B Segregation of duties is prescribed throughout the expenditure process. Responsibilities are clearly laid down for most key steps while further details may be needed in a few areas. C Segregation of duties is prescribed throughout the expenditure process. More precise definition of important responsibilities may be needed. D Performance is less than required for a C score. 25.2: Effectiveness of expenditure commitment controls A Comprehensive expenditure commitment controls are in place and effectively limit commitments to projected cash availability and approved budget allocations. B Expenditure commitment controls are in place and effectively limit commitments to projected cash availability and approved budget allocations for most types of expenditure. C Expenditure commitment control procedures exist which provide partial coverage and are partially effective. D Performance is less than required for a C score. 25.3: Compliance with payment rules and procedures A All payments are compliant with regular payment procedures. All exceptions are properly authorized in advance and justified. B Most payments are compliant with regular payment procedures. The majority of exceptions are properly authorized and justified. C The majority of payments are compliant with regular payment procedures. The majority of exceptions are properly authorized and justified. D Performance is less than required for a C score. 96 Bhutan: Public Financial Management Performance Report Indicator/Dimension Score Brief justification for the score PI-25: Internal controls for non- A Scoring Method M2 salary expenditure 25.1: Segregation of duties. A Appropriate and clear segregation of duties and responsibilities are laid down in the financial rules and regulations. Effectiveness of expenditure 25.2:  A Comprehensive expenditure commitment controls are in commitment controls. place. Compliance with payment rules 25.3:  A Compliance to the rules and regulations is high and more than and procedures. 90% of payments are executed in accordance with regular rules and procedures as noted from the audit reports. PI-26: Internal audit This indicator assesses the standards and procedures applied in internal audit. It contains four dimensions and uses the M1 (WL) method for aggregating dimension scores. The Ministry of Finance Central Coordinating Agency (CCA) is responsible for administering the internal audit service to all public sector agencies under the Royal Government of Bhutan. Internal audit was first introduced in the year 2000 and ever since its popularity, amidst challenges, as an in-house tool to manage risk, governance and control mechanism in an organization has been surging. Internal audit is one of the important components in the national internal control framework along with the Royal Audit Authority and the Anti-Corruption Commission. As a coordinating agency, CCA issues internal audit guidelines, coordinates function and monitors and evaluates internal audit activities in agencies. The CCA has issued a Charter, Internal Audit Manual, Code of Conduct and internal control framework. It has also provided standard operating procedure for auditing the procurement system in the country. Dimension 26.1: Coverage of internal audit This measures the proportion of total planned expenditure and/or revenue collection covered by annual audit activities. The Royal Government of Bhutan has functioning internal audit units in all twenty dzongkhags, ten ministries and two autonomous agencies, a total of 32 agencies. However, there are a few autonomous agencies without internal audit units. All 32 functioning units implement audit plans and produce reports annually. The total budget of these agencies constitutes 89.1% of the overall budget of the Government (FY 2015/16). The annual internal audit plans are risk prioritized but implementation is subject to resource availability. Not all risk-inflicted departments/divisions (as per risk assessment by the internal auditors) receive internal audit services. At the national level, the service has a resource gap of 29 internal auditors. Table 3.5.26.1 below shows the expenditure coverage of internal audit in 2015/16. Table 3.5.26.1: Expenditure coverage of internal audit in 2015-16 CG entity with (1) internal auditors placed and Expenditure % of Overall Budget (2) approved internal audit plan Nu. Millions Total government budget for 2015-16 FY 50,713.707 100.0% Total budget for 10 ministries having IA 33,165.215 Total budget for 20 dzongkhags having IA 11,563.617 Total budget for 2 autonomous bodies having IA 466.389 Total budget subject to internal audit 45,195.221 89.1% 3. Assessment of PFM Performance 97 As for the revenue, all revenue for the government is collected by the Department of Revenue and Customs (DRC). Although there is no dedicated IAU in the DRC, there is an IAU under MoF and DRC is covered under MoF. Dimension 26.2: Nature of audits and standards applied This dimension assesses if internal audit focuses on risk areas of the agency by way of prioritization in the internal audit plan. Internal audit plans are formulated before the start of the fiscal year based on risk assessment. Internal Audit Service in Bhutan has adopted the International Standards for the Professional Practice of Internal Auditing. There are risk-based audit plans to prioritize agencies and/or programs within the audit universe. However, audit engagements are primarily ex-post reviews of financial compliance. Theme based audits have been introduced such as on procurement management. Audit areas are specified in the Audit Plan and these are approved by the Secretary of the Department. Internal audits are primarily focused on financial compliance. Dimension 26.3: Implementation of internal audits and reporting In 31 IAUs, the plans for FY 2014/15 were almost fully implemented (see table below). For financial year 2014/15, all 32 functioning IAUs completed their plans and submitted reports within a month of every engagement. CCA received a copy of all reports submitted to the respective managements by IAUs. The Royal Audit Authority is yet to rely on internal audit reports. Internal audit units are not required to endorse a copy of their reports to the Royal Audit Authority. However, the RAA can ask for a copy of internal audit reports from the management should they desire to have one. Table 3.5.26.2 shows the Completion of Programmed Audits during 2014-15. Table 3.5.26.2: Completion of Programmed Audits during FY 2014/15 Agency Audits planned Audit completed and reports issued All 10 ministries 9 audit plans All completed and issued reports All 20 dzongkhags 20 audit plans 19 completed and issued reports 2 autonomous agencies 2 audit plans Both completed and issued reports Out of a total of 31 planned audits, 30 were completed and reports issued (97%) This meets the PEFA requirement for A, where “all” means over 90%. Dimension 26.4: Response to internal audits The responsible managers generally address internal audit findings involving financial restitution almost immediately. However, recommendations calling for systemic reforms receive lukewarm response in the central agencies. The majority of the findings relate to financial compliance. For example, for FY 2014/15, almost 80% of the findings related to financial compliance. The practice is acute in the dzongkhags, possibly due to the low status of internal auditors vis-à-vis the management. 98 Bhutan: Public Financial Management Performance Report Score Scoring Method M1 (WL). Minimum Requirements 26.1: Coverage of internal audit A Internal audit is operational for all central government entities. B Internal audit is operational for central government entities representing most total budgeted expenditures and for central government entities collecting most budgeted government revenue. C Internal audit is operational for central government entities representing the majority of budgeted expenditures and for central government entities collecting the majority of budgeted government revenue. D Performance is less than required for a C score. 26.2: Nature of audits and standards applied A Internal audit activities are focused on evaluations of the adequacy and effectiveness of internal controls. A quality assurance process is in place within the internal audit function and audit activities meet professional standards, including focus on high risk areas. B Internal audit activities are focused on evaluations of the adequacy and effectiveness of internal controls. C Internal audit activities are primarily focused on financial compliance. D Performance is less than required for a C score. 26.3: Implementation of internal audits and reporting A Annual audit programs exist. All programmed audits are completed, as evidenced by the distribution of the reports to their appropriate parties. B Annual audit programs exist. Most programmed audits are completed, as evidenced by the distribution of their reports to the appropriate parties. C Annual audit programs exist. The majority of programmed audits are completed, as evidenced by the distribution of their reports to the appropriate parties. D Performance is less than required for a C score. 26.4: Response to internal audits A Management provides a full response to audit recommendations for all entities audited within twelve months of the report being produced. B Management provides a partial response to audit recommendations for most entities audited within twelve months of the report being produced. C Management provides a partial response to audit recommendations for the majority of entities audited. D Performance is less than required for a C score. Indicator/Dimension Score Brief justification for the score PI-26: Internal audit C+ Scoring Method M1  overage of internal audit. 26.1: C B Internal audit is operational for CG entities incurring most expenditure and collecting most revenue.  ature of audits and standards 26.2: N C Internal audit is primarily focused on financial compliance. applied. mplementation of internal audits 26.3: I A All planned audits are completed and reports distributed to the and reporting. appropriate parties. 26.4: Response to internal audits. C Management provides a partial response for the majority of entities audited. 3. Assessment of PFM Performance 99 Pillar VI – Accounting and reporting 3.6  (Performance indicators 27 to 29) PI-27: Financial data integrity This indicator assesses the extent to which treasury bank accounts, suspense and advance accounts are regularly reconciled and how the processes in place support the integrity of financial data. It contains four dimensions and uses the M2 (AV) method for aggregating dimension scores. Figure 3.6.27.1: Classification of Government Bank Accounts Government Bank Accounts Consolidated Fund Non-CFA Account (CFA) maintained with Bank Accounts RMA as Treasury Single A/c LC/PLC Accounts Drawing sub-accounts Budgetary Extra-Budgetary maintained with agent banks Government Budget Fund Account (BFA) Refundable subsidiary account Govt. trust Funds Deposits A/c maintained with BoB Current Deposit A/cs- National Pension and (Gewogs, Municipal, Provident Fund Judiciary, Others) (NPPF) Government -Revenue Account (RGR) subsidiary account Revolving Fund A/c maintained with BoB Government Non Audit Recoveries A/c Revenue receipt and deposit account subsidiary account Bank accounts maintained with BoB abroad Dimension 27.1: Bank account reconciliation The FAM provides that reconciliation of the principal and subsidiary bank accounts shall be undertaken by the authorized agencies of the MoF while the collection agencies shall follow instructions in the Revenue Manual for reconciliation of revenue sub-accounts (RGR accounts). Table 3.6.27.1 shows the Frequency of reconciliation of government bank accounts outside the GCA. The constituents of the Government Consolidated Account (GCA) and the regularity of reconciliation are: 100 Bhutan: Public Financial Management Performance Report a. The Government Budget Fund Account (BFA) – operated by the DPA and reconciled at monthly intervals. b. The Government Revenue Account (RGR) – operated by the DRC and reconciled daily on RAMIS. c. The LC/PLC (memorandum) accounts - operated by the designated Accounting Units in all offices and reconciled by the respective office on a monthly basis; the information of reconciliation, however, is not collated by a centralized agency. d. Non-revenue account maintained to facilitate the inter-agency transfers. The FAM states that on receipt of the monthly accounts from agencies, the DPA shall check whether the amount shown under the head ‘Deposits: Non-Revenue’ is reconciled with the bank statements and Deposit Invoices received from the Agent Banks. However, information on the regularity of reconciliation is not known. Table 3.6.27.1: Frequency of reconciliation of government bank accounts outside the GCA No. of Balance as of Jun Balance as of Jun Periodicity of Name of Account Currency accounts 30, 2014 (million) 30, 2015 (million) Reconciliation Refundable Deposits Nu. 1 717.528 0.000 No Account Bhutan Health Trust Nu. 1 881.977 1,392.679 At least monthly Fund Bhutan Trust Fund USD 1 45.823 47.450 At least monthly for Environment Conservation Cultural Trust Fund Nu. 1 52.106 59.704 At least monthly Bhutan Information Nu. 1 193.31 323.039 At least monthly Communication and Media Authority (current Account) Revolving fund Nu. 7 32.729 28.442 At least monthly (current Account) Gewogs Current Nu. 205 22.081 22.329 At least monthly Deposit Account Municipal Current Nu. 15 233.970 380.839 At least monthly Deposit Account Judiciary Current Nu. 19 27.157 26.777 At least monthly Deposit Account Other Current Deposit Nu. 123 530.701 956.554 At least monthly Accounts35 Grand Total 374 Nu. 2,691.559 + Nu. 3,190.363 + USD 45.823 USD 47.450 Source: Annual Financial Statements, FY 2013/14 and FY 2014/15. Reconciliation of current deposit accounts is done at each agency level, but the information is not collated centrally. 35 These include the Audit Recoveries Account, Escrow Account, Endowment Fund etc. 3. Assessment of PFM Performance 101 The reconciliation of the RGR is daily. The BFA, trust accounts, revolving fund and current deposit accounts are reconciled monthly and the reconciliation is completed within 3 weeks of the end of the month. These together constitute 95% of the Government receipts for the year 2013/14. Dimension 27.2: Suspense accounts The Finance and Accounting Manual of the FRR 2001 explains the need for suspense accounts as ‘used for temporarily accommodating some expenditure of or amounts payable by the Government until those can be transferred to the rightful activities or paid to the creditors’. Accordingly, Suspense Accounts are used for the following transactions: a. Stock b. Purchases c. Public Work Advance (PWA) d. Intra-Agency Assignments e. Deposit Works f. Other Deposits Further, permanent and temporary advances are also allowed in accordance with the rules in the FAM. Such advances if issued for Government works are treated under Suspense heads for the purpose of accounting. Permanent advances (operating like rolling imprest accounts) are issued to meet recurring expenses in the field units and are settled against ‘an account of utilization’ provided at the time of replenishment. Temporary advances are provided for making disbursements against specific purposes for a specific time and are settled upon receipt of a utilization account immediately upon completion of the assignment, along with refund of any unutilized funds. It has to be refunded immediately if the specific purpose no longer needs to be fulfilled or if it transpires that advance shall not be used during a period of 15 days. A complete liquidation of the temporary advances is required to be done on the close of the financial year. Any unutilized advances in both the permanent and temporary advance accounts are refunded to RGoB at the close of the financial year. The FAM further provides that the Head of Office using the suspense account is responsible for timely clearance of such balances and each accounting unit must review the balances and items under suspense to ensure timely action for clearance. Accounting for suspense accounts is done at the individual LC/ PLC account of each of the budgetary bodies in PEMS – recording the party name, assignment details and budget line against each transaction. Adjustment is recorded against the respective budget line in PEMS – thereby ensuring that details of unadjusted balances are available for each transaction. At the end of the fiscal year, the unadjusted PWA (except PWA: Employees) accounts balances are carried forward to the subsequent year as opening balance in PEMS. The closing balance of the LC/ PLC accounts of these budgetary bodies is arrived at after taking into account all the budgetary actual expenditures plus the advances and suspense balances. As accounting for suspense is done in PEMS electronically, there is no need to reconcile the ledger and control accounts. 102 Bhutan: Public Financial Management Performance Report Accounting and monitoring of suspense accounts are done on the individual LC/PLC accounts of budgetary bodies. A consolidated statement showing agency-wise aggregate additions and adjustments within the fiscal year in the suspense account is included in the Annual Financial Statements of RGoB. Information on the opening and closing balances of suspense accounts is not disclosed. During the financial year 2014/15, transactions were recorded in 714 suspense accounts, on which a closing balance was reported in 570 accounts amounting to Nu. 888.5 million. Further, 54 accounts (with a closing balance of Nu. 94 million), were noted where there was no movement during the year (i.e. reporting the same opening and closing balance for 2014/15). Table 3.6.27.2 details the movement of suspense accounts for the last 2 years: Table 3.6.27.2: Movement of Suspense accounts for last 2 years (in Nu.) Year Opening Balance Additions during the year Adjustments during the year Closing Balance 2013-14 232,800,995 8,400,549,495 8,156,661,248 476,689,242 2014-15 476,689,242 8,186.865,560 7,775,074,517 888,480,285 Source: DPA. The periodicity of clearance of suspense accounts depends on the terms and conditions of each relevant suspense category. However, at the close of each fiscal year, every accounting unit performs the overall review and reconciliation of suspense accounts to ensure that the balances reflected against assignments and parties are correct. The accounting for suspense accounts is done in PEMS, thereby eliminating the need for a reconciliation of the Ledger and Control accounts. The suspense accounts are cleared at the end of the financial year. Dimension 27.3: Advance accounts Advances provided to Government employees on personal accounts like Travel Advance, Leave Salary etc. are accounted for under Advance accounts. All other advances are recorded under the head ‘Suspense Accounts’ and are dealt with in dimension 27.2 above. The regulations and accounting of governing advances are provided in the FAM: i. Personal advances are processed on the basis of a sanction order documenting the purpose and recovery/adjustment procedure of the advance. The sanction order is issued by a competent authority in accordance with the Delegation of Powers. ii. Personal advance of any kind are not sanctioned or paid in case a previous personal advance remains unsettled. iii. Balance of advances at the end of a fiscal year is carried forward to the next year. The accounting units of the respective budgetary bodies provide advances to their employees and are also responsible for ensuring timely liquidation. Accounting for advances is done at the individual LC/PLC of budgetary body in PEMS – recording the nature of advance and budget line against each advance. Adjustment is recorded against the respective budget line in PEMS – thereby ensuring that details of unadjusted balances are available for each transaction. At the year end, the unadjusted advance balances are carried forward to the subsequent year as opening balance in PEMS. The closing 3. Assessment of PFM Performance 103 balance of the LC/PLC accounts of these budgetary bodies is arrived at after taking into account all the budgetary actual expenditures plus the advances and suspense. As accounting for advances is done in PEMS electronically, there is no need to reconcile the ledger and control accounts. Monitoring of Advance Accounts is done at the individual LC/PLC of budgetary body. A consolidated statement showing agency-wise aggregate additions and adjustments within the fiscal year in the Advance Account is included in the Annual Financial Statements of RGoB - information on the opening and closing balances of Advance accounts is not disclosed. During the financial year 2014-15, advance transactions occurred in 503 operating units (advances given - Nu. 273 million), out of which a closing balance was reported only in 94 accounts amounting to Nu. 10 million, as detailed in the Table 3.6.27.3 below: Table 3.6.27.3: Movement of Advance Accounts for the last 2 years In Nu. Opening Advances given during Adjustments made during Year Closing Balance Balance the year the year 2013-14 9,368,632 252,711,463 251,709,667 10,370,428 2014-15 10,370,428 272,833,582 273,468,965 9,735,045 Source: DPA. The accounting for advances is done in PEMS, thereby eliminating the need for a reconciliation of the ledger and control accounts. Most of the advances are cleared in a timely way because anything beyond the prescribed time line attracts penalty interest of 24% per annum as per the resolution of Parliament. This compliance is enforced by the RAA during their annual audit of budgetary bodies. Dimension 27.4: Financial data integrity processes Access rights and privileges to financial records and information is in accordance with the Public Finance Act, financial rules and regulations and other acts and rules in place. Users of the financial management systems like MYRB, PEMS, RAMIS etc. have a unique user identity and password and also different access levels like System Administrator, Department Head, Division Chief, Supervisor, Verifying Officer, Approving Officer etc. Therefore, access to the records and information in the PFM system is based on the individuals’ roles and responsibilities as defined in the FRR and there is no unlimited or unauthorized access to everyone. Access level can be controlled in the system based on role management. Since all transactions in the systems are tagged to the user IDs there is an audit trail in the system. There is an internal audit unit in all ministries and dzongkhags and they have read-only access to the records and information of the agency concerned for review and scrutiny. Further, the external auditors are given full read-only access to the system and its records while carrying out audit in the budgetary bodies. The reports on all financial transactions are readily available from the system for further analysis and review purposes. The access and changes to records are restricted by access level controls. An audit trail is available in the financial management systems. 104 Bhutan: Public Financial Management Performance Report Score Minimum requirements for scores 27.1:. Bank account reconciliation A Bank reconciliation for all active central government bank accounts takes place at least weekly at aggregate and detailed levels, usually within one week from the end of each week. B Bank reconciliation for all active central government bank accounts takes place at least monthly, usually within 4 weeks from the end of each month. C Bank reconciliation for all active central government bank accounts takes place at least quarterly, usually within 8 weeks from the end of each quarter. D Performance is less than required for a C score. 27.2: Suspense accounts A Reconciliation of suspense accounts takes place at least monthly, within a month from the end of each month. Suspense accounts are cleared in a timely way, no later than the end of the fiscal year unless duly justified. B Reconciliation of suspense accounts takes place at least quarterly within two months from the end of each quarter. Suspense accounts are cleared in a timely way, no later than the end of the fiscal year unless duly justified. C Reconciliation of suspense accounts takes place annually, within two months from the end of the year. Suspense accounts are cleared in a timely way, no later than the end of the fiscal year unless duly justified. D Performance is less than required for a C score. 27.3: Advance accounts A Reconciliation of advance accounts takes place at least monthly, within a month from the end of each month. All advance accounts are cleared in a timely way. B Reconciliation of advance accounts takes place at least quarterly within two months from the end of each quarter. Most advance accounts are cleared in a timely way. C Reconciliation of advance accounts takes place annually, within two months from the end of the year. Advance accounts may frequently be cleared with delay. D Performance is less than required for a C score. 27.4: Financial data integrity processes A Access and changes to records is restricted and recorded, and results in an audit trail. There is an operational body, unit or team in charge of verifying financial data integrity. B Access and changes to records is restricted and recorded, and results in an audit trail. C Access and changes to records is restricted and recorded. D Performance is less than required for a C score. Indicator/Dimension Score Brief justification for the score PI-27: Financial data integrity B Scoring Method M2  egularity of bank 27.1: R B The reconciliation of the RGR is daily and of the BFA, trust accounts, reconciliation. revolving fund and current deposit accounts is monthly. These together constitute 95.2% of the Government receipts for the year 2013-14. Regularity of 27.2:  C The accounting for Suspense accounts is done in PEMS, thereby reconciliation and eliminating the need for a reconciliation of the Ledger and Control clearance of suspense accounts. The suspense accounts are cleared at the end of the accounts. financial year.  egularity of reconciliation 27.3: R B The accounting for Advances is done in PEMS, thereby eliminating and clearance of advance the need for reconciliation of the Ledger and Control accounts. Most accounts. of the advances are cleared in a timely way.  rocesses supporting 27.4: P B The access and changes to records are restricted by access level financial data integrity. controls. An audit trail is available in the financial management systems. 3. Assessment of PFM Performance 105 PI-28: In-year budget reports This indicator assesses the comprehensiveness, accuracy and timeliness of information on the budget execution. In-year budget reports must be consistent with budget coverage and classifications to allow monitoring of budget performance and, if necessary, timely use of corrective measures. It contains three dimensions and uses the M1 (WL) method for aggregating dimension scores. Dimension 28.1: Coverage and comparability of reports The relevant period for this assessment is FY 2014/15 during which DNB was issuing information in the form of a Quarterly Note Sheet (QNS) for further directives. The QNS included the comparison of the approved budget with the revised budget and actual expenditure of the quarter ended. Expenditures made from transfers to deconcentrated units (the LGs) are included in the QNS. Dimension 28.2: Timing of in-year budget reports During 2014/15, the note sheet prepared by DNB on a quarterly basis was issued to MoF within 5 to 6 weeks from the end of the quarter. From FY 2015/16, a Budget Situation Report is being produced quarterly within about four weeks from the end of the quarter, and submitted to MoF. The report for the 1st quarter of FY 2015/16 was submitted to MoF on November 6, 2015. Dimension 28.3: Accuracy of in-year budget reports The quality of data is very good as it is the actual data derived from the budget and accounting systems, which are updated daily. Data quality is verified according to procedures stated in the Financial Rules and Regulations. Only after these procedures are completed are they are entered into the systems. The usefulness of the reports is not undermined by inaccuracies or omissions. The report however shows only disbursed expenditure, not outstanding commitments. Score Scoring Method M1 (WL). Minimum Requirements 28.1: Coverage and comparability of reports A Coverage and classification of data allows direct comparison to the original budget. Information includes all items of budget estimates. Expenditures made from transfers to de-concentrated units within central government are included in the reports. B Coverage and classification of data allows direct comparison to the original budget with partial aggregation. Expenditures made from transfers to de-concentrated units within central government are included in the reports. C Coverage and classification of data allows direct comparison to the original budget for the main administrative headings. D Performance is less than required for a C score. 28.2: Timing of in-year budget reports A Budget execution reports are prepared monthly, and issued within two weeks from the end of each month. B Budget execution reports are prepared quarterly, and issued within four weeks from the end of each quarter. C Budget execution reports are prepared quarterly (possibly excluding first quarter), and issued within 8 weeks from the end of each quarter. D Performance is less than required for a C score. 106 Bhutan: Public Financial Management Performance Report Score Scoring Method M1 (WL). Minimum Requirements 28.3: Accuracy of in-year budget reports A There are no material concerns regarding data accuracy. An analysis of the budget execution is provided by whatever budget classifications are in use. Information on expenditure is covered at both commitment and payment stages. B There may be concerns regarding data accuracy. Data issues are highlighted in the report and the data is consistent and useful for analysis of budget execution. An analysis of the budget execution is provided on at least a half-yearly basis. Expenditure is captured at least at payment stage. C There may be concerns regarding data accuracy. Data is useful for analysis of budget execution. Expenditure is captured at least at payment stage. D Performance is less than required for a C score. Indicator/Dimension Score Brief justification for the score PI-28: In-year budget reports C+ Scoring Method M1  overage and comparability of 28.1: C B The quarterly note sheet included the comparison of the reports. approved budget with the revised budget and actual expenditure of the quarter ended.  iming of in-year budget reports. 28.2: T C Quarterly reports are issued within 5-6 weeks of the end of each quarter.  ccuracy of in-year budget 28.3: A B Report data are accurate, but do not include commitment reports. data. On-going and planned reforms The Department of National Budget (DNB) started preparing a quarterly Budget Situation Report (BSR) from FY 2015/16. The report comprises information such as the revised budget, expenditure, revenue collected, grants received and the trend for the quarter as against the original projections. Information is at the summary level and administrative headings level. DNB is in charge of preparing and issuing the report and monitoring revenue and expenditure. Expenditure is classified as current and capital expenditures, by economic code and by activity. Revenue is classified by type. PI-29: Annual financial reports This indicator assesses the extent to which annual financial statements are complete, timely and consistent with generally accepted accounting principles and standards. This is crucial for accountability and transparency in the PFM system. It contains three dimensions and uses the M1 (WL) method for aggregating dimension scores. Dimension 29.1: Completeness of annual financial reports The Annual Financial Statements (AFS) of the Royal Government of Bhutan are prepared and published each year. They cover all government budgetary bodies (constitutional bodies, autonomous bodies, judiciary, ministries, dzongkhags, gewogs and thromdes). Revenue accounting is done by the Revenue Administration Management Information System (RAMIS) maintained by DRC. Expenditure details are obtained from the Public Expenditure Management 3. Assessment of PFM Performance 107 System (PEMS) based on the accounting records maintained at agency level. The Budget Fund Account details are obtained from the records maintained by the Treasury Management Division of the Department of Public Accounts. The preparation of the AFS is a manual process of consolidating information from various systems and sources - RAMIS (DRC); MYRB (DNB); CS-DRMS (DMD, DPA); PlaMS (GNHC); PEMS (DPA); Public Enterprise Division, MoF; Bank of Bhutan; National Statistical Bureau. The AFS contain comparison of actual expenditure with approved budgets, and complete and detailed information on revenues, grants, loans and expenditures. They also include statements of the Government Equity Portfolio in State-Owned Enterprises (SOEs), corporations and financial institutions, government guarantees, government outstanding debt etc. However, complete information on tangible and financial assets and liabilities (such as balances of advances and suspense accounts) is not provided in the AFS and is not supported by a cash flow statement. Financial statements covering all budgetary units are prepared annually including a comparison with the budget and information on revenue, expenditure and cash balances. Dimension 29.2: Submission of reports for external audit The Finance and Accounting Manual of the FRR 2001 requires that the AFS of the Government be forwarded to the Royal Audit Authority (RAA) for certification within six months after the close of the fiscal year. Accordingly, the AFS of the Government have been prepared and forwarded to RAA for certification annually within six months after the close of the FY. Table 3.6.29.1 shows the Timeliness of submission of financial reports. Table 3.6.29.1: Timeliness of submission of financial reports Financial Year Date of submission of AFS to RAA 2011-12 25th December, 2012 2012-13 31st December, 2013 2013-14 31st December, 2014 2014-15 31st December, 2015 Source: DPA. The AFS are submitted for external audit within six months of the end of the fiscal year. Dimension 29.3: Accounting standards The Finance and Accounting Manual of FRR 2001 specifies that the Government accounts shall be maintained on a cash basis and that the total receipts and expenditures of the Government during a financial year shall be the basis for preparation of the AFS. The Manual further specifies the form and content of the AFS. Accordingly, the AFS have been presented in a consistent format over the last three years. The Statement of Responsibility, signed by the Finance Minister and the Director General Department of Public Accounts, states that the AFS have been prepared in accordance with the provisions of the Public Finance Act and the FRR 2001.The Accounting and Auditing Standard Board of Bhutan (AASBB) was set up in July 2010 and is currently implementing Bhutanese Accounting Standards (BAS) 108 Bhutan: Public Financial Management Performance Report for private sector accounting. At the moment, there is no plan to develop accounting standards for government accounting. An attempt was made to apply the International Public Sector Accounting Standard (IPSAS) Cash Basis of Financial Reporting to the AFS for FY 2006/07 by the Ministry of Finance and explore the possibility of moving to/adopting the international standard. No progress, however, has been made and the AFS are prepared based on the country’s legal requirements. Accounting standards are based on the country’s legal framework, and applied consistently over time. Score Scoring Method M1 (WL). Minimum Requirements 29.1: Completeness of annual financial reports A Financial reports for budgetary central government are prepared annually and are comparable with the approved budget. They contain full information on revenue, expenditure, financial and tangible assets, liabilities, guarantees and long-term obligations, and are supported by a reconciled cash flow statement. B Financial reports for budgetary central government are prepared annually and are comparable with the approved budget. They contain information on at least revenue, expenditure, financial assets, financial liabilities, guarantees and long-term obligations. C Financial reports for budgetary central government are prepared annually, and are comparable with the approved budget. They include information on revenue, expenditure and cash balances. D Performance is less than required for a C score. 29.2: Submission of reports for external audit A Financial reports for budgetary central government are submitted for external audit within 3 months of the end of the fiscal year. B Financial reports for budgetary central government are submitted for external audit within 6 months of the end of the fiscal year. C Financial reports for budgetary central government are submitted for external audit within 9 months of the end of the fiscal year. D Performance is less than required for a C score. 29.3: Accounting standards A Accounting standards applied to all financial reports are consistent with international standards. Most international standards have been incorporated into the national standards. Variations between international and national standards are disclosed and any gaps are explained. The standards used in preparing annual financial reports are disclosed in notes to the reports. B Accounting standards applied to all financial reports are consistent with the country’s legal framework. The majority of international standards have been incorporated into the national standards. Variations between international and national standards are disclosed and any gaps are explained. The standards used in preparing annual financial reports are disclosed. C Accounting standards applied to all financial reports are consistent with the country’s legal framework and ensure consistency of reporting over time. The standards used in preparing annual financial reports are disclosed. D Performance is less than required for a C score. Indicator/Dimension Score Brief justification for the score PI-29: Annual financial reports C+ Scoring Method M1  ompleteness of annual 29.1: C C Financial statements covering all budgetary units are prepared financial reports. annually including a comparison with the budget and information on revenue, expenditure and cash balances, but not all financial assets and liabilities. 3. Assessment of PFM Performance 109 Indicator/Dimension Score Brief justification for the score  ubmission of reports for 29.2: S B The AFS are submitted for external audit within 6 months of the end external audit. of the fiscal year. 29.3: Accounting standards. C Accounting standards applied to the AFS are based on the country’s legal framework, and have been applied consistently over time. The basis is disclosed in the AFS. Pillar VII – External scrutiny and audit 3.7  (Performance indicators 30 to 31) PI-30: External audit This indicator examines the characteristics of external audit. In contains four dimensions and uses the M1 (WL) method for aggregating dimension scores. A high quality external audit is an essential requirement for ensuring accountability and creating transparency in the use of public funds. Whilst dimension 30.4 is focused on the independence of the external audit function, the first three dimensions focus on audit of the government’s annual financial reports. Inclusion of some aspects of performance audit would also be expected of a high quality audit function, but this is covered in PI-8 Performance information for service delivery, dimension 8.4. Indicator 30.1: Audit coverage and standards This dimension assesses key elements of the quality of external audit in terms of the scope and coverage of audit, as well as adherence to auditing standards. The scope of audit indicates the entities and sources of funds that are audited in any given year36 and should include extra-budgetary funds and autonomous agencies. The latter may not always be audited by the supreme audit institution, the Royal Audit Authority (RAA), as the use of other audit institutions may be foreseen. Where RAA capacity is limited, the audit program may be planned in line with legal audit obligations on a multi- year basis in order to ensure that the most important or risk-prone entities and functions are covered regularly, whereas other entities and functions may be covered less frequently. Audit work should cover all revenue, expenditure, assets and liabilities, regardless of whether all these are reflected in financial reports (see PI-29 Annual financial reports). Adherence to auditing standards (ref. the International Standards of Supreme Audit Institutions (ISSAI)37 should ensure a focus on significant and systemic PFM issues in reports, as well as financial and compliance audit activities, such as providing an opinion on the financial statements, the regularity and propriety of transactions and the functioning of internal control and procurement systems. Article 25 (1) of the Constitution of the Kingdom of Bhutan says that ‘There shall be a Royal Audit Authority to audit and report on the economy, efficiency and effectiveness in the use of public resources’. Further, Article 25 (4) stipulates that ‘The Royal Audit Authority shall, without fear, favor, or prejudice, audit the accounts of all departments and offices of the Government including all offices in the Legislature and 36 i.e. fall within the implementation of the overall risk-based audit plan for the given year, regardless of whether or not the plan requires substantive audit work to be carried out on that entity/fund. 37 The ISSAIs on financial audit are based on the corresponding ISAs, which guide the conduct of the audit of financial statements, including related compliance audit requirements such as consideration of laws and regulations in an audit of financial statements. 110 Bhutan: Public Financial Management Performance Report the Judiciary, all public authorities and bodies administering public funds, the police and the defense forces as well as the revenues, public and other monies received and the advances and reserves of Bhutan’. Section 39 (h) of the Audit Act of Bhutan stipulates that ‘The Authority shall conduct without fear, favor or prejudice the audits of all entities including non-governmental organizations, foundations, trusts, charities and civil societies fully or partly funded by the Government; whose loans are approved or guaranteed by the Government; and those receiving funds, grants and subsidies directly or through the Government and collections and contributions from people and funds raised through lottery’. 
Section 83 of the Audit Act outlines that ‘The Parliament shall appoint independent auditors drawn from professional firms or bodies not within the audit jurisdiction of the Authority for auditing the annual accounts of Royal Audit Authority’. Section 41 of the Public Finance Act stipulates that ‘The Royal Audit Authority shall audit the Government’s receipts and payments accounts’. In accordance with Section 38 (c) of the Audit Act of Bhutan, which stipulates that ‘the RAA shall conduct in depth audit of any aspects of the accounts, operations, systems and management practices of the agencies’, the RAA encompasses both the transactions and systems audit in its routine work. There is also a dedicated division within RAA, which performs systems audit. In accordance with Section 38 (b) there is also a dedicated division that performs performance audit. In accordance with Section 56 of the Audit Act, which stipulates that ‘The Authority shall establish auditing, reporting standards and practices that will meet the highest auditing and reporting standards’, the RAA back in 2010 drafted and adopted its own auditing standards, which are compliant with INTOSAI auditing standards. The RAA conducts its audit in accordance with RAA auditing standards. RAA through its audit reports has been covering several areas of common interest and highlighting systemic issues and risks. Some of the topics that were covered during the last three years were: Payroll and Provident fund; Absorption capacity of the government in undertaking increasing developmental works and related topics; Constituency Developments Grants; Environmental issues in Forestry – NFI, Forest Fires & Watershed Management; Need to develop policy framework for leasing of government land; Need to undertake assessment of environmental and social impact for mining activities; Persistent irregularities in construction works; need to reinforce adherence to Property Management Manual for repair and maintenance of buildings & infrastructures; Review of 10th Five year Plan. Central government ministries and agencies of RGoB are divided into over 700 auditable units. A review of the said auditable units was carried out based on which it was concluded that during the last three years, (FY 2012/13, 2013/14 and 2014/15) financial reports of central government entities representing more than 75% of expenditure and revenue have been audited. Dimension 30.2: Submission of audit reports to the legislature This dimension assesses the timeliness of submission of the audit report(s) on budget execution to the legislature as a key element in ensuring timely accountability of the executive to the legislature and the public. The Framework requires delays in submission of audit reports to be measured from the end of the period covered (when there is no financial audit involved) or date of the external auditor’s receipt of the respective financial reports (when a financial audit is involved). Where audit reports are made 3. Assessment of PFM Performance 111 separately on different agencies/funds of central government, the overall delay may be assessed as a weighted average of the delays on the respective agencies/funds, weighted by the higher of their income or expenditure. Section 69 of Audit Act stipulates that ‘The Auditor General shall submit the Annual Audit Report (AAR) during the fourth quarter of the fiscal year on the audits carried out during the previous fiscal year’. The RAA meets this requirement. It submits its annual audit report to legislature in the first week of May, which is within six months of receipt of the financial statements in December. Reports are available at www.bhutanaudit.gov.bt. Table 3.7.30.1 provides the dates of receipt of AFS and submission of audit reports to Parliament. Table 3.7.30.1: Dates of receipts of AFS and submission of Audit Reports to Parliament Date of submission of annual financial Dates of submission of annual audit Financial Year statements by RGoB to RAA reports to Parliament 2011/12 Dec 31. 2012 May 7, 2013 2012/13 Dec 31, 2013 May 8, 2014 2013/14 Dec 31, 2014 May 7, 2015 Source: RAA Dimension 30.3: External audit follow-up This dimension assesses the extent to which effective and timely follow-up of external audit recommendations or observations is undertaken by the executive and/or audited entity. Evidence of effective follow up of the audit findings includes the issue by the executive or audited entity of a formal written response to the audit findings indicating how these will be or already have been addressed. Reports on follow-up may provide evidence of implementation by summing up the extent to which the audited entities have cleared audit queries and implemented audit recommendations or observations. Note that follow-up to recommendations issued by the legislature is assessed separately under PI-31 Legislative scrutiny of audit reports. Section 75 of the Audit Act states that ‘All audited entities must respond to the Audit Reports within the time frame as specified: a. Response to initial audit observations - within one month of the issue of field audit memos. b. Response to agency specific reports - within three months of the issue of the reports by the Authority. c. Response to draft Annual Audit Report - within one month of the issue of the draft by the Authority. In invoking section 75 (b) of the Audit Act, every report issued by RAA has an Action Taken Report (ATR) mandating every audited agency to report to RAA within three months on the actions taken against each audit observation. The recommendations of RAA to audited agencies are acted upon by the audited agencies. This is ensured through a system of two-layer accountability viz. direct accountability and supervisory accountability. Direct accountability is being fixed on the primary responsible official to act upon the audit recommendation, while the supervisory accountability is fixed on the senior level official who ensures consistent follow-up on the audit recommendations. 112 Bhutan: Public Financial Management Performance Report Section 76 of the Audit Act provides that ‘The Lhengye Zhungtshog (Cabinet), ministries, and other concerned authorities shall be responsible to take timely follow-up actions on Audit Reports under this Act’, and section 77 of the Audit Act stipulates that ‘The Royal Audit Authority shall issue reminders on reports not being acted upon and if there be further non-compliance and non co-operation, a defaulting auditee must be questioned and required to submit explanation’. Also Section 77 empowers the RAA to ask for explanation from non-complying agencies and ministries. Further, the Parliament has empowered the RAA to impose 24% penal interest on outstanding issues with monetary value. Table 3.7.30.2 shows the Value of audit observations, recoveries made and pending audit issues for 2012-2014. Table 3.7.30.2:  Value of audit observations, recoveries made and pending audit issues for 2012-2014 As per Annual As per Annual As per Annual Particulars Audit Report 2012 Audit Report 2013 Audit Report 2014 (Nu. in Millions) (Nu. in millions) (Nu. in Millions) Value of audit observation reported by RAA 1,166.388 553.571 1,705.502 Recoveries made 147.641 151.214 115.628 Pending 391.007 261.464 634.313 Source: Annual Audit Reports. The follow-up system of the RAA is handled by the Follow-up and Clearance Division headed by an Assistant Auditor General. Its core function is to carry out timely follow-up on unresolved and pending audit issues in accordance with the provisions of the Audit Act of Bhutan 2006. The RAA had developed Audit Information Management System (AIMS) way back in the 1990s to capture the data from audit reports. The system is still in use as of today. Every audit report of RAA is issued with a unique identification number called the Audit Information Number (AIN), which is generated through the AIMS by the Follow-up Division. A copy of every report issued is shared with the Follow-up Division, which feeds the data from audit reports into the AIMS. The AIMS can generate reports on pending audit issues against every accountable official. Based on the information captured by the AIMS the Follow-up Division carries out periodic follow-up on unresolved and pending audit issues. The RAA also maintains a bank account called Audit Recoveries Account (ARA) with Bank of Bhutan. All recoveries made through audit are deposited into this account. The ARA is maintained by RAA’s Finance Section and is reconciled periodically. Audit clearance is one of the most effective instruments through which the RAA is able to enforce settlement of pending audit issues. The mandatory requirement of audit clearance for the purpose of training, promotion, further studies, contract renewal, retirement and superannuation for civil servants and for election for politicians facilitates timely follow-up by the RAA. The graphical presentation in Figure 3.7.30.1 below shows the trend of audit recoveries for the seven years from 2008 to 2014. 3. Assessment of PFM Performance 113 Dimension 30.4: Supreme Audit Institution (SAI) independence This dimension assesses Figure 3.7.30.1: Trend of Audit Recoveries for the seven years the independence of the from 2008 to 2014 RAA from the executive. Independence is essential 160 147.641 151.214 for an effective and Recoveries Recoveries (Nu. in million) 140 credible system of financial 115.628 120 accountability, and should be laid down in the 100 87.411 constitution or comparable 80 62.791 legal framework. In 57.169 60 52.837 practice, independence is demonstrated by 40 the arrangements for 20 the appointment (and 0 removal) of the Head of 2008 2009 2010 2011 2012 2013 2014 the RAA, non-interference Year in the planning and implementation of the Source: Annual Audit Report 2014. RAA’s audit work, and in the approval and disbursement procedures for the RAA’s budget. The RAA’s mandate should cover all central government activities and enable the RAA to carry out a full range of audit activities, specifically financial, compliance and performance audit. The RAA should have unrestricted access to documents, records and information. It should be noted that performance audits are covered by PI-8 Performance information for achieving efficiency in service delivery, whereas PI-30.4 S is focused on audit of the government’s annual financial reports. The RAA has full constitutional and legal independence. Article 25 (1) of the Constitution of the Kingdom of Bhutan spells out that ‘There shall be Royal Audit Authority to audit and report of the economy, efficiency and effectiveness in the use of public resources’. Article 25 (4) stipulates that ‘The Royal Audit Authority shall, without fear, favor, or prejudice, audit the accounts of all departments and offices of the Government including all offices in the Legislature and the Judiciary, all public authorities and bodies administering public funds, the police and the defense forces as well as the revenues, public and other monies received and the advances and reserves of Bhutan’. Article 25 (7) of the Constitution of the Kingdom of Bhutan stipulates that ‘The Royal Audit Authority shall function in accordance with the Audit Act’. 
 On the coverage of the RAA, Section 39 (h) of the Audit Act stipulates that ‘The Authority shall conduct without fear, favor or prejudice the audits of all entities including non-governmental organizations, foundations, trusts, charities and civil societies fully or partly funded by the Government; whose loans are approved or guaranteed by the Government; and those receiving funds, grants and subsidies directly or through the Government and collections and contributions from people and fund raised through lottery’. Sections 50 to 53 of the Audit Act provide for RAA’s right of access to records, documents and information. 114 Bhutan: Public Financial Management Performance Report Further, Section 41 of the Public Finance Act stipulates that ‘The Royal Audit Authority shall audit the Government’s receipts and payments accounts’. 
 Section 15 of the Audit Act states that ‘The Authority shall enjoy full organizational and functional independence including programming, investigative and reporting’, and Section 16 states that ‘The Authority shall have full authority to determine and administer its organizational structure, budgetary and personnel requirements’. The Auditor General who is the head of the RAA is appointed by His Majesty the King from a list of eminent persons recommended jointly by the Prime Minister, the Chief Justice of Bhutan, the Speaker, the Chairperson of the National Council and the Leader of the Opposition Party in accordance with the Article 25 (2) of the Constitution of the Kingdom of Bhutan. Sections 12 and 13 of the Audit Act provide for removal of the Auditor General. The RAA’s Strategic Plan 2010-2015 acts as a guiding document for preparing annual audit plans and audit engagements. For 2014/15 every department, division and regional office signed a performance compact with the Auditor General, based on which the audit engagements were prepared and executed. The RAA also undertook an auditee agency rationalization exercise in which the agencies were grouped and categorized by priority and size (as Priority P1, P2, P3 and Size A1, A2, A3). The P1 agencies needed to be audited annually, P2 agencies need audit once in two years and P3 agencies once in three years. The sizes A1, A2 and A3 determine the number of man-days required to conduct particular audits. The RAA’s budget for 2014/15 was approved as proposed by the Parliament, which is in accordance with Section 16 of the Audit Act although routed through the Department of National Budget, MoF, being a nodal agency primarily entrusted with responsibilities to look after the budgeting aspects of the spending agencies across the country. The approved budget can be used by the RAA without interference from the Executive. The RAA has operational independence, but HR matters have to be prescribed broadly in accordance with the Civil Service Act. Access to new personnel is controlled by the Civil Service Commission. The budget is executed according to the budgeting plan as developed by RAA Administration and Finance Division in close coordination with Policy and Planning Division. The approved budget is detailed by activity. Score Scoring Method M1 (WL). Minimum Requirements 30.1: Audit coverage and standards A Financial reports including revenue, expenditure, assets and liabilities of all central government entities have been audited using ISSAIs or consistent national auditing standards during the last three completed fiscal years. The audits have highlighted any relevant material issues and systemic and control risks. B Financial reports of central government entities representing most total expenditures and revenues have been audited using ISSAIs or national auditing standards during the last three completed fiscal years. The audits have highlighted any relevant material issues and systemic and control risks. C Financial reports of central government entities representing the majority of total expenditures and revenues have been audited, using ISSAIs or national auditing standards during the last three completed fiscal years. The audits have highlighted any relevant significant issues. D Performance is less than required for a C score. 3. Assessment of PFM Performance 115 Score Scoring Method M1 (WL). Minimum Requirements 30.2: Submission of audit reports to the legislature A Audit reports were submitted to the legislature38 within 3 months from receipt of the financial reports by the audit office for the last three completed fiscal years. B Audit reports were submitted to the legislature within 6 months from receipt of the financial reports by the audit office for the last three completed fiscal years. C Audit reports were submitted to the legislature within 9 months from receipt of the financial reports by the audit office for the last three completed fiscal years. D Performance is less than required for a C score. 30.3: External audit follow-up A There is clear evidence of effective and timely follow up by the executive, or the audited entity on audits for which follow-up was expected, during the last three completed fiscal years. B A formal and comprehensive response was made by the executive, or the audited entity on audits for which follow-up was expected, in a timely manner, during the last three completed fiscal years. C A formal response was made by the executive, or the audited entity on audits for which follow up was expected, during the last three completed fiscal years. D Performance is less than required for a C score. 30.4: Supreme Audit Institution (SAI) independence A The SAI operates independently from the executive, ensured through legislation, procedures for appointment and removal of the Head of the SAI, the planning of audit engagements, arrangements for publicizing reports as well as the approval and execution of the SAI’s budget. The SAI has unrestricted and timely access to records, documentation and information. B The SAI operates independently from the executive, ensured through the procedures for appointment and removal of the Head of the SAI, the planning of audit engagements as well as the approval and execution of the SAI’s budget. The SAI has unrestricted and timely access to records, documentation and information for most audited entities. C The SAI operates independently from the executive, ensured through the procedures for appointment and removal of the Head of the SAI as well as the execution of the SAI’s budget. The SAI has unrestricted and timely access to the majority of the requested records, documentation and information. D Performance is less than required for a C score. Indicator/Dimension Score Brief justification for the score PI-30: External audit B+ Scoring Method M1 Audit coverage and 30.1:  B Financial reports of central government entities representing standards. more than 75% of expenditure and revenue have been audited using national standards during the last three years. Submission of audit reports 30.2:  B Audit reports were submitted to the legislature within 6 months to the legislature. from receipt of the financial reports by the audit office for the last three completed fiscal years. 30.3: External audit follow-up A There is clear evidence of follow-up by RAA on audits.  upreme Audit Institution 30.4: S B The SAI operates independently from the executive, ensured (SAI) independence. through the Constitution, and there is a process for appointment of the Head of the SAI. There is independence in planning of audit engagements as well as the approval and execution of the RAA’s budget. The SAI has unrestricted and timely access to records, documentation and information. 38 Or body responsible for public finance governance. 116 Bhutan: Public Financial Management Performance Report PI-31: Legislative scrutiny of audit reports This indicator focuses on legislative scrutiny of the audited financial reports on central government. It has four dimensions and uses the M2 (AV) method for aggregating dimension scores. Article 25 of the Constitution of Bhutan provides for the appointment of a five-member Public Accounts Committee (PAC) to review and report on the Annual Audit Report of the Royal Audit Authority (RAA) or any other report presented by Auditor General. The PAC is a joint committee of both Houses of Parliament and is governed by the Rules of Procedure of the Public Accounts Committee (2015). The PAC’s terms of reference include reviewing and reporting to Parliament on the various reports of the RAA that the PAC may choose to review and accounts of all agencies in which public funds have been invested. The Audit Act of Bhutan, 2006 mandates that the Auditor General shall endorse copies of the Annual Audit Report to the PAC. The PAC has the power to summon any person before it to give evidence or produce documents. A ministry or department is represented by its Secretary or Head of Department and, if permitted, a senior officer can represent the ministry/department. The PAC has the power to compel attendance and production of documents. Dimension 31.1: Timing of audit report scrutiny The current legislation and existing procedures do not state any deadlines for review of audit reports by the legislature. However, Parliamentary resolutions direct the Public Accounts Committee [PAC] to review and report in the subsequent session of the Parliament. The current legislation and procedures have not established any timelines for review of audit reports by the Parliament. The time for completion of the review by PAC has been a matter of discussion in Parliament. The 1st session of 2nd Parliament (September 2013) had given assent that the PAC review of the annual audit report would be presented in the summer session and of the performance audit reports in the winter session of Parliament. However, the 3rd session resolved that the PAC review of the annual audit reports would be in winter session and that of performance audit in the summer session. The rules of procedure of PAC 2015 reflect these timelines (rule 33 in Chapter 11). Examination of an audit report takes place immediately after it is received and the legislature usually takes up to three months (up to presentation to the House, see table below) to complete its examination, the time varying with the seriousness and number of issues reflected in the reports. Table 3.7.31.1 shows the Timing of audit report scrutiny. Table 3.7.31.1: Timing of audit report scrutiny Date of receipt of RAA Annual Audit Report Date of presentation of PAC report on review Year by the PAC of audit report in Parliament 2013/14 May 18, 2015 (AAR 2014) November 23, 2015 2012/13 May 15, 2014 (AAR 2013) June 16, 2014 2011/12 August 9, 2013 (AAR 2012) September 20, 2013 Source: Annual Audit Reports and PAC. Dimension 31.2: Hearings on audit findings The legislative scrutiny function is mandated by the Constitution of Bhutan and rules of procedure of the PAC. The rules mandate that the hearings of the PAC shall be public except in cases which are of secret 3. Assessment of PFM Performance 117 or confidential nature in the opinion of the Chairperson of the PAC, or if requested by a witness (rule 26, Chapter 9). The reports of the PAC are presented in Parliament and deliberated and these as well as the audit reports are publicly available in the national language. In practice, all hearings are public except for specified limited circumstances, and reports of the PAC are discussed in Parliament and are published on the official website of the Parliament. PAC first reviews the status of audit recommendations implemented by the agencies and then follows with public hearings if necessary prior to the presentation of the final report to the Parliament. The PAC asks the audited agencies to give explanations and/or summons responsible officers to appear before the Committee to answer the questions or to provide evidence on significant findings. In-depth hearings on key findings take place as and when required, covering a few audited entities. The Committee fixes deadlines and calls responsible officers or sometimes goes to the auditees. Dimension 31.3: Recommendations on audit by the legislature The Audit Act 2006 requires follow-up action, though not the Rules of Procedure of the PAC. However, an Action Taken Report (ATR) is required under the recommendations of the legislature and resolutions/ standing orders of the House. The legislature always issues its recommendations against the audit issues in its reports where the audited agencies need to provide ATRs. The PAC endorses the recommendations of the RAA and provides its own recommendations, for instance: zz The PAC strongly endorses the recommendations made by the RAA and requests the Government to issue appropriate directives to all agencies to implement them. zz The Ministry of Finance must ensure that the Procurement Rules and Regulations (PRR) are reviewed from time to time with relevant clauses inserted in order to avoid future lapses and wastage of government resources. zz The Public Procurement Policy Division (PPPD), MoF is the central agency that looks into public procurement. It is imperative that this Department is adequately staffed with people who have the necessary qualifications and experience required to discharge this important function effectively. The Royal Civil Service Commission together with the MoF needs to address this urgently. zz Currently, it seems that every procuring agency interprets the PRR differently based on its own needs and convenience. This has led to a situation where there is no uniformity in the implementation of the PRR. Therefore, any agency that seeks to procure consultancy services beyond a threshold amount must obtain a clearance from the PPPD. This threshold amount may be fixed by the MoF in consultation with the various agencies. There is evidence of executives acting on the recommendations of the PAC and issues have been resolved. Table 3.7.31.2 indicates the resolution of irregularities claimed by the PAC. 118 Bhutan: Public Financial Management Performance Report Table 3.7.31.2: Resolution of irregularities by Parliamentary directive Irregularities resolved based Irregularities balance as on Annual Audit Unresolved irregularities on Parliamentary directives September 30, 2015 (Nu. Reports (AAR) reported to the Parliament as on September 30, 2015 Millions) AAR 2011 770.141 478.460 291.681 AAR 2012 391.007 227.897 163.110 AAR 2013 261.464 178.848 82.616 Source: Annual Audit Report. The Parliamentary directive to impose 24% penal interest on overdue outstanding advances and recoverable amounts reflected in the audit reports prompted the audited agencies to initiate actions in settling the audit memo and has made a great impact in resolving a number of pending issues. For every Parliament Session and through Prime Minister, PAC gets the implementation status of the previous PAC recommendations by the agencies and accordingly incorporates them as a follow-up section in the main PAC report. Thus, PAC recommendations are always recorded and followed up. Dimension 31.4: Transparency of legislative scrutiny of audit reports The Audit Act 2006, the Rules of Procedure of the PAC 2015 and Parliamentary resolution/directions mandate the legislative scrutiny. All hearings are public except for specified limited circumstances, and reports of the PAC are discussed in Parliament and are published on the official website of the Parliament. Score Scoring Method M2 (AV). Minimum Requirements 31.1: Timing of audit report scrutiny A Scrutiny of audit reports on annual financial reports has been completed by the legislature within 3 months from receipt of the reports. B Scrutiny of audit reports on annual financial reports has been completed by the legislature within 6 months from receipt of the reports. C Scrutiny of audit reports on annual financial reports has been completed by the legislature within | 12 months from receipt of the reports. D Performance is less than required for a C score. 31.2: Hearings on audit findings A In-depth hearings on key findings of audit reports take place regularly with responsible officers from all audited entities which received a qualified or adverse audit opinion or a disclaimer. B In-depth hearings on key findings of audit reports take place with responsible officers from most audited entities which received a qualified or adverse audit opinion or a disclaimer. C In-depth hearings on key findings of audit reports take place occasionally, covering a few audited entities or may take place with ministry of finance officials only. D Performance is less than required for a C score. 31.3: Recommendations on audit by the legislature A The legislature issues recommendations on actions to be implemented by the executive and systematically follows up on their implementation. B The legislature issues recommendations on actions to be implemented by the executive, and follows up on their implementation. 3. Assessment of PFM Performance 119 Score Scoring Method M2 (AV). Minimum Requirements C The legislature issues recommendations on actions to be implemented by the executive. D Performance is less than required for a C score. 31.4: Transparency of legislative scrutiny of audit reports A All hearings are conducted in public except for strictly limited circumstances such as discussions related to national security or similar sensitive discussions. Committee reports are debated in the full chamber of the legislature and published on an official website or by any other means easily accessible to the public. B Hearings are conducted in public with a few exceptions in addition to national security or similar sensitive discussions. Committee reports are provided to the full chamber of the legislature and published on an official website or by any other means easily accessible to the public. C Committee reports are published on an official website or by any other means easily accessible to the public. D Performance is less than required for a C score. Indicator/Dimension Score Brief justification for the score PI-31: L  egislative scrutiny of B+ Scoring Method M2 audit reports Timing of audit report 31.1:  B The legislature usually takes up to three months to complete its scrutiny. examination. 31.2: Hearings on audit findings. C In-depth hearings on key findings of audit reports take place occasionally, covering a few audited entities or may take place with ministry of finance officials only. Recommendations on audit 31.3:  A The PAC issues recommendations and systematically follows up on by the legislature. their implementation.  ransparency of legislative 31.4: T A All hearings are public except for specified limited circumstances, scrutiny of audit reports. and reports of the PAC are discussed in Parliament and are published on the official website of the Parliament. 120 Bhutan: Public Financial Management Performance Report Conclusions on the 4. Analysis of PFM Systems The objective of this chapter is to present an integrated analysis on the performance of PFM systems in Bhutan on the basis of information provided in the preceding chapters, and to state overall conclusions. In particular, the analysis seeks to assess how the performance of PFM systems may affect the Government’s ability to deliver the intended fiscal and budgetary outcomes, and to identify the main weaknesses of the PFM system in that respect. 4.1 Integrated assessment of PFM performance The indicator assessment is explained in terms of its implications for the seven pillars of PFM performance: 1. Budget reliability: In order for the government budget to be useful for policy implementation, it is necessary that it be realistic and implemented as passed. RGoB succeeds in keeping aggregate expenditure close to the approved budget, even though the approved budget does not include donor- funded project expenditure unless it is agreed at the time of budget preparation. As donor agreements are concluded during the year, additional supplementary estimates are prepared for legislative approval, but these are not counted in a PEFA assessment, which is based on original budgets. Since FY 2010/11, budgets have been managed through a web-based and real time online Multi-Year Rolling Budget. This system has improved monitoring of revenue and expenditure and shortened the processing time for incorporation of donor funds. Revenue budgets are similarly reliable in aggregate, particularly on domestic revenue. Most of the budget/actual variance has been due to unreliable projections of donor grants, and their conservative budgeting. The aggregate control of both expenditure (PI-1) and domestic revenue (PI-3.1) facilitates control of the fiscal deficit. Contingency reserve in the annual budget is relatively high (13% of total expenditure in FY 2013/14), but actual expenditure is charged to the benefitting agencies and the budget is re-allocated accordingly (PI-2.3). This is good international practice, even though it contributes to expenditure variance. At the agency level, there is high variance of expenditure (PI-2.1). On an administrative classification, variance of expenditure composition from the budget (current and capital together) was more than 15% in each of the past three years. Much of this appears to be due to under-spending by the Ministry of Finance expenditure compared with its original budgets. On an economic classification basis (PI-2.2), there was also significant variance, partly due to the conservative budgeting of donor capital expenditure, as mentioned above. On the revenue side, the composition of revenue (share of each revenue item in the total, PI-3.2) also varied highly from the original budget, mainly because of the underlying variation in external grants 4. Conclusions on the Analysis of PFM Systems 121 and partly because original budgets are prepared on a baseline scenario that does not assume any policy changes. External grants are not included in the original budget unless confirmed yet these vary somewhat beyond the control of RGoB. Subsequent policy changes and confirmed grants are reflected in revised estimates later in the year. 2. Transparency of public finances: Transparency of information on public finances is necessary to ensure that activities and operations of governments are taking place within the government fiscal policy framework and are subject to adequate budget management and reporting arrangements. Transparency is an important feature that enables external scrutiny of government policies and programs and their implementation. The Public Expenditure Management System (PEMS) allow the internal tracking of expenditure by administrative agency, by economic character, and by functional purpose (program) (PI-4). The economic classification is broadly aligned with IMF-GFS classification, and the program classification can be bridged to the UN/IMF Classification of Functions of Government (COFOG) classification. The chart of accounts is based on cash basis of accounting and meets the basic needs for accountability and transparency. Government receipts are also broadly aligned with the GFS classification. Budget documentation is publicly available on the Ministry of Finance website and is of good international standard (PI-5) with one exception: the annual Budget Report and Annual Financial Statements show the past and projected fiscal accounts in economic and functional classification, but not administrative classification. This is available only internally. Budget documentation covers all central government revenue and expenditure with insignificant exceptions. In this context, ‘central government’ includes dzongkhags, gewogs and thromdes, which do not meet the PEFA criteria to be classified as sub-national governments and are here treated as deconcentrated entities under central government control (PI-7). Overall, there is good public transparency of key fiscal information (PI-9) which could be further strengthened through public disclosure of in-year and end-year budget execution reports. A global trend in PFM is the integration of physical performance information with financial data in budgets and budget execution reports so that accountability can be extended beyond the containment of expenditure and include accountability for the outputs resulting from expenditure (PI-8). RGoB is in the vanguard of this trend as it has instituted a Government Performance Management System based on annual performance agreements between the Prime Minister and heads of agencies, which are the basis on which budgets are prepared and approved. Despite the considerable impact of this system on budget management, it has not yet been included in budget documentation and the agreements are only partially available to the public beneficiaries of the agreements. In addition to the performance audits carried out by RAA, independent evaluation of the service delivery is planned under the performance management system by GPMD, PMO. 3. Management of assets and liabilities: Effective management of assets and liabilities ensures that risks are adequately identified and monitored, public investments provide value for money, financial investments offer appropriate returns, asset maintenance is well planned, and asset disposal follows clear rules. It also ensures that debt service costs are minimized and fiscal risks are adequately monitored so that they can be mitigated in a timely way. Fiscal risks to the central government budget are adequately monitored (PI-10). State-owned enterprises in Bhutan send their annual reports, including audited financial statements, to the Ministry of Finance 122 Bhutan: Public Financial Management Performance Report within six months of the end of the year. Fiscal risks from their operations are monitored by MoF and summary information on the PEs is included in the Annual Budget Report and Annual Financial Statements. MoF monitors local government revenues, expenditure and debt. An important aspect of PFM that is now brought into the 2016 Framework is the management of public investments in major capital projects (PI-11). In Bhutan, the management of public investments is decentralized to line ministries and agencies, but closely regulated by guidelines issued by the MoF. Projects are subject to independent social and environmental screening, but are not subject to economic analysis (except for large donor-funded projects). Feasibility studies do not routinely include life-time recurrent costs in the evaluation of economic merit. Project monitoring up to the point of capital cost completion is undertaken by the implementing agencies and in parallel by MoF and the Gross National Happiness Commission. Apart from project work in progress, the Government owns a vast range of financial assets and non- financial (physical) assets (PI-12). The holding ministries and agencies keep records and monitor asset usage and maintenance, again under tight control from MoF (Department of National Properties), though coverage of the records and reports is not yet complete – the Government is working on a web-based inventory system. Public disclosure of non-financial assets is presently not made. Conversely, debt records are complete and accurate, and all decisions on issue of debt or granting of guarantees are made by MoF against transparent criteria and fiscal targets. The score on this indicator (PI-13) is lower than it might be as the debt strategy is not publicly available. 4. Policy-based fiscal strategy and budgeting: A strength of Bhutan PFM is its fiscal framework for budget management. Fiscal planning and budgeting are based on quarterly macro projections managed by a cross-government committee, based on a set of assumptions and possible scenarios. Fiscal projections are then based on the macroeconomic projections (PI-14). They inform the preparation of the annual budget and its internal use, but are not published. All proposed changes in expenditure policies are costed for their fiscal impact in the budget year. However, revenue projections in the initial budget are based on pre-existing tax/non-tax policy. Changes in tax/non-tax policy once approved by Parliament are incorporated into the revised budget. Special attention is paid to the projection of debt: a debt sustainability analysis is prepared every other year by MoF, and discussed with World Bank and IMF staff. According to law, recurrent expenditures should be kept within revenues, i.e. no deficit on current account, and the 11th Five Year Plan sets targets for the coverage of total expenditure by domestic revenue (>85%) and the average fiscal deficit (<3%). As mentioned above, a medium-term debt strategy has been prepared but it is not publicly available (PI-13 and 15). Expenditure is budgeted on a three-year horizon, which rolls over each year (PI-16). A major factor in planning and budgeting is the progress of several hydropower projects, and the timetable for their commissioning. A chapter in the annual Budget Report describes the status of each project. Private- public partnerships are coming into use and a PPP policy has recently been approved by Cabinet. Rules and regulations are being prepared and a PPP unit is about to be set up in the Ministry of Finance. A PPP pipeline and monitoring have yet to be established. By and large, budgets are consistent with previous year projections as they are all based on the same Five Year Plan and strategy statements, subject to policy and program changes from year to year and from original to mid-year revised estimates. There is a clear budget calendar that is substantially adhered to, and budget agencies are provided politically approved expenditure ceilings before they start their detailed budgeting. This provides enough time (around 8 weeks) for the agencies to decide their priorities (PI-17). The National 4. Conclusions on the Analysis of PFM Systems 123 Assembly has only a few days to deliberate on proposed allocations, as budgets have to be approved before the financial year starts on July 1 (FY 2013/14 was an exception as the budget process was delayed by elections). The budget for FY 2015/16 was presented one month before July 1, which is an improvement. The scope and depth of legislative scrutiny is expected to be further enhanced by the establishment of a permanent Finance Committee recently (PI-18): rules for its working are being finalized. There are clear rules for in-year budget adjustments by the executive and they are respected. Predictability and control in budget execution: Predictable and controlled budget execution is necessary to ensure that revenue is collected and resources are allocated and used as intended by government and approved by the legislature. Effective management of policy and program implementation requires predictability in the availability of resources when they are needed, and control ensures that policies, regulations, and laws are complied with during the process of budget execution. Revenue administration in Bhutan meets international standards, being based on a clear legislative framework that is known and accessible by taxpayers, a functioning appeals procedure and a tax audit program based on assessment of risks (PI-19). Revenue accounting is also of good standard, with prompt collection of revenues and transfer to Treasury-controlled accounts, and daily reconciliation of collections and transfers. Accumulated tax arrears are low (< 1% of total revenue collection)., but the score (PI-20) is brought down as overall reconciliation of opening revenue arrears, assessments and penalties raised during the year, collections, write-offs and closing The score for PI-20 would have been higher had overall reconciliation of tax arrears been carried out on a quarterly basis rather than annually. Bank and cash balances are monitored daily (other than for some extra-budgetary funds) and MoF releases funds in accordance with the budget utilization plans of the spending agencies. This provides a secure basis for both agency planning and procurement and for central cash and debt management. Agencies can plan at least six months in advance. The assessment team did not hear of any delays in funding from domestic sources. The uncertainties and delays on funds for externally-assisted projects have been reduced but are still an issue. The MoF has legal power to exercise discretion in the re-allocation of funds in advance of legislative approval of supplementary appropriations (PI-21). However, there is no central monitoring of expenditure arrears and the stock of arrears in not known (PI-22). Payroll and procurement are decentralized to line agencies. Payroll management suffers from a lack of integration of agency systems (PEMS) with the Civil Service Information System which has the personnel records: a reconciliation between the two is yet to be undertaken. Serious internal control weaknesses have been reported by the auditors. Strengthening of PEMS and related systems would help in overall efficiency and provide opportunity for strengthening in the areas of internal control, payroll processes (PI-23) and expenditures arears (PI-22). Procurement suffers from a lack of central monitoring. However, competitive procurement methods appear to be the accepted norm, and there is an independent procurement complaints process, though it is hardly used. Both these areas, which are responsible for most government expenditure, suffer from shortage of trained and experienced personnel. Major new information systems are being developed and existing systems are being upgraded and integrated. There is no system of regular payroll audits or procurement audits outside the general audits of the RAA, though some regular surveys have been undertaken by RCSC (PI-22 and 23). 124 Bhutan: Public Financial Management Performance Report Expenditure commitment and payment controls (controls based in budget and L/Cs) are well established through Financial Regulations and system controls and are followed in actual practice (PI-25). Acceptance of internal audit has built up in recent years and recommendations are addressed more seriously, though could be strengthened further. Audit now covers almost 90% of government expenditure and all of government revenue. However, internal audit is still primarily focused on compliance with financial regulations and not on the review and analysis of systems (PI-26). Accounting and reporting: Timely, relevant and reliable financial information is required to support fiscal and budget management and decision-making processes. Financial data integrity in Bhutan is good, based on daily and monthly reconciliation of receipts and payments with bank statements, and control over access and changes to PEMS. Advance and suspense accounts are reconciled and cleared regularly (PI-27). The DNB has started issuing formal quarterly reports on budget execution with high accuracy of data but based on payments only, not commitments. This is for internal use and is not published (PI-28). Annual financial statements are prepared by DPA and sent to RAA for audit within six months of close of financial year, i.e. by December 31. As mentioned above, these are prepared on a cash basis. They do not cover all financial assets and liabilities in a cash-based system and do not meet the cash-IPSAS international standard (PI-29). External scrutiny and audit: Effective external audit and scrutiny by the legislature are enabling factors for holding the government’s executive branch to account for its fiscal and expenditure policies and their implementation. Bhutan’s supreme audit institution, the Royal Audit Authority, has constitutional independence from the executive and fairly complete operational independence. It has unrestricted access to all records and officers, and prepares and implements its own annual audit plan, based on risk criteria. In the last three years, it has covered more than 75% of expenditure and revenue. Audit reports are submitted to the Parliament within six months from submission of accounts for audit. The RAA makes recommendations in its reports and there is evidence of follow up by the responsible managers (PI-30). Audit reports are scrutinized by the Public Accounts Committee of the Parliament. It holds public hearings with accountable officers, endorses audit recommendations and makes its own recommendations in reports to the National Assembly, which are discussed (PI-31). The external audit and legislative scrutiny of government operations completes the cycle of transparent accountability. 4.2 Effectiveness of the internal control framework Bhutan has always placed high importance on good governance – striving to enhance it on the principles of transparency, accountability and effectiveness. A strong internal control system is integral to promoting the three principles in Bhutan. It is through strong internal control that Bhutan is able to achieve commendable ambitions through economy, efficiency and effectiveness in the procurement and use of resources while managing risk within the risk appetite. Ministry of Finance, as the national custodian of public funds, has continuously sought to build a strong internal control system in the use 4. Conclusions on the Analysis of PFM Systems 125 of public funds through various means by formulating rules and regulations (financial and otherwise); devising frameworks of management, and instituting and expanding internal audit in all government funded agencies. Currently in practice, issued by the Ministry of Finance, are the Financial Rules and Regulations 2001, which set up the controls necessary for uniform and accurate financial reporting, the Procurement Rules and Regulations 2009 which together with the standard bidding documents for goods and for works, and the standard request for proposals and services establish the fundamental controls in procurement of goods, services and works; and the Property Management Manual which dictates the controls necessary for safe-keeping of assets, and appropriate disposal of used goods. Also there are the Bhutan Civil Service Rules 2012 of the Royal Civil Service Commission, which spell out internal control measures related to human resource management. Bhutan also has the Anti-Corruption Act of Bhutan 2011, and the Audit Act of Bhutan 2006, both empowered by the Constitution of Bhutan to curb corruption and deter fraudulent practices in the country. The Ministry (of Finance) has been sensitive to grievances and variations, and difficulties in implementing the rules, and thus revises the rules and issues remedial orders to reduce the difficulties. This led the MoF to develop an overarching Internal Control Framework in 2013 to network the numerous internal control measures and leverage their impact on strengthening internal control system. This holistic framework takes stock of all rules governing public spending and classifies them into different stages and managerial levels. Recognizing the importance of the control environment, the framework specifically describes internal control-related measures for the heads of agencies. By highlighting areas where the existing system has failed, the framework also seeks to evaluate and improve systems for internal control. One prominent output of the good governance drive in the late 1990s was the institutionalization of internal audit in the public sector. It started with 17 internal auditors placed in the then eight ministries. Over the years, the service underwent tremendous professional development - from setting an environment conducive to effective internal audit to enhancing professional competence of the growing number of internal auditors. The Central Coordinating Agency (CCA) within the Ministry of Finance is the central office for internal audit service in the country. CCA has the mandate of promoting the acceptance and utilization of internal auditors in the various agencies. The service now has a formal Charter that formalizes the position of internal audit in the RGoB setting. There is a code of conduct specifically for the internal auditors that prescribes the ethical conduct expected, and a manual to guide internal auditors through the course of audit engagements. Presently there are 48 internal auditors spread across the ten central ministries, two central agencies and 20 dispersed dzongkhags. Four of them are Certified Government Auditing Professionals (CGAP). Detailed findings concerning the main elements of the five internal control components are summarized in a table (Annex 2) that also highlights any gaps in coverage of the control components by the assessed internal control system. 4.3 PFM strengths and weaknesses This subsection analyzes the extent to which the performance of the PFM system appears to be supporting or affecting the overall achievement of the three main fiscal and budgetary outcomes, as follows: 126 Bhutan: Public Financial Management Performance Report 1. Aggregate fiscal discipline The assessment of budget credibility indicators PI-1, 2 and 3 provides a mixed message. Primarily, aggregate discipline is good in that original revenue and expenditure budgets are closely achieved, but not so good because the composition of revenue and expenditure shows high variances in most years. As the budget is an expression of government policies for the coming year, variance is an expression of the challenge of implementing those policies. High variance/low credibility may be due to challenges in predicting donor support, poor planning and budgeting, or it may be due to variation in the execution of budgets. Execution of policies and programs may of course be prevented by exogenous factors, in which case allocations may be switched to policies and programs that are able to spend them. In such cases, the MoF has legal power to vary allocations within overall limits so that social benefit can be maximized. On the other hand, challenges in implementing budgets may be due to poor discipline by line agencies or poor enforcement by MoF: this is not thought to be the case in Bhutan. It should be noted that RGoB has made a conscious decision of omission from the allocated initial budget of (1) donor project support that has not been agreed at the time the budget is prepared, (2) revenue policy changes (which are subsequently brought into revised estimates), and (3) contingency reserve. As the budget for contingency is quite high (13% of total expenditure in FY 2013/14), and all contingency expenditure is (correctly) re-allocated to the benefitting ministries, this adds to total variance from the original budget. Fiscal discipline is assisted by the comprehensiveness of the PEMS, the orderly execution of the budget, timely and reliable financial reporting, and effective external audit and legislative scrutiny. It is reduced by some lack of public transparency in administrative classification in the budget and accounts, and lack of economic appraisal of projects before inclusion in the budget. 2. Strategic allocation of resources Resources are allocated in a rolling three year framework based on the 11th Five Year Plan, which is fixed for the whole period. There are many changes from year to year as program priorities change, more efficient work methods are found, the mix of self-provision and contracting out changes, and relative prices change. Nevertheless, planning and budgeting are bottom-up and can be assumed to reflect the changing realities of what can be done at least twice a year, at budget preparation and at supplementary budget preparation. However, the limited economic analysis of major projects (except some funded by donors) and the institutionalized preference of capital expenditure reduces allocative efficiency39. Capital expenditures prioritization is often at the expense of non-wage recurrent expenditure, mainly at the expense of operating and maintenance expenditure, thereby resulting in low levels of productivity of existing assets. Favorable factors are the amount of time allowed to agencies to prepare their budgets and the relative assurance that resources will be released in accordance with the approved budget. 3. Efficient use of resources for service delivery The recent adoption of a performance management system is expected to provide data on output and the corresponding expenditure. This will enable calculation of unit costs and other measures of efficiency in the delivery of public services, keeping in view that costs may be varying based on location 39 “Meeting the requirement for sustainability of the fiscal balance shall not be achieved at the expense of development projects” (Public Finance Act, section 7.e). 4. Conclusions on the Analysis of PFM Systems 127 and other factors. Even on a cash basis, it will be possible to make rough comparisons among schools, health centers and other service delivery units. This is potentially a powerful tool of cost reduction. The largest cost elements in many services are goods and services procured from the private sector. The use of competitive methods of procurement, as practiced in Bhutan, achieves value for money and greater efficiency. Greater public transparency in the delivery of resources to service delivery units (PI-8.3) would promote enhanced efficiency. The RAA’s program of performance audits should do the same. 4.4 Performance changes since a previous assessment This section introduces a dynamic perspective on PFM performance and its impact on achieving the three budgetary outcomes. As the last assessment was based on the 2005 framework, there are several changes that prevent direct comparison of scores with the 2016 assessment. Apart from four new indicators that were not used in 2010, there are several indicators where the structure changed, dimensions being added or subtracted, and many changes have been made in the calibration and wording of even ‘unchanged’ indicators. Therefore no table of scores in 2010 and scores in 2016 would be meaningful. A change from D to A in a particular area may not imply an improvement in performance, only a change in the way of measuring it. During the current assessment, data was obtained and the performance indicators were assessed using the same 2005 framework so as to measure progress over time. To assess real changes, the comparison has been made between two dates using the same framework, in this case the 2005 framework. Annex 4 lists the scores of all 28 government indicators used for the 2010 assessment, and their corresponding scores today, using the same 2005 framework, and summarized in figure 4.4.1 below. Since the previous indicators D-1, D-2 and D-3 pertaining to Figure 4.4.1: Changes in Score donor practices were not relevant, these were not assessed from 2010 assessment currently. Other/ Ten scores improved (PI-1, 5, 9, 10, 13, 14, 15, 16, 19 and 24), for NA, 2, six a decline was noted (PI-2, PI-7, 11, 18, 23 and 28 ), while 7% ten did not change, and two could not be compared for lack of information (PI-4 and 8). This result is good: it is difficult to Reduction in Improvement, 10, get score improvements across the board, and an excess of Score, 6, 36% improvements over ‘deteriorations’ is commendable. It may 21% also be noted that, even on the same framework, there may have been different interpretations of what the framework required, resulting in scores that are not truly comparable. Performance The column of Annex 4 explaining the changes in scores Maintained, 10, 36% gives individual details. Aggregate expenditure and domestic revenue out-turn remain strong and further strengthened by implementation of web-based MYRB and RAMIS. Areas that saw improvement since the previous PEFA assessment are: adoption of COFOG classification, introducing formula-based system for fiscal transfers to local governments, strengthening monitoring of fiscal risk over public enterprises, a more active 128 Bhutan: Public Financial Management Performance Report Tax Appeals Board, formalizing a cash flow forecast system, improving the effectiveness of internal audit function, introducing a system of formal in-year budget execution reporting, constitution of a Finance Committee for legislative scrutiny of budgets and a more active Public Accounts Committee for scrutiny of audit reports. The main reverses have been in the area of controls over payroll and no real change in coverage of hearings on external audit reports. 4. Conclusions on the Analysis of PFM Systems 129 Government Reform 5. Process 5.1 Overall approach to PFM reforms Bhutan has a strong commitment to a Good Governance agenda. Good Governance is the central theme of key strategic documents of Bhutan including the five year plans, the Gross National Happiness (GNH) index and the Bhutan Vision 2020: zz Bhutan 2020, A Vision for Peace, Prosperity and Happiness (the Vision) is a twenty year perspective strategy which sets the preferred direction for where Bhutan wants to be in the year 2020 starting from the base year of 2000. In terms of good governance outcomes to be attained by 2020, the Vision anticipates the full development of the country’s governance and legal institutions. zz The 11th Five Year Plan of Bhutan (2013-2018), the key planning document for the country, makes multiple references to enhancing capacity building, transparency, accountability, efficiency and effectiveness in governance. zz Gross National Happiness or GNH Index: Good governance is one of the four pillars of the GNH Index and one of the nine domains within the same index. Four Pillars of GNH • Sustainable and • Preservation and Pillar 1 Pillar 2 Pillar 3 Pillar 4 • Conservation of equitable Socio promotion of • Good Governance Environment Eco Development Culture The preparation of the 11FYP was guided by the development philosophy of Gross National Happiness (GNH) based on the above four pillars. Strengthening Public Financial Management (PFM) is a key element of good governance. As part of the governance agenda, strengthening PFM systems is an area of high priority for the RGoB. Given that the Government is the major controller of public resources, RGoB over the years has been making progress in PFM covering budget preparation, budget execution, control, reporting and oversight. There is increased legislative oversight on budget approval through a finance committee and of audit reports through a public accounts committee. Similar to other countries, public at large has become more demanding in terms of transparent and efficient government. With all strategic documents placing a great importance on good governance, it is clear that PFM within the country is continuously strengthened. 5. Government Reform Process 131 5.2 Recent and on-going reform actions RGoB is pursuing a PFM Reform Action program based on PEFA findings. Based on the 2010 PEFA Assessment Report, RGoB prepared a comprehensive, sequenced and time-bound action plan to bring about improvements in the PFM framework leading to enhancement in quality of public spending. Key PFM reforms implemented include: i. Amendment of the Public Finance Act 2007 in 2012. ii. Introduction of web-based application software for PFM and Planning and Evaluation systems viz. Planning and Monitoring System (PlaMS)40, Multi-Year Rolling Budget (MYRB) System, Revenue Administration Management Information System (RAMIS), Public Expenditure Management System (PEMS). The PlaMS, MYRB and PEMS are integrated on several aspects. iii. Implementation of online fund transfer system through Electronic Fund Transfer and Clearing System (EFTCS) for salaries and other periodic expenses. iv. The implementation of a medium-term fiscal framework and the creation of a Macroeconomic Framework Coordination Committee (MFCC). v. A National Internal Control Framework developed based on the COSO principles (Dec 2013). vi. Internal Audit Charter and Audit Code of Ethics issued (Nov 2014) and Internal Audit Manual developed and operationalized (Mar 2014). vii. Audit Resource Management System implemented in RAA. viii. A Public Procurement Strategic Framework issued, a Public Procurement Policy drafted and is under consultation and a User Guide for procurement issued in July 2012. ix. Strengthening of internal audit and raising its profile and enhancing capacity of staff in terms of numbers and skills. x. Phased issue and implementation of accounting and auditing standards for public corporations. xi. Strengthening the national procurement system which includes strategic procurement, electronic procurement, framework agreement and capacity building to ensure value for money, economy and efficiency. xii. Revised Financial Rules and Regulations (FRR) are in the process of being reviewed and finalized. xiii. An Annual Performance Management system introduced with linkages with the budgeting process (2014-15). The following key reforms are being pursued: zz The integration of PlaMS, PEMS and MYRB. zz Further development of the Government Performance Management System. zz Web-based inventory system under development by DNP. zz DRC is implementing a web-based integrated Revenue Administration Management Information System (RAMIS) and instituting a separate intelligence and investigation unit to strengthen revenue collection. 40 The 11th five year plan has been entered in PlaMS. 132 Bhutan: Public Financial Management Performance Report zz Dialogue has started on the integration of the Civil Service Information System with the payroll system in PEMS. zz A central procurement management system (e-GP) is being developed. 5.3 Institutional considerations Strengthening PFM is a continuous process for a growing country and Bhutan is geared towards taking the reform agenda to the next phase. While Bhutan had received reasonable scores against many indicators in the last PEFA assessment, there are certain areas where further strengthening is required. Based on the 2010 PEFA Assessment Report, RGoB prepared a comprehensive, sequenced and time- bound action plan (called PFM Reform Program) to bring about improvements in the PFM framework. The parliamentarians remain a key stakeholder in the PFM reform agenda. The PAC in Bhutan is one of the most active PACs in the region and has been raising key issues within parliament and with the agencies. Till the financial year 2014/15, the National Assembly had only four days for budget review including two days for discussions on the budget in the House, after it was presented by the Finance Minister. Subsequently, a nine-member legislative Finance Committee has been constituted in 2015 (as a permanent committee) - this was facilitated by an amendment to the National Assembly Act allowing the budget to be referred to a Legislative Committee. The budget for 2015/16 was the first budget to be referred to the Committee for review. Bhutan is making steady progress in PFM with various activities being completed and others in progress and there is a strong commitment to PFM reforms backed by sound stakeholder buy-in at the highest level. Donors are supporting PFM Efforts: The World Bank is supporting various initiatives on PFM which include the development of internal audit, implementation of Bhutan Accounting Standards (BAS) in major enterprises, strengthening external audit, intergovernmental fiscal transfers, strengthening of procurement and the development of a PFM reform group. The Asian Development Bank - ADB is working on macroeconomic TA with finance, early warning systems, RAMIS, custom simplification procedures and systems, including risk-based screening and better trade-related agency integration and debt sustainability, DANIDA through its on-going Transition Support Program; the United Nations Development Program recently supported RGoB in preparing the National Internal Control Framework, the ADA through its projects in support of the judiciary, civil society organizations and the Royal Audit Authority; and the Swiss Development Cooperation which also supports select activities in the area of PFM. The International Monetary Fund (IMF) provides a series of technical assistance interventions (in cash management, e-payment, macroeconomic framework, treasury), and supports the provision of a long-term advisor on budgeting issues. In addition, a local governance support program has brought together donors to co-finance support for local governance at the sub-national level. The EU is a key partner and a significant donor to RGoB. Forward Thrust on PFM Reforms: Continuous thrust of reforms requires sustained resources and focused joint efforts of the Royal Government of Bhutan (RGoB) and its development partners (DPs). To this end, RGoB has taken two large initiatives which include formation of a PFM-Governance Group (PFM-GG) and establishment of a PFM – Multi-donor Fund (PFM-MDF). These two initiatives will help the Government to meet the objectives of finding sustained resources to carry out PFM reforms, with Government leadership and ownership and coordination across the various branches of government. 5. Government Reform Process 133 PFM-GG: With the formation of the PFM-GG, institutional arrangements are in place to spearhead the PFM reform agenda. PFM-GG, a national level apex committee formed by RGoB, steers the PFM reform action plan of Bhutan and coordinates the resources required for the implementation of the action plan. The PFM-GG was formed in November 2013 under the Ministry of Finance (MoF), chaired by the Finance Secretary, with representation from all the four departments of MoF (Department of National Budget, Department of Public Accounts, Department of Revenue and Customs and Department of National Properties), the Accounting and Auditing Standards Board of Bhutan, Public Procurement Policy Division, Internal Audit Service and Policy and Planning Division, with the Chief Accounts Officer, Department of Public Accounts (DPA) as the Member Secretary. The Accounts Division of DPA acts as the Secretariat for the PFM-GG. The PFM-GG leads the PFM reform programs in Bhutan through a PFM Reform Strategy and an Action Plan adopted and updated on a periodic basis (RGoB notification May 2015). The PFM-GG provides oversight, guidance, and revises and monitors implementation of the RGoB’s PFM reform program or action plan. To improve coordination across the government, there is clearly scope for expanding PFM-GG membership to RAA, ACC and line ministries. Multi-Donor Fund for PFM (PFM-MDF): A Multi Donor Fund is an effective aid modality instrument to support and spearhead Bhutan’s PFM reform agenda. In line with the Paris Declaration on Aid Effectiveness (March 2005) and the commitments at the high level forum on Aid Effectiveness in Accra (2008) and Busan (2011), the World Bank recognizes the advantages of joint cooperation and technical assistance amongst the donors. One of the aid modalities (financing instruments) through which the World Bank endeavors to achieve this is the Multi Donor Fund (MDF) which is funded by donors and administered by the Bank that provides a grant to beneficiaries to implement their reform agenda, thus enhancing country ownership. Bhutan Multi Donor Fund for PFM Reform Program (PFM-MDF or the Program) provides a common platform for the DPs to come together and support RGoB in implementing a RGoB-led PFM Reform Program. The MDF could also support a joint dialogue on PFM reforms amongst the DPs. Through various windows under MDF, DPs are able to provide comprehensive support to RGoB by avoiding duplication, reducing administration costs and providing a platform for other DPs to contribute, who otherwise would not have engaged in PFM individually. The key objective of the Bhutan PFM–MDF or the Program is to help RGoB implement its PFM Reform Program in a coordinated and holistic basis and to scale it up. This is done through a basket-funding mechanism by establishing an MDF which provides a common platform for DPs to come together by pooling their resources and efforts in strengthening PFM in Bhutan. The MDF plays a catalytic role in leveraging knowledge and financing by drawing on the best expertise in the field and working closely with a broad range of partners and stakeholders. This MDF or the Program is initially funded by the European Commission (EC) and the Austrian Development Agency (ADA) through a EUR 4 million contribution. Going forward, it is expected that other DPs will join the Program and contribute to the Bhutan PFM-MDF. The overall development objective of the program is “to support strengthening the performance, transparency and accountability in public financial management in Bhutan.” The main areas that are expected to be supported under the PFM-MDF are: zz Window 1: Strengthening Tax, Fiscal and Cash Management, Budget Formulation. zz Window 2: Enhancing Accounting and Reporting Systems. 134 Bhutan: Public Financial Management Performance Report zz Window 3: Scaling up Public Procurement (through automation ensuring economy, efficiency and enhanced transparency). zz Window 4: Strengthening Accountability Institutions. A Program Coordination Committee (PCC) is being constituted to provide management oversight for the MDF Program. The PCC members will include RGoB, World Bank and donors who are contributors to the MDF. Based on RGoB’s PFM Reform Action Plan, which is owned by PFM-GG, reform activities will be prioritized. The PCC will coordinate closely with the Government’s PFM-GG. In addition to dialogue with the RGoB, members of the PCC will keep the DPs interested in PFM well informed about the MDF work program in order to promote coordination and cooperation with non-contributing partners. Transparency of the PFM Program - public accessibility After the last PEFA assessment, a workshop was held where several donors participated. After the workshop, RGoB’s PFM Reform Action Plan was prepared. Though the said PFM Reform Action Plan is not available on any public platform, it has been shared with the development partners as and when needed and secondly, the financing of the majority of the reform programs is reflected in the RGoB’s budget document since these are implemented as recipient-executed projects. 5. Government Reform Process 135 Annex 1: Performance Indicator Summary Indicator Dimension Score Description of Requirements Met 1. Aggregate 1.1 Aggregate A In only one year, 2012/13, the ratio of actual expenditure expenditure out-turn expenditure to the original budget was outside the out-turn range 95-105%. 2. Expenditure 2.1 Expenditure C Variance on administrative classification was less composition composition out-turn than 15% in two of the last three years. out-turn by function 2.2 Expenditure B Variance on economic classification was less than composition out-turn 10% in two years out of three. by economic type 2.3 Expenditure from A Actual expenditure charged to contingency vote was contingency reserves nil in each year. 3. Revenue 3.1 Aggregate C Actual revenue was between 92% and 116% of out-turn revenue out-turn budget in two years out of three 3.2 Revenue D Variance was more than 15% in 2 of the last 3 years composition out-turn 4. Budget 4.1 Budget A Budget formulation, execution and reporting is classification classification based on every level of administrative, economic and functional classification using GFS/COFOG- compliant classification 5. Budget 5.1 Budget A Budget documentation includes all four basic documentation documentation elements, and six out of eight of the additional elements. 6. Central 6.1 Expenditure B Expenditure outside government financial reports is government outside financial less than 5% of total BCG expenditure. operations outside reports financial reports 6.2 Revenue outside B Revenue outside government financial reports is less financial reports than 5% of total BCG revenue. 6.3 Financial reports D Financial reports of the NPPF and Trust Funds are of extra-budgetary submitted to the Government annually and key data units are included in the National Budget Report, but not within 9 months of the end of the year. 7. Transfers to 7.1 System for Not scored as the indicator is not applicable. sub-national allocating transfers governments 7.2 Timeliness of information on transfers 8. Performance 8.1 Performance C Information on policy or program objectives, KPIs information for plans for service and outputs to be produced are contained in the service delivery delivery APAs prepared for all ministries and dzongkhags and some autonomous bodies. The APAs are on the website of the GPMS but the links are not active, so they are not effectively published. A few agencies include their APAs on their own websites. 8.2 Performance D Information on quantities of outputs is included in achieved for service the APAs for the following year for all ministries and delivery dzongkhags and some autonomous bodies. The APAs are on the website of the GPMS but the links 136 Bhutan: Public Financial Management Performance Report Indicator Dimension Score Description of Requirements Met are not active, so they are not effectively published. A few agencies include information on actual APA results on their own websites. 8.3 Resources C Information on resources received by front-line received by service delivery units is collected and recorded for all delivery units ministries and dzongkhags. However, a report compiling the information is not published. 8.4 Performance D Evaluations of the efficiency and effectiveness of evaluation for service service delivery have been carried out for a few delivery ministries in the last three years. 9. Public access 9.1 Public access to D Two of the four basic elements are made available to to information information the public. 10. Fiscal risk 10.1 Monitoring of A Audited annual financial statements are published reporting public corporations for all PEs within six months from the close of the financial year and their financial performance is consolidated. 10.2 Monitoring Not A separate level of SNG has not been recognized for of sub-national applicable PEFA assessment government 10.3 Contingent A All significant contingent liabilities and other fiscal liabilities and other risks are reported in the annual financial statements fiscal risks of RGoB. 11. Public 11.1 Economic C There are no national guidelines on economic investment analysis of analysis. Some of the development partners management investment proposals conduct economic analysis in accordance with their own methodology in which case the analysis is published. 11.2 Investment A As per current practice, prior to inclusion in project selection the budget, all major investment projects are prioritized by the departments and approved by the Department of National Budget and the GNHC on the basis of standard criteria for project selection which are published. 11.3 Investment C Capital costs are included in the forthcoming budget project costing year for those projects that are funded by RGoB, and through external assistance only if agreements have been signed and fund release is confirmed. Other projects are included in the budget as and when these conditions are met and finally included in the supplementary budget presented to Parliament in June. Major activities are individually listed in the Budget Report. 11.4 Investment C Financial and physical progress of major investment project monitoring projects is monitored at the level of the departments through PSCs and centrally by MoF and GNHC and the standard procedures are complied with. Information on implementation of such projects is prepared after each monitoring visit and otherwise, but these are not published. Annex 1: Performance Indicator Summary 137 Indicator Dimension Score Description of Requirements Met 12. Public asset 12.1 Financial asset B Records of financial assets are maintained by the management monitoring concerned agencies and in PEMS. Financial assets are recognized at acquisition cost and disclosed in the annual financial statements/budget reports including information on performance of major categories of financial assets. 12.2 Non-financial C The government maintains records of holding of asset monitoring its fixed assets and other non-financial assets and information on their usage and age is collected only partially, and is not published. 12.3 Transparency of A Procedures and rules for transfer and disposal of asset disposal financial and non-financial assets are established and information is included in the annual financial statements presented to Parliament. 13. Debt 13.1 Recording and A Domestic and foreign debt records are complete, management reporting of debt and accurate and updated and reconciled on a monthly guarantees basis. Integrity of debt data is fairly high and comprehensive management and statistical reports covering debt, service, stock and operations are produced at least quarterly. 13.2 Approval of debt A Public Finance Act is the primary legislation that and guarantees grants authorization to borrow and issue new debt and guarantees to the Minister of Finance, subject to approval by the Cabinet, and are made against transparent criteria and fiscal targets. 13.3 Debt D A medium-term debt strategy covering all existing management and projected debt is available with a horizon of strategy five years, as a separate document and planned for periodic updating. The strategy is approved by the Minister of Finance and sets targets for interest rate, refinancing and exchange rate risk. The document is not publicly available. 14. Macro- 14.1 Macroeconomic A A government committee prepares 3-year forecasts economic and forecasts of key macroeconomic indicators which, together fiscal forecasting with the underlying assumptions, are included in the Budget Report submitted to the legislature. 14.2 Fiscal forecasts B The Government prepares 3-year forecasts of the main fiscal indicators. These and the underlying assumptions are included in the Budget Report 14.3 Macro-fiscal C The Government prepares for its internal use a sensitivity analysis range of fiscal scenarios based on alternative macroeconomic assumptions, but not a sensitivity analysis of the impact of alternative assumptions. 15. Fiscal strategy 15.1 Fiscal impact of B The Government prepares estimates of the fiscal policy proposals impact of all proposed changes in revenue and expenditure policy for the budget year and two following fiscal years, but only the estimates for the budget year of the fiscal impact of proposed changes are submitted to the legislature. 138 Bhutan: Public Financial Management Performance Report Indicator Dimension Score Description of Requirements Met 15.2 Fiscal strategy C The Government has prepared a fiscal strategy adoption covering the next three years that includes quantitative objectives for fiscal policy, but has not submitted it to the legislature. 15.3 Reporting on B Chapter 2 of the 2015/16 Budget report discusses fiscal outcomes the fiscal outcomes of the last completed fiscal year and any deviations from the objectives and targets set, and explains that the target of 85% of coverage of public expenditures by domestic revenues is unlikely to be achieved because of the delay in the commissioning of major hydropower projects. 16. Medium term 16.1 Medium C The annual budget report presents estimates for perspective in term expenditure the budget year and the two following fiscal years expenditure estimates allocated by economic classification. budgeting 16.2 Medium term B The Government approves expenditure ceilings for expenditure ceilings the budget year and for the two following years, before the first budget circular is issued. Ministry ceilings are set for the budget year only. 16.3 Alignment C Strategic plans are prepared by some ministries, but of strategic plans medium-term budgets diverge from fixed strategic and medium-term plans due to changing policies and priorities. budgets 16.4 Consistency of C The budget report provides an explanation of most budgets with previous changes to expenditure estimates from one year to year estimates the next at the aggregate level. 17. Budget 17.1 Budget calendar A A clear budget calendar exists and is substantially preparation adhered to. It allows budget units around 8 weeks to process complete their detailed estimates. 17.2 Guidance on A The budget circular is comprehensive and clear and budget preparation reflects ministry expenditure ceilings approved by the Cabinet. 17.3 Budget D The annual budget proposal was not presented to submission to the Parliament at least one month before the start of 2 of legislature the last 3 FYs. 18. Legislative 18.1 Scope of budget C Legislative review of the budget for 2014/15 was scrutiny of scrutiny limited, but included review of expenditure and budgets revenue. From 2015/16, a Finance Committee has been constituted. 18.2 Legislative C The legislature’s procedures for budget review are procedures for firmly established, including review by a recently budget scrutiny established specialized committee and are respected, but are not comprehensive as there are no procedures for negotiations or public consultations and for the working of the Finance Committee. 18.3 Timing of C The legislature has approved the annual budget before budget approval the start of the year for FY 2015/16, within one month of start of financial year for FY 2014/15 and with a delay of over 2 months in FY2013/14 (election year). 18.4 Rules for budget A Clear rules exist for in-year budget adjustments by adjustment by the the executive, set strict limits on extent and nature of executive amendments and are always respected. Annex 1: Performance Indicator Summary 139 Indicator Dimension Score Description of Requirements Met 19. Revenue 19.1 Rights and B Entities, which collects majority of the revenue, administration obligations for provides payers with comprehensive information revenue measures on main of revenue obligations and on their rights including rights of redress. 19.2 Revenue risk B The DRC uses a structured and systematic approach management for assessing and prioritizing compliance risks for some categories of revenue and, as a minimum, for their large revenue payers. 19.3 Revenue audit A Entities collecting most revenue undertake audits and investigation and fraud investigations managed and reported on according to a documented compliance improvement plan, and complete over 90% of planned audits and investigations. 19.4 Revenue arrears A Revenue arrears is 0.38% of the total revenue monitoring collection. Reported revenue arrears are two to seven years old. 20. Accounting for 20.1 Information on A Information on revenue collection is reported revenue revenue collections monthly to MoF and is summarized into a report. 20.2 Transfer of A Transfers to the Treasury and other designated revenue collections agencies are made daily. 20.3 Revenue B Complete reconciliation of assessments, collections, accounts arrears, and transfers to the Treasury is made monthly, reconciliation quarterly and annually within 8 weeks of end of period. 21. Predictability 21.1 Consolidation of B The bank/cash balances are consolidated on a of in-year resource cash balances daily basis, but some extra-budgetary funds remain allocation outside the arrangements. 21.2 Cash B A cash flow forecast is prepared for the fiscal year forecasting and and updated at least quarterly taking into account monitoring the actual inflows and outflows. 21.3 Information on A The departments are able to plan and commit commitment ceilings expenditure for at least six months in advance in accordance with the budgeted appropriations and cash/commitment releases. 21.4 Significance A Significant in-year adjustments to budget allocations of in-year budget takes place only once a year above the level of the adjustments MDAs and are done in a transparent and predictable way. 22. Expenditure 22.1 Stock of D* For lack of information, the dimension is scored D*. arrears expenditure arrears 22.2 Expenditure D A system has been prescribed for recording arrears monitoring commitments or obligations, outside of the system of accounting, to track expenditure arrears at an individual level. No exercise has been undertaken, at a central level, to collate the data on expenditure arrears, if any, and determine the stock of expenditure arrears any time during the last two years. 23. Payroll 23.1 Integration of D The payroll and personnel records are not integrated controls payroll and personnel and no reconciliation between the two records has records been undertaken. 140 Bhutan: Public Financial Management Performance Report Indicator Dimension Score Description of Requirements Met 23.2 Management of A The required changes to the personnel records and payroll changes payroll are updated monthly and in time for the following month’s payments in accordance with the rules laid down in FAM. Retroactive adjustments are rare. 23.3 Internal control D There are serious weaknesses in internal controls in of payroll PEMS payroll module and significant observations are made by the auditor on the adequacy of controls to ensure integrity of the payroll data. 23.4 Payroll audit C There is no system of annual payroll audits in RGoB. The RAA undertook a detailed review of the payroll in 2013-14 across all central government agencies and reported its findings as a separate chapter in the Annual Audit Report. Also, regular surveys and HR audits are being undertaken by RCSC. 24. Procurement 24.1 Procurement C Records are maintained on works contracts showing monitoring what is procured, its cost, and who is awarded the contracts. These cover the majority of all procurement. 24.2 Procurement B 70% or more of total value of contracts are awarded methods through competitive methods. 24.3 Public access B Public has access to information on procurement to procurement rules and procedures, bidding opportunities information and contract awards and data on resolution of procurement complaints. 24.4 Procurement A The complaints system meets all six criteria. complaints management 25. Internal 25.1 Segregation of A Appropriate and clear segregation of duties and controls on non- duties responsibilities are laid down in the financial rules salary expenditure and regulations. 25.2 Effectiveness A Comprehensive expenditure commitment controls of expenditure are in place. commitment controls 25.3 Compliance with A Compliance to the rules and regulations is high payment controls and more than 90% of payments are executed in accordance with regular rules and procedures as noted from the audit reports. 26. Internal audit 26.1 Coverage of B Internal audit is operational for CG entities incurring effectiveness internal audit most expenditure and collecting most revenue. 26.2 Nature of audits C Internal audit is primarily focused on financial and standards compliance. applied 26.3 Implementation A All planned audits are completed and reports of internal audits and distributed to the appropriate parties. reporting 26.4 Response to C Management provides a partial response for the internal audits majority of entities audited. Annex 1: Performance Indicator Summary 141 Indicator Dimension Score Description of Requirements Met 27. Financial data 27.1 Bank account B The reconciliation of the RGR is daily and of the BFA, integrity reconciliation trust accounts, revolving fund and current deposit accounts is monthly. These together constitute 95.2% of the Government receipts for the year 2013-14. 27.2 Suspense C The accounting for Suspense accounts is done accounts in PEMS, thereby eliminating the need for a reconciliation of the Ledger and Control accounts. The suspense accounts are cleared at the end of the financial year. 27.3 Advance B The accounting for Advances is done in PEMS, accounts thereby eliminating the need for reconciliation of the Ledger and Control accounts. Most of the advances are cleared in a timely way. 27.4 Financial data B The access and changes to records are restricted by integrity processes access level controls. An audit trail is available in the financial management systems. 28. In-year budget 28.1 Coverage and B The quarterly note sheet included the comparison reports comparability of of the approved budget with the revised budget and reports actual expenditure of the quarter ended. 28.2 Timing of in- C Quarterly reports are issued within 5-6 weeks of the year financial reports end of each quarter. 28.3 Accuracy of in- B Report data are accurate, but do not include year financial reports commitment data. 29. Annual 29.1 Completeness C Financial statements covering all budgetary units financial reports of annual financial are prepared annually including a comparison with reports the budget and information on revenue, expenditure and cash balances, but not all financial assets and liabilities. 29.2 Submission of B The AFS are submitted for external audit within 6 reports for external months of the end of the fiscal year. audit 29.3 Accounting C Accounting standards applied to the AFS are based standards on the country’s legal framework, and have been applied consistently over time. 30. External audit 30.1 Audit coverage B Financial reports of central government entities and standards representing more than 75% of expenditure and revenue have been audited using national standards during the last three years. 30.2 Submission of B Audit reports were submitted to the legislature within audit reports to the 6 months from receipt of the financial reports by the legislature audit office for the last three completed fiscal years. 30.3 External audit A There is clear evidence of follow-up by RAA on follow-up audits. 30.4 Supreme B The SAI operates independently from the executive, Audit Institution ensured through the Constitution, and there is a independence process for appointment of the Head of the SAI. There is independence in planning of audit engagements as well as the approval and execution of the RAA’s budget. The SAI has unrestricted and timely access to records, documentation and information. 142 Bhutan: Public Financial Management Performance Report Indicator Dimension Score Description of Requirements Met 31. Legislative 31.1 Timing of audit B+ Scoring Method M2. scrutiny of audit report scrutiny reports 31.2 Hearings on B The legislature usually takes up to three months to audit findings complete its examination. 31.3 Recommenda- C In-depth hearings on key findings of audit reports tions on audit by the take place occasionally, covering a few audited legislature entities or may take place with ministry of finance officials only. 31.4 Transparency of A The PAC issues recommendations and legislative scrutiny of systematically follows up on their implementation. audit reports A All hearings are public except for specified limited circumstances, and reports of the PAC are discussed in Parliament and are published on the official website of the Parliament. Annex 1: Performance Indicator Summary 143 Annex 2: Summary of Observations on the Internal Control Framework Internal control components Summary of observations and elements 1. Control environment 1.1 The personal and professional The ethical values embedded in the internal control framework are integrity and ethical values of generally respected by management and staff, as evidenced by the management and staff, including a responses to external audit reports, which are generally good, though supportive attitude toward internal not always as prompt as expected, there are comprehensive expenditure control constantly throughout the commitment controls and compliance to rules and regulations is high. organization 1.2. Commitment to competence Commitment to competent performance is required by the Performance Management System, which includes regular monitoring and feedback of performance that fails to meet output targets. The Royal Civil Service Commission manages the Civil Service Regulations, which are intended to ensure that only competent staff are appointed and that their performance meets their job descriptions and performance standards. The promotions and career progress of the staff are also based on their performance. 1.3. The “tone at the top” (i.e. The tone at the top has been set unequivocally by the Gyalpo (King) - management’s philosophy and “Every individual must strive to be principled, And individuals in position operating style) of responsibility must even strive Harder” (His Majesty the King); and “It is the responsibility of every Bhutanese to act against corruption in our country” (His Majesty the Fourth King). In addition, the RGoB attaches great importance to the maintenance of a comprehensive set of rules for the management of public resources, and on their observance. The former is evidenced by the National Internal Control Framework (NICF, a “steel frame of best practices”41); the Public Finance Act,42 internal audit standards (Manual, Charter, Code of Ethics), the Financial Rules and Regulations (comprising the Financial Management Manual supported by the Finance and Accounting Manual, the Budget Manual, the Aid & Debt Management Manual, Property Management Manual, Procurement Manual and Revenue Manual). Compliance is strengthened by national pride in the uniqueness of this kingdom and strong centralized management, an effective anti-corruption body (ACC) and evidenced by RAA audit reports and Bhutan’s high score on the Corruption Perception Index of Transparency International43. 1.4. Organizational structure There is a clear separation between operating and oversight functions. Internal Audit Unit (Central Coordinating Agency) reports to the Finance Secretary administratively and to the high level Committee of Secretaries (CoS) in case of any disrespect or disregard of any internal audit functions and its recommendations thereof. Internal audit units report directly to the heads of the agencies in which they are established. 41 The NICF was developed with the overall goal to strengthen integrity, transparency, efficiency, effectiveness, participation, accountability and ethical behaviour at all levels of management. All agencies of RGoB (including government owned institutions and corporations, and autonomous agencies) are obliged to institute and institutionalize internal controls and to draw upon the country’s laws, rules, regulations, procedures and policies. 42 The Act seeks to regulate the financial management of the Royal Government of Bhutan in order to promote the effective and efficient use of public resources, strengthen accountability and provide statutory authority and control for sound and sustainable fiscal policy. 43 An average score of 58 points between 2006-2016 with the latest score of 65 being the highest. 144 Bhutan: Public Financial Management Performance Report Internal control components Summary of observations and elements 1.5. Human resource policies and Human resource management is decentralized to line agencies which practices implement rules set by the RCSC. For instance, heads of agencies ensure that the duties of staff are rotated so as to prevent the development of vested interests. 2. Risk assessment 2.1 Risk identification The NICF casts responsibility on ministries and other autonomous agencies to identify and evaluate risks at departmental, divisional and operating unit levels; establish policies, plans, procedures and systems to deal with risks and conduct a self-assessment of the five control components. Risks are identified in budget preparation: both revenue and expenditure are projected under multiple scenarios, such as the timing of HEP project commissioning. PED and DMD monitor risks arising out of operations of the public enterprises, debt and contingent liabilities, though there is no mention of PPPs. DRC manages risks on taxpayer registration, assessment, collection and audit. 2.2 Risk assessment (significance All identified risks are evaluated. The significance and likelihood of risk are and likelihood) distinguished in tax audit planning. 2.3 Risk evaluation 2.4 Risk appetite assessment No information available 2.5 Responses to risk (transfer, No information available tolerance, treatment or termination) 3. Control activities 3.1 Authorization and approval Budgets are classified (inter alia) by responsibility centre, so that procedures accountability for both revenue and expenditure against approved budgets is established each year. Controls over expenditure are controlled through computerized systems. 3.2 Segregation of duties Responsibilities for authorization, processing, recording, and reviewing (authorizing, processing, recording, of transactions and custody of relevant assets are prescribed by the FRR reviewing) 2001, and followed, subject to endemic shortages of skilled staff and absences of key staff. 3.3 Controls over access to Procedural and system controls limit access to resources and records, in resources and records accordance with the FRR 2001. 3.4 Verifications Accounting procedures include verifications and reconciliations, such as 3.5 Reconciliations cash reconciliations with bank statements, debt balance reconciliations with creditors, and advance/suspense balance reconciliations with accountable officers. There is no regular reconciliation/verification of employee records with the payroll. There are serious weaknesses in internal controls in payroll and significant observations are made by the auditor on the adequacy of controls to ensure integrity of the payroll data. 3.6 Reviews of operating There are multiple monitoring and reviewing systems. Operations, performance processes, activities and performance are reviewed quarterly by the 3.7 Reviews of operations, Prime Minister’s Office against Annual Performance Agreements, by processes and activities MOF against annual budgets, and by GNHC against the Five Year Plan. The Government Performance Management System has been reviewing physical and financial performance since 2013/14. There are mid-year reviews and annual progress reports. In addition, there is ex ante scrutiny of budgets and ex post scrutiny of accounts by the legislature. 3.8 Supervision (assigning, No information available. reviewing and approving, guidance and training) Annex 2: Summary of Observations on the Internal Control Framework 145 Internal control components Summary of observations and elements 4. Information and Operational and financial information for managers are available through communication the computerized applications such as MYRB, PEMS and RAMIS. 5. Monitoring 5.1 Ongoing monitoring See 3.6 and 3.7 above. 5.2 Evaluations The GPMS has instituted a system of mid-year and year-end evaluation and assessment process. RAA has started on performance audits, but there is not yet a systematic and comprehensive evaluation function. 5.3 Management responses Accountable managers submit Action Taken Reports on recommendations by internal and external audit, though not always promptly. These reports are assessed and, if necessary, followed up by auditors and by the PAC. 146 Bhutan: Public Financial Management Performance Report Annex 3: Sources of Information Annex 3A: Surveys and analytical work SAI PMF Report, RAA, May 2015 IMF Article IV report data GPP Bhutan 10 Major Findings and Implications for GPP September 2015 Analysis of data on Construction Development Board (CDB) online database Data Analysis from the sample contract data of Ministry of Education PEFA Performance Report June 2010 SAR Report on Public Sector Accounting and Audit, 2009, (ROSC) Annex 3B: List of persons met Ministry of Finance Mr. Lam Dorji Honorable Secretary Department of Public Accounts, Ministry of Finance Mr. Choiten Wangchuk Director General Mr. Tshering Dorji Chief Program Officer Mr. Sonam Tobgyel Chief Accounts Officer Mr. Budhiman Rai Chief Accounts Officer Ms. Kuenzang Dema Accounts Officer Ms. Yeshey Peden ICT Officer Government Performance Management Division (GPMD), Office of the Prime Minister Mr. Chencho Deputy Chief Planning Officer and Head, GPMD Royal Audit Authority Mr. P.M. Pradhan Deputy Auditor General Mr. Karma Jambayyang Dy. Chief Audit Officer Mr. Sonam Wangdi (Telephonic Discussion) Senior Audit Officer Ministry of Education Mr. Thinley Rinzin Planning Officer Mr. Dochu Sr. Planning Officer Ms. Thinley Wangmo Budget assistant Mr. Chimi Tshewang Officiating head of AFD Mr. Tempa Gyelsthen Department of National Budget, MoF Mr. Lekzang Dorji Director Mr. Namgyel Wangchuk Chief Budget Officer Mr. Gyembo Chief Budget Officer Central Coordinating Agency, Internal Audit Services, MoF Mr. Loday Tsheten Chief Internal Auditor Mr. Padam Singh Ghishing Specialist Public Enterprises Division Mr. Kapil Sharma Chief Program Officer Department of Revenue and Customs Ms. Lhakpa Bhuti Dy. Collector Mr. Sherub Chogyel BST Division Mr. Karma Loday Collector, Revenue Audit and Accounts Division Ms. Mindrel Zangmo Sherpa Dy. Collector Annex 3: Sources of Information 147 Policy and Planning Division, MoF Mr. Sonam Tenzin Chief Planning Officer Mr. Rinzin Dorji Sr. Planning Officer Thimphu Dzongkhag Ms. Dechen Pelzom Accountant Ms. Tshering Deki Accounts Officer Ms. Namgay Donkar Budget Assistant Mr. Ugyen Planning Officer Department of National Properties Dasho Nima Tshering Director General Mr. Tashi Tangbi Engineer Mr. Karma Wangdi Chief Procurement Officer Mr. Leki Tshering Senior Procurement Officer Construction Development Board Mr. Chencho Tshering Senior ICT Associate II RCSC Ms. Kuenga Zam Senior ICT Officer MoAF (Line Agency) Ms. Dema Tshomo Ms. Pema Lhamo Accounts Officer Bhutan Chamber of Commerce and Industries Mr. Chandra Chhetri Mr. Yeshi Dorji Annex 3C: Sources of Information Annual Financial Statements - http://www.mof.gov.bt Bhutan Internal Audit Charter, Code of Conduct, Internal Audit Manual and Internal Control Framework Budget Manual-2001 Constitution of Bhutan - www.constitution.bt Finance and Accounting Manual Financial Rules and Regulations 2001 Public Finance Act 2007 The Audit Act of Bhutan 2006 National Budget reports 11th five-year plan Procurement Rules and Regulations 2009 (revised July 2015) Terms of Reference –Independent Review Body eTool/ciNet – cdb.gov.bt Grievance – pppd.gov.bt Local Government Act 2009 Revised Guidelines for Public Debt Management, April 2014 Government Order, Establishment of Government Performance Management Division, March 2015 11th Five Year Plan 2013-2018 PEFA Framework for assessing public financial management, 2016 World Bank Country Partnership Strategy August 2014 Annual Financial Statements of the Royal Government of Bhutan for the year ended 30th June 2013, 2014 and 2015 Performance Indicator Report 2013, 2014, Department of Revenue and Customs 148 Bhutan: Public Financial Management Performance Report Annex 4: Comparison with 2010 Assessment Scores from Explanation of Indicators and Dimensions Assessment Scores in the Current Description of Change Previous Current Assessment PI-1. Aggregate expenditure B A out-turn compared to original approved Budget. Dimension (i) - Difference B A In none of the last Improvement in expenditure between actual primary three years the actual tracking due to the introduction expenditure and the originally expenditure deviated of a web-based and real time budgeted primary expenditure from budgeted online system called MYRB (i.e. excluding debt service expenditure by an (Multi-Year Rolling Budget) in charges and externally financed amount equivalent to FY 2010/11. The new system project. more than 5%. has improved monitoring of (refer table provided at budget and expenditure, and the end of this Annex). shortened processing time for incorporation of donor funds. The budget call notification now includes submission of pre-requisite documents along with the budget proposals to expedite implementation of activities. PI-2. Composition of B D expenditure out-turn compared to original approved budget. Dimension (i) - Extent to which B D Variance in excess of Composition variance has variance in primary expenditure the overall deviation increased. composition exceeded overall in primary expenditure deviation in primary expenditure exceeded 10% in all (as defined in PI-1) during the three years. (refer table last three years. provided at the end of this Annex). PI-3. Aggregate revenue A A out-turn compared to original approved budget. Dimension (i) - Actual domestic A A Domestic revenue No change. Note that the revenue collection compared to (excluding grants) was assessment on the 2016 domestic revenue estimates in more than 97% of Framework was scored C due to the original, approved budget. budget in all the last high variance of grants. Grants 3 years. have been excluded in this assessment of change so as to make the scores comparable. PI-4. Stock and monitoring of NR NR expenditure payment arrears. Dimension (i) - Stock of NR NR Stock of arrears is not No change expenditure payment arrears known (as a percentage of actual total expenditure for the corresponding fiscal year) and any recent change in the stock. Annex 4: Comparison with 2010 Assessment 149 Scores from Explanation of Indicators and Dimensions Assessment Scores in the Current Description of Change Previous Current Assessment Dimension (ii) - Availability of D D A system has been No change data for monitoring of the stock prescribed for recording of expenditure payment arrears. commitments or obligations, outside of the system of accounting, to track expenditure arrears at an individual level. No exercise has been undertaken, at a central level, to collateaz the data on expenditure arrears, if any, and determine the stock of expenditure arrears any time during the last two years. No reliable data on the stock of arrears. PI-5. Classification of the B A budget. Dimension (i) - The classification B A Budget formulation, In 2010, it was not possible system used for formulation, execution and reporting to classify activities in execution and reporting of the is based on every accordance with COFOG at government’s budget. level of administrative, the sub-functional level. This economic and is now achieved. No other functional classification changes in classification. using GFS/COFOG- compliant classification. PI-6. Comprehensiveness of A A information included in budget documentation. Dimension (i) - Number of the 9 A A 8 out of 9 benchmarks In 2009, 7 out of 9 benchmarks information benchmarks listed provided, omitting only were provided, omitting below that are included in the financial assets. only financial assets and budget documentation most explanation of fiscal impact recently issued by the central of new policy initiatives. government. Significant improvement, though no change in score. PI-7. Extent of unreported A B+ Scores not comparable (see government operations. dimension (i) below). Dimension (i) - Level of extra- A B The NPPF and 5 trust In the 2010 assessment, the budgetary expenditure (other funds are the only NPPF was not taken into than donor funded projects) extra-budgetary units consideration. Scores not which is unreported i.e. not in central government. comparable. included in fiscal reports. In 2014/15 they had expenditure equal to 2.6% of total expenditure. 150 Bhutan: Public Financial Management Performance Report Scores from Explanation of Indicators and Dimensions Assessment Scores in the Current Description of Change Previous Current Assessment Dimension (ii) - Income/ A A All income and No change expenditure information on expenditure on donor- donor-funded projects which is funded projects is fully included in fiscal reports. reported. PI-8. Transparency of inter- A NA governmental fiscal relations Dimension (i) - Transparent A NA Not scored as the Under the 11th FYP, which and rules based systems in the indicator is not began in FY 2013/14, the horizontal allocation among applicable. RGoB has initiated a formula- lower level governments of based fiscal transfer allocation unconditional and conditional for annual grants. LGs treated transfers from higher level as SNGs in 2010. government (both budgeted and actual allocations). Dimension (ii) - Timeliness of A NA As above reliable information to lower level governments on their allocations from higher level government for the coming year. Dimension (iii) - Extent to which A NA As above consolidated fiscal data (at least on revenue and expenditure) is collected and reported for general government according to sectoral categories. PI-9. Oversight of aggregate D+ B fiscal risk from other public sector entities. Dimension (i) - Extent of C B All PEs submit audited In 2010, there was no government monitoring of AGAs financial statements consolidated overview of fiscal and PEs. annually to the MoF data and fiscal risk from PEs. and their financial performance is consolidated in the National Budget Report. There are no AGAs. Dimension (ii) - Extent of D NA There are no SNGs LGs treated as SNGs in 2010. government monitoring of SN meeting PEFA criteria. Scores not comparable. (urban and rural local bodies) governments’ fiscal position. PI-10. Public access to key B A fiscal information Dimension (i) - Number of the B A 5 of the 6 listed In 2009 out of 6 elements, only six listed elements of public elements of information 4 were available to the public. access to information that is are accessible by Missing in–year budget fulfilled. the public. The only execution. reports and contract exception is in-year awards. The latter are now budget execution published on the procuring reports. entities’ notice boards. Annex 4: Comparison with 2010 Assessment 151 Scores from Explanation of Indicators and Dimensions Assessment Scores in the Current Description of Change Previous Current Assessment PI-11 Orderliness and A B+ participation in the annual budget process. Dimension (i) - Existence of and A A There is a fixed budget No change adherence to a fixed budget calendar and it is calendar. substantially adhered to. It allows budget agencies around 8 weeks to prepare their detailed estimates. Dimension (ii) - Clarity/ A A The budget circular is No change comprehensiveness of and comprehensive and political involvement in the clear, and includes guidance on the preparation of ministry expenditure budget submissions. ceilings that have been approved by Cabinet. Dimension (iii) -Timely budget B C Parliament has In one year (2013/14) there approval by the legislature or approved the budget was a delay of 2 months. similarly mandated body. before the end of June for FY 2014/15 and FY 2015/16. Only for FY 2013/14 was it delayed till September (3 months). PI-12 Multi-year perspective B+ B+ in fiscal planning, expenditure policy and budgeting. Dimension (i) - Preparation of A A Fiscal forecasts are No change multi-year fiscal forecasts and prepared on a rolling functional allocations. three-year basis on an economic classification, and the budget report explains most changes in expenditure at an aggregate level. Dimension (ii) - Scope and B B A debt sustainability No change frequency of debt sustainability analysis is produced analysis - Dates for debt every two years. sustainability analyses. Dimension (iii) - Existence of A A Sector plans are No change sector strategies with multi- produced, including year costing of recurrent and both capital and investment expenditure. recurrent expenditure, and are broadly consistent with fiscal forecasts. Dimension (iv) - Linkages C C The linkage between No change between investment budgets budget estimates and and forward expenditure the costing of recurrent estimates. implications of new 152 Bhutan: Public Financial Management Performance Report Scores from Explanation of Indicators and Dimensions Assessment Scores in the Current Description of Change Previous Current Assessment policy initiatives in the investment decision making process is weak. PI-13 Transparency of taxpayer B B+ Improvement in performance obligations and liabilities. Dimension (i) - Clarity and B B Legislation and No change comprehensiveness of tax procedures for most liabilities. major taxes are comprehensive and clear, and DRC has limited discretionary powers. Dimension (ii) - Taxpayer access B B The DRC, which No change to information on tax liabilities collects most revenue, and administrative procedures. provides payers with comprehensive information on majority of revenue obligations and on their rights including rights of redress. Dimension (iii) - Existence and B A Tax appeals are In 2009, the appeals board functioning of a tax appeals administered had only just been set mechanism. transparently through up. Since then there has three tiers, including an been improvement in the independent institution effectiveness of the system. which is operating satisfactorily. PI-14 Effectiveness of measures C+ B Overall improvement for taxpayer registration and tax assessment. Dimension (i) - Controls in the C C Taxpayers are No change taxpayer registration system. registered in a database system, but there is no linkage to other government systems to ensure complete coverage. Dimension (ii) - Effectiveness of B B Penalties exist but are No change penalties for non-compliance not always effective. with registration and declaration obligations. Dimension (iii) - Planning and C B Tax audits and Improvement in the planning of monitoring of tax audit and fraud investigations tax audits. fraud investigation programs. are managed in accordance with an annual audit plan based on specific risk assessment criteria. Annex 4: Comparison with 2010 Assessment 153 Scores from Explanation of Indicators and Dimensions Assessment Scores in the Current Description of Change Previous Current Assessment PI-15 Effectiveness in collection C+ B+ Overall improvement of tax payments. Dimension (i) - Collection ratio A A Revenue arrears No change for gross tax arrears, being the are less than 1% of percentage of tax arrears at the collections, beginning of a fiscal year, which was collected during that fiscal year (average of the last two fiscal years). Dimension (ii) - Effectiveness A A All tax revenue is No change of transfer of tax collections paid directly into the to the Treasury by the revenue government revenue administration. account and transferred daily to the Treasury. Dimension (iii) - Frequency C B Complete reconciliation Monthly and quarterly of complete accounts of assessments, reconciled figures by the reconciliation between tax collections, arrears, DRC are now shared with assessments, collections, and transfers to the Department of Public Accounts arrears records and receipts by Treasury is made daily, within a week of the end of the Treasury. monthly, quarterly and the month or quarter. This also annually within 8 weeks generates a periodic tax arrears of end of period. picture. In addition a statement reflecting the revenue arrears, (which in this case is revenue collected and not deposited in treasury account) is shared with the Department of Public Accounts on an annual basis to be incorporated in the Annual Financial Statement within 8 weeks of the end of the fiscal year. This is an improvement over the previous PEFA assessment. PI-16 Predictability in the C+ B+ availability of funds for commitment of expenditures. Dimension (i) - Extent to which C B Cash flow forecast is Improvement through a system cash flows are forecast and prepared for the fiscal of Budget Utilization Plan monitored. year and updated at (BUP) through a module in least quarterly on the PEMS. basis of actual cash inflows and outflows. Dimension (ii) - Reliability and A A The departments are No change horizon of periodic in-year able to plan and commit information to MDAs on ceilings expenditure for at least for expenditure commitment. six-months in advance in accordance with the budgeted appropriations and cash/commitment releases. 154 Bhutan: Public Financial Management Performance Report Scores from Explanation of Indicators and Dimensions Assessment Scores in the Current Description of Change Previous Current Assessment Dimension (iii) – Frequency and A A Significant in-year No change transparency of adjustments adjustments to to budget allocations, which budget allocations are decided above the level of take place only once management of MDAs. a year and are done in a transparent and predictable way. PI-17 Recording and A A management of cash balances, debt and guarantees. Dimension (i) - Quality of debt A A Domestic and foreign No change data recording and reporting. debt records are complete, updated and reconciled on a monthly basis with data considered of high integrity. Comprehensive management and statistical reports covering debt, service, stock and operations are produced at least quarterly. Dimension (ii) Extent B B All cash/bank balances No change of consolidation of the are calculated daily government’s cash balances. and consolidated but extra-budgetary funds remain outside the arrangement. Dimension (iii) - Systems for A A Government’s No change contracting loans and issuance contracting of loans of guarantees. and issuance of guarantees are made against transparent criteria and fiscal targets and always approved by a single government entity i. e. the Minister of Finance. PI-18 Effectiveness of payroll B+ D+ controls. Dimension (i) - Degree of B D The payroll and Apparent deterioration integration and reconciliation personnel records are between personnel records and not integrated and no payroll data. reconciliation between the two records has been undertaken. Annex 4: Comparison with 2010 Assessment 155 Scores from Explanation of Indicators and Dimensions Assessment Scores in the Current Description of Change Previous Current Assessment Dimension (ii) - Timeliness of A A Required changes No change changes to personnel records to the personnel and the payroll. records and payroll are updated monthly and in time for the following month’s payments in accordance with the rules laid down in FAM. Retroactive adjustments are rare. RAA has not made any observations in this regard. Dimension (iii) - Internal controls B C There are serious Apparent deterioration based of changes to personnel weaknesses in on RAA findings in FY13/14 records and the payroll. internal controls in audit report. PEMS payroll module, reported on by RAA. Dimension (iv) - Existence of B C There is no system of Apparent deterioration payroll audits to identify control annual payroll audits weaknesses and/or ghost in RGoB. The RAA workers. undertook a detailed review of the payroll in 2013-14 across all central government agencies and reported its findings as a separate chapter in the Annual Audit Report. Also, regular surveys and HR audits are being undertaken by RCSC. PI-19 Competition, value C B for money and controls in procurement. Dimension (i) - Use of open D B Most of the contracts Improved Performance. competition for award of use competitive However, implementation of contracts that exceed the tendering process. a comprehensive electronic nationally established monetary For works contracts government procurement threshold for small purchases. there is an electronic (e-GP) system with end to database managed end solution (advertisement by Construction to contract implementation Development Board including open contracting) is (CDB). For goods and very important. service there is no such comprehensive In addition to that improvement database but hard copy in CDB’s electronic system fills are maintained. (integration with e-GP, better information dissemination to public). 156 Bhutan: Public Financial Management Performance Report Scores from Explanation of Indicators and Dimensions Assessment Scores in the Current Description of Change Previous Current Assessment Dimension (ii) - Justification B C Lack of central Procurement regulations for use of less competitive information on use set limits on use of less procurement methods. of non-competitive competitive methods. Based methods. on sample data it is observed that implementing agencies are following the rules strictly with adequate justifications. In the absence of a nationwide MIS at the time of assessment, it is not possible to verify. In fact performance has improved compared with 2009 when a different sample approach was taken. Dimension (iii) - Existence and C A The complaints process Improved performance. In 2009 operation of a procurement is operational and there were no procurement complaints Mechanism. is overseen by the complaint mechanism. In 2015 Independent Review a comprehensive procurement Board. mechanism has been developed and fully functional. PI-20 Effectiveness of internal A A controls for non-salary expenditure. Dimension (i) - Effectiveness A A Comprehensive No change of expenditure commitment expenditure controls. commitment controls are in place. Dimension (ii) - A A Internal control rules No change Comprehensiveness, and procedures consist relevance and understanding of basic set of rules of other internal control rules/ for processing and procedures. recording transactions, which are understood by those directly involved in their application. Dimension (iii) - Degree of A A Compliance with rules No change compliance with rules for is fairly high. processing and recording transactions. PI-21 Effectiveness of internal C+ C+ audit. Dimension (i) - Coverage and B B There are 48 IUAs Improvement of coverage from quality of the internal audit and IAS now covers 70% to 89% but no change in function. 10 ministries, 20 score. dzongkhags and 2 autonomous agencies representing 89% of the budgeted expenditure. Annex 4: Comparison with 2010 Assessment 157 Scores from Explanation of Indicators and Dimensions Assessment Scores in the Current Description of Change Previous Current Assessment Dimension (ii) - Frequency and C C Internal audit reports Reports issued to management distribution of reports. are issued to the mgt but no consolidated report with a copy to CCA, issued annually. Reports not MoF. CCA consolidates circulated to SAI and MoF. the reports received from IAUs and submits to Cabinet for information and reference. Reports are not copied to SAI are available on request. Dimension (iii) - Extent of B C Managements generally Apparent deterioration of management response to acts promptly on management response. internal audit findings. financial recoveries however there is lukewarm response when it comes to systemic corrections. PI-22. Timeliness and regularity B B of accounts reconciliation. Dimension (i) - Regularity of B B The reconciliation of the No change bank reconciliations. RGR is daily and of the BFA, trust accounts, revolving fund and current deposit accounts is monthly. The reconciliation for these accounts is completed within 3 weeks of the end of the period. Dimension (ii) - Regularity of B B The accounting for No change reconciliation and clearance suspense and advance of suspense accounts and accounts is done advances. in PEMS, thereby eliminating the need for a reconciliation of the ledger and control accounts. The suspense accounts are cleared at the end of the financial year. Most advances are cleared in a timely way. PI-23 Availability of information A C on resources received by service delivery units. 158 Bhutan: Public Financial Management Performance Report Scores from Explanation of Indicators and Dimensions Assessment Scores in the Current Description of Change Previous Current Assessment Dimension (i) - Collection and A C Information on A report compiling the processing of information to resources received by information on resources demonstrate the resources that front-line delivery units received by service delivery were actually received (in cash (in cash and in kind) is units is not prepared, unlike and kind) by the most common collected and recorded done at the time of the front-line service delivery units in accounting systems previous assessment. (focus on primary schools (PEMS) for all ministries and primary health clinics) in and dzongkhags. A relation to the overall resources report compiling the made available to the sector(s), information is not irrespective of which level of prepared. government is responsible for the operation and funding of those units. PI-24. Quality and timeliness of D+ C+ in-year budget reports. Dimension (i) - Scope of C C In 2014/15 DNB was No change. reports in terms of coverage issuing information and compatibility with budget in the form of a note estimates. sheet which included the comparison of the approved budget with the revised budget and actual expenditure of the quarter but only at the payment stage, not commitment stage. Dimension (ii) - Timeliness of D B During 2014/15, a Improvement in in-year the issue of reports. quarterly note sheet reporting. was prepared by DNB and was issued to MoF within 5 to 6 weeks from the end of the quarter. Dimension (iii) - Quality of A A The quality of The MYRB system has information. information is good as significantly improved actual data is derived information quality and from the budget and timeliness. but no change in accounting systems, score. which are updated daily. Data quality is verified according to procedures stated in the Financial Rules and Regulations. The usefulness of the reports is not undermined by inaccuracies or omissions. Annex 4: Comparison with 2010 Assessment 159 Scores from Explanation of Indicators and Dimensions Assessment Scores in the Current Description of Change Previous Current Assessment PI-25 Quality and timeliness of C+ C+ annual financial statements. Dimension (i) Completeness of B B Financial statements No change the financial statements. covering all budgetary units are prepared annually including a comparison with the budget and information on revenue, expenditure and cash balances. Dimension (ii) - Timeliness of A A The AFS is submitted No change submission of the financial for external audit within statements. 6 months of the end of the fiscal year. Dimension (iii) - Accounting C C Accounting standards No change standards used. applied to the AFS are based on the country’s legal framework, and have been applied consistently over time. PI-26 Scope, nature and follow- B+ B+ up of external audit. Dimension (i) - Scope/nature B B More than 75% of No change of audit performed (incl. total expenditure of adherence to auditing central government standards). entities was audited for FY13/1444. Dimension (ii) - Timeliness of A A Audit reports are No change submission of audit reports to submitted to legislature legislature. within 4 months of receipt of financial statements. Dimension (iii) - Evidence A A There is a clear No change of follow up on audit evidence of effective recommendations. and timely follow-up. PI-27 Legislative scrutiny of the D+ D+ annual budget law. Dimension (i) - Scope of the D C National Assembly Act Improvement in legislative legislature’s scrutiny. has been amended scrutiny of the budget to allow the budget following establishment of the to be referred to a Finance Committee. Legislative Committee. From 2015/16, a nine- member legislative Finance Committee has been constituted. The budget for 2015/16 was 44 Calculation based on number of auditable units audited during fiscal year 13/14. 160 Bhutan: Public Financial Management Performance Report Scores from Explanation of Indicators and Dimensions Assessment Scores in the Current Description of Change Previous Current Assessment the first budget to be referred to the Committee for review. Legislative review of the budget for 2014/15 was limited, but included review of expenditure and revenue. Dimension (ii) - Extent to which C B Simple procedures Improvement in legislative the legislature’s procedures are exist for legislature’s procedures for scrutiny. well established and respected. budget review and are respected. Dimension (iii) - Adequacy D D For 2015/16, the There is progress from the past of time for the legislature budget was presented when there was no Finance to provide a response to before the National Committee, but no change in budget proposals both the Assembly on May 26, score as the time allowed is detailed estimates and, where 2015 and referred to only a few days. applicable, for proposals on the Finance Committee. macro-fiscal aggregates earlier The National Assembly in the budget preparation cycle discussed the budget (time allowed in practice for all and the report of the stages combined). Finance Committee on June 8-9, 2015 and adopted the budget on June 9, 2015. The Finance Committee had less than a month to review the budget document. Dimension (iv) - Rules for in- A A Clear rules exist No change year amendments to the budget for in-year budget without ex-ante approval by the adjustments by the legislature. executive, set strict limits on extent and nature of amendments and are always respected. PI-28 Legislative scrutiny of B+ C+ external audit reports. Dimension (i) - Timeliness of A B Audit reports were Not much change since the examination of audit reports reviewed within last assessment, which was by the legislature (for reports 4 months in two of the made on one year’s experience received within the last three last three years and only. years). within 6 months in one of the years. Dimension (ii) - Extent of B C In-depth hearings No real change, as 2010 hearings on key findings on key findings take assessment was made on undertaken by the legislature. place with responsible limited experience. officers from the Annex 4: Comparison with 2010 Assessment 161 Scores from Explanation of Indicators and Dimensions Assessment Scores in the Current Description of Change Previous Current Assessment audited entities as a routine, but cover only a few of the entities that received a qualified or adverse audit opinion. Dimension (iii) - Issuance of B A The PAC issues There is progress since the last recommended actions by the recommendations assessment. legislature and implementation on action to be by the Executive. implemented by the executive, and they are generally implemented. For example, the Parliamentary directive to impose 24% penal interest on overdue outstanding advances and recoverable amounts reflected in the audit reports has prompted action by the auditable agencies. CALCULATION OF PI-1 AND PI-2 VARIANCES AS PER 2005 FRAMEWORK Table 1: Fiscal years for assessment Year 1 = 2012-13 Year 2 = 2013-14 Year 3 = 2014-15 Table 2 Data for year = 2012-13 Functional Head Budget Actual Difference Absolute Percent Autonomous and Constitutional Bodies 3,984 5,242 1258 1258 31.6% Ministry of Home and Cultural Affairs 1,594 1,914 320 320 20.1% Ministry of Finance (excl. interest) 4,827 3,187 -1640.29 1640.29 34.0% Ministry of Foreign Affairs 524 538 14 14 2.7% Ministry of Agriculture & Forest 2,482 2,570 88 88 3.5% Ministry of Economic Affairs 1,034 774 -260 260 25.1% Ministry of Works and Human Settlement 4,506 4,665 159 159 3.5% Ministry of Information and Communication 1,239 1,325 86 86 6.9% Ministry of Health 1,565 1,799 234 234 15.0% Ministry of Education 1,088 1,312 224 224 20.6% Ministry of Labour and Human Resources 436 422 -14 14 3.2% Dzongkhags and Gewogs 9,193 10,136 943 943 10.3% Total Expenditure 32472.29 33884 1411.71 5240.29 4.3% Composition variance 32472.29 33884 5240.29 16.1% 162 Bhutan: Public Financial Management Performance Report Table 3 Data for year = 2013-14 Functional head Budget Actual Difference Absolute Percent Autonomous and Constitutional Bodies 4,421 4,458 37 37 0.8% Ministry of Home and Cultural Affairs 1,844 1,765 -79 79 4.3% Ministry of Finance (excl. interest) 6,370 5,883 -486.65 486.65 7.6% Ministry of Foreign Affairs 573 567 -6 6 1.0% Ministry of Agriculture & Forest 2,503 2,601 98 98 3.9% Ministry of Economic Affairs 1,173 702 -471 471 40.2% Ministry of Works and Human Settlement 4,384 4,027 -357 357 8.1% Ministry of Information and Communication 1,058 698 -360 360 34.0% Ministry of Health 1,424 1,444 20 20 1.4% Ministry of Education 830 867 37 37 4.5% Ministry of Labour and Human Resources 346 428 82 82 23.7% Dzongkhags and Gewogs 9,065 9,064 -1 1 0.0% Total Expenditure Deviation 33990.65 32504 -1486.65 2034.65 4.4% Composition variance 33990.65 32504 2034.65 6.0% Table 4 Data for year = 2014-15 Functional head Budget Actual Difference Absolute Percent Autonomous and Constitutional Bodies 4,430 5,024 594 594 13.4% Ministry of Home and Cultural Affairs 2,166 2,141 -25 25 1.2% Ministry of Finance (excl. interest) 7,441 4,156 -3285.37 3285.37 44.2% Ministry of Foreign Affairs 662 556 -106 106 16.0% Ministry of Agriculture & Forest 2885 2739 -146 146 5.1% Ministry of Economic Affairs 1335 794 -541 541 40.5% Ministry of Works and Human Settlement 3958 4273 315 315 8.0% Ministry of Information and Communication 541 918 377 377 69.7% Ministry of Health 1456 1526 70 70 4.8% Ministry of Education 1323 1799 476 476 36.0% Ministry of Labour and Human Resources 446 515 69 69 15.5% Dzongkhags and Gewogs 8302 10012 1710 1710 20.6% Total Expenditure Deviation 34945.37 34453 -492.37 7714.37 1.4% Composition Variance 34945.37 34453 7714.37 22.1% Table 5: Results Matrix For PI-1 For PI-2 Year Variance in excess of total Total exp. deviation Total exp. variance deviation 2012-13 4.3% 16.1% 11.8% 2013-14 4.4% 6.0% 1.6% 2014-15 1.4% 22.1% 20.7% Annex 4: Comparison with 2010 Assessment 163 Annex 5: Financial Management in Local Government in Bhutan Overview 1. The Royal Government of Bhutan operates as a unitary state with 3 tiers of government: Central government, dzongkhags, gewogs and thromdes. These are Local Governments (LG) with elected bodies to represent the interests of local communities and fulfil their aspirations and needs. The country has 47 electoral constituencies which directly elect members as representatives for the National Assembly. Each dzongkhag also elects a representative for the National Council comprising 25 members. The dzongkhags elect 20 of the 25 members and 5 eminent members are nominated by the His Majesty the King. 2. LGs have been successfully formed all over the country based on local democratic elections in 2011 and 2012. There are 20 dzongkhags, 205 gewogs and 4 thromdes Class A45. LGs are convened within thirty days of the declaration of election results and, unless dissolved sooner, continue for five years from the date of the first sitting. The election of members of the LGs is governed by the electoral laws of Bhutan. Dzongkhag thromdes are considered as a constituent of the dzongkhag and gewogs, for purposes of planning and budgeting, with the exception of the four City Corporations (Class A thromdes)2 which function as quasi corporations. Their autonomy was granted and operations governed by the Charters, Thromde Act 1999 and Municipal Act 2007. In 2012, the GNHC issued the Division of Responsibilities between Local Governments and National Government in an effort to further clarify roles and responsibilities. Legal and Institutional framework 3. The Constitution (Article 22) is dedicated to LGs and provides that power and authority shall be decentralized and devolved to elected LGs to facilitate direct participation of the people in the development and management of their own social, economic and environmental well-being. The objective is to provide democratic and accountable government for the local communities through people’s participation in decision making, implementation and delivery of services. Bhutan has LGs in each of twenty dzongkhags comprising Dzongkhags Tshogdu (DT), Gewogs Tshogde (GT) and Thromde Tshogde (TT), as depicted in. 4. Figure 1 below, which are constituted as the highest decision making bodies. These are supported by dzongkhag, gewog and thromde administrations staffed by civil servants. DT and GT are interlinked as Gup and Mangmi are members of the GT and as ex-officio members of the DT. 5. The institutional structure, responsibilities and powers of LGs are enshrined in the Constitution and the Local Government Act, 2009 (LG Act) as amended by the Local Government (Amendment) Act of Bhutan 2014, superseding all previous legislations and read with the Local Government Rules and Regulations, 2012 (LG Rules), promulgated under section 294 of the LG Act, together provide the constitutional basis, and the legal and regulatory framework for formation and development of LGs in line with the new democratic system introduced in 2008. The LG Act came into force on March 15, 2010. 6. To improve accountability and enhance participatory planning and development, LGs are answerable to the local communities. DT has the power to approve plans, programs and budget prepared by the 45 Thimpu, Phuentsholing, Samdrup and Gelephu. The other 16 Thromdes are referred to as Class B Thromdes and are under the administrative control of their respective Dzongkhags. 164 Bhutan: Public Financial Management Performance Report dzongkhag administration, receipts and payments of expenditures, and audit report of dzongkhag and can seek clarifications on any activities. Similarly GT has power to formulate five year plan, approve the gewog’s annual plan and budget, and administer the use of the fund from current account. GTs can levy and vary taxes at such rates as may be approved by Parliament. Figure 1: Institutional Framework of Local Governments in Bhutan • Dzongkhag Tshogdu is highest decision making body comprising of: – Gup and Mangmi, as two elected representatives from each Gewog – One elected representative from the Dzongkhag Thromde DZONGKHAG – One elected representative from Dzongkhag Yenlag Thromdes – The Chairperson and Deputy Chairperson are elected from among its members through a secret ballot • Thromde Tshogde is highest decision makeing body comprising of: – Not less than seven and not more than ten elected members including the Thrompon THROMDE – Thromde shall have a Dzongkhag Thromde and or Dzongkhag Yenlag Thromde – Dzongkhag Thromde, which is further categorized as Class A or Thromde and Dzongkhag Yenlag Thromde • Gewog Tshogde is the highest decision making body comprising of: GEWOG – Gup (Chairperson) and Mangmi (Deputy Chairperson) – Not less than five and not more than eight elected Tshogpas 7. RGoB follow unitary system for the financial operations under one framework for all spending agencies at all levels of government. The Government of Bhutan has a record of satisfactory financial management system. This reflects the fact that financial management system of LGs as well as all procedures are same as in central government and managed by the same pool of finance personnel. There is an established and comprehensive legal framework governing its budget system. Legal frameworks emanate from the Constitution, Public Finance Act 2007 and FRR 2001 and clearly define and establish the roles and responsibilities of different ministries, autonomous agencies and LGs. 8. The parent administrative ministry for overall decentralization policies and frameworks is the Ministry of Home and Cultural Affairs. The Department of Local Governance (DLG) established within the Ministry in 2009 is the focal agency responsible for supporting LGs and has been vested with the responsibilities of support to LGs in planning, monitoring and evaluation, capacity building, maintaining information database of LGs, conducting assessments, and research and analysis. Additionally, the Local Development Division of GNHC is in charge of collaboration on LGs FYPs and annual planning processes. The Department of National Budget and the Department of Public Accounts under the Ministry of Finance are the agencies responsible for inter-governmental fiscal transfers to local governments and monitoring expenditures. 9. RGoB issued the Thromde Finance Policy in 2012 to establish the financial management practices in thromdes and “empowers the thromdes to levy taxes and duties in accordance with procedures and subject to limitations as may be provided for by the Parliament to provide essential services, promote public participation in decision making and to manage the resources and growth of the thromde in a sustainable manner for the general wellbeing of the residents of the thromde”. The Annex 5: Financial Management in Local Government in Bhutan 165 Finance Policy is applicable to Class A thromdes (as Class B thromdes are under the administrative control of the zodngkhags). Decentralization and Autonomy of Local Governments 10. Chapter 15 of the LG Act, 2009 grants financial autonomy to LGs to (a) levy, collect and appropriate taxes, fees, tolls, duties and fines in accordance with such procedures and subject to limitations as may be provided for by law; and (b) own assets and incur liabilities by borrowing on their own account. However, in other sections of the Act, the authority to levy taxes has been limited to only gewogs and thromdes. The Constitution (Article 22) guarantees that the LGs would be supported by the Government in the development of administrative, technical and managerial capacities and structures which are responsive, transparent, and accountable. For this purpose, an entitlement framework has been provided for the LGs in the LG Act. However, most of these remain “entitlements” only as depicted in Table 3 below. Table 3: Entitlement Framework for Local Governments in Bhutan and actual practices The Legal/Entitlement Framework In actual practice Related Provision in the Local Government Act of Bhutan, 2009 Dzongkhags Gewogs Thromdes (section mentioned in brackets) zz LGs shall, subject to such zzYes, in the form of building, land, equipment zzYes Can be limitations as may be provided for etc. and these are recorded in their disposed off by law, be entitled to own individual asset registers. Assets can only subject to policies assets ….. (s. 219) be transferred/sold subject to rules framed of the government by the government. zzLGs shall be entitled to levy, zzNo own revenue zzYes, taxes levied zzYes (land tax, collect and appropriate taxes, on land, building, urban house tax, fees, tolls, duties and fines in grazing, cattle, etc. under development accordance with such procedure at rates approved fees, parking fees, and subject to limitations as may by Parliament, property transfer be provided for by law (s. 216) though amounts fee, etc). zzLGs shall be allocated a raised are very less zzTaxes levied are proportion of the national zzTaxes levied are retained. revenue to ensure self-reliance retained. and sustenance. To this end Local Governments shall receive annual grants from the Royal Government for undertaking plan programmes, activities, and managing and maintaining existing service infrastructures and delivery of services (s. 218). zzLGs shall have the power to zzSource of funds zzSource of funds zzSpending is spend funds generated from their are Annual Capital are Annual Capital subject to LG Act, local taxes, fees and fines, and Grants (ACG) and Grants and Gewog FRR, Thromde from funds allocated by the Royal spending is subject Development Fund Finance Policy Government (s. 220) - this will be to Annual Capital and spending is 2012 and Public subject to compliance with Public Grant Guidelines subject to Annual Finance Act, 2007. Finance Act. and Financial and Capital Grant Procurement Rules. Guidelines, 166 Bhutan: Public Financial Management Performance Report The Legal/Entitlement Framework In actual practice Related Provision in the Local Government Act of Bhutan, 2009 Dzongkhags Gewogs Thromdes (section mentioned in brackets) zz LGs also prepare 5-year plans, The tied portion of the and Procurement zzDiscretion in the annual plans and budgets within ACG (80%) are used Rules and Gewog use of own revenue the ceiling provided by the for activities planned Development Grant and approved Ministry of Finance. and prioritized by the Guidelines. government capital LG; The untied portion zzDiscretion in grants Financial. is used for activities the use of funds over and above the is available plan but decided for the Gewog by the LG based on Development eligible activities. Grant up to Nu. 2 million as per their priorities. zzOfficialsof various sectors and zzOnly Elementary zzOnly Clerk zzOnly muster roll agencies of the Government Support Personnel and care taker workers appointed serving within the jurisdiction of and General appointed by the by Thromde. Rest a LG shall be administratively Service Carder Gewog. Rest all are all appointed by accountable to the head of the LG recruited by the appointed by the RCSC. and technically to the concerned Dzongkhag. Rest RCSC. sector or agency (s. 204). all appointed by zzSupported the RCSC. by extension zzSupported representatives by sector of the sector representatives representatives in from the central the Dzongkhag. line ministries and autonomous agencies. zzLGs are entitled to incur liabilities zzNo borrowing done so far. by borrowing on their own account, subject to limitations. Source:  Compiled from the Local Government Act and information received from Department of Local Government and Thimpu Thromde. 11. There have been significant developments within the area of fiscal decentralization and RGoB has introduced many initiatives with support from its development partners. The key initiatives are: a formula-based annual grant system based on Annual Grant Guidelines for Local Governments (Dongkhags and Gewogs (2010); Thromde Finance Policy (2012); the Local Development Planning Manual for Dzongkhags and Gewogs (2010); and Division of Responsibilities between Local Governments and National Government (2012). The flow of funds is guided by the rules and regulations in the fund release guidelines. The allocations are needs-based with inclusion of criteria such as size of population, size of the territory and level of poverty. In the 11th FYP, the current poverty criterion is replaced by a multi-dimensional poverty index and a transportation cost index has been included. 12. In the annual national budget, allocations are made directly to the LGs and also in the central ministries for the purposes of implementing on behalf of the LGs (e.g. Education). Annex 5: Financial Management in Local Government in Bhutan 167 Table 4: Budget allocation for Local Governments 2015/16 Budget 2014/15 Budget Particulars Capital Current Total Capital Current Total RGoB Expenditure Outlay 23476.845 23871.321 47348.166 15,202.327 21,895.682 21,895.682 Allocation for Dzongkhags 3271.478 6145.990 9417.468 1,899.540 5,315.878 7,215.418 Allocation for Gewogs 1884.240 261.909 2146.149 895.817 190.650 1,086.467 Total Allocation 5155.718 6407.899 11563.617 2,795.357 5,506.528 8,301.885 As percent of RGoB outlay 22% 27% 24% 18% 25% 38% Allocation for Thromdes 1383.023 431.260 617.561 1,048.821 Allocation to Central 3854.969 – 3854.969 1327.630 1010.550 2338.180 Agencies Source: Annual Budget Reports and DNB. For the financial year 2015/16, the combined budget estimates of all activities implemented by the dzongkhags and gewogs is Nu. 11563.617 million (up from Nu. 6,928.205 million in 2009/10 at the time of first PEFA assessment). This constitutes about 24% (26% in 2009/10) of the total RGoB expenditure outlay. Of the total estimated amount, 81% will be implemented by dzongkhags and 19% by gewogs. If allocations for dzongkhags and gewogs in the budgets of central agencies and thromdes are included, the share of LGs in the budget would be 35%. 13. Financial Rules & Regulations, 2001 require that all collection of national revenues and taxes are controlled and deposited into one central account from which the allocations are made for expenditures including for LGs. Gewogs and thromdes are, however, authorized to retain rural and urban taxes only46. Planning and Budgeting and Funds 14. RGoB’s Five Year Plans (FYP) are developed by the Gross National Happiness Commission (GNHC) in consultation with LGs. A system of participatory development was introduced in the 9th FYP based on gewog-led planning i. e. the LGs formulated their own FYPs based on priorities identified by the communities at the gewog level. Devolution of resources and decision making powers to the local level was the key feature in 10th FYP and is supported by the highest political commitment. As espoused in the LG Act, LG bodies have autonomy of planning, regulations and raising taxes as per the rules in force within the existing framework of FYP programs and budgetary ceilings. Planning is guided by the Local Development Planning Manual (2010). In the recent past, there is increased decentralization of financial powers and responsibilities to the lower level of government, which is evidenced by the increase in LG expenditure as a proportion of total government expenditure. 15. Dzongkhags and gewogs do not have substantial revenue resources of their own and prepare budget proposals for central funding and submit the same to the Ministry of Finance, RGoB. Expenditure budget estimates are prepared based on the FYP programs and budget ceilings issued by the Ministry of Finance through the annual Budget Call Notification. The DT is the final decision making body in the dzongkhag and annual work plans and budgets of each dzongkhag are submitted to fer taxes 46 Rural taxes comprise land, building, cattle and grazing taxes while urban taxes comprise land and property taxes, property trans­ and betterment taxes. 168 Bhutan: Public Financial Management Performance Report DT for endorsement. Similarly, in case of gewogs, the annual plan and budget for central funding is reviewed and endorsed by the GT. Once the annual work plan and budget are reviewed and endorsed by GT, they are submitted to the DT for endorsement and further submission to DNB in Ministry of Finance, which is responsible for the preparation of national budget. Given the high level of dependence on central funding, the planning and budgeting procedures followed are similar to those of other budgetary agencies. Detailed provisions for approval of budget are provided in the LG Act and RGoB has prescribed formats to be used for this purpose. 16. The City Corporations finance their annual programs with their own revenue and subsidy grant from Government especially for capital investments. They prepare the annual budgets which incorporate own source revenues and calculate a demand for grant from the government equal to the difference between the expenditure budget and revenue. The work plan and budget estimates are endorsed by the Thromde Tshogde (City Council). 17. Gewogs have two principal funding sources, namely funding from central government and retained rural taxes. Central funding is in the form of Annual Capital Grants (ACG) and Gewog Development Grant (GDG)47. zz The ACGs are a share of the national budget based on a Resource Allocation Formula. The current allocation formula is based on population (35% weight); area (10% weight); Multidimensional Poverty Index (45%); and Transport Cost Index (10% weight). The latter two were added in the 11th FYP. These form the basis for the determination of the annual budget ceilings. 80% of the ACG is tied to the 11th FYP and the balance 20% can be used by LGs more flexibly for implementing programs and activities over and above the FYP. The tied portion of the ACG (80%) is used for activities planned and prioritized by the LG. The untied portion is used for activities over and above the plan but decided by the LG based on eligible activities. The resources are divided between dzongkhags and gewogs in the ratio of 60:40, reflecting the estimated division of functional assignments between the two tiers of LG and based on population, poverty incidence and size of territory. A list of eligible and ineligible expenditure that can be financed through ACGs has been provided in the guidelines. zz In addition to the ACG, each Gewog Development Grants (GDG) of Nu. 2 million per annum to generate income and employment and for disaster relief activities. The GDGs are part of the national budget under a separate budget head and the activities to be carried out are created in the MYRB. Construction of farm roads, water and irrigation schemes and construction and maintenance of religious buildings are the common uses of the GDG. 18. Own retained revenues as arising from rural taxes is another resource to finance the gewog’s expenditure. LG taxes are imposed on houses, cattle and land. Such taxes are collected based on the records of number of houses, cattle and land as registered in each egwog. The quantum of retained income from rural taxes at gewog levels is very small and constitutes just 1% of total LG financing and typically in the range of Nu. 20-30,000. The retained taxes are used by the gewogs to meet expenditures on maintenance of gewog infrastructures and approved by the GT. The LG Act, 2009 mandates that a detailed plan for the use of such funds be prepared and approved by the GT, along with a work plan for the implementation of the activities. 47 Administered through the Annual Grants Guidelines for Local Governments and Guidelines for Implementation of the Gewog Development Grant. Annex 5: Financial Management in Local Government in Bhutan 169 Budget Execution 19. Budget execution is limited to implementation of the programs for which there are budget appropriations reflected in the Budget and Appropriation Act. The budget is prepared line item-wise for each dzongkhag, gewog and thromde showing the details of activities with appropriations. The provisions regarding the execution of public works and procurement of services are elaborated in the Procurement Rules and Regulations and the Financial Rules and Regulations. LGs are expressly prohibited by the LG Act from exceeding budgetary ceilings or allowing a bank to be in overdraft and other acts specified in the PFA. 20. In dzongkhags, the Dzongdag - the Dzongkhag’s Chief Executive Officer (CEO) - together with Sector Heads are responsible for execution and implementation of the annual budget. The DT monitors and evaluates implementation of activities. In gewogs, gups and gewog functionaries implement the programs. GT monitors and ensures that implementation of programs is per the framework provided by the Government. The Executive Secretaries and CEOs in thromdes are entrusted and made responsible for execution and implementation of the programs. The Thromde Tshogde (City Council) ensures that implementation is per agreed plans. Dzongkhags and gewogs follow the government budget execution systems which are also followed by Class A Thromdes so far as the government grants are concerned. 21. In the dzongkhags the works are executed either through contractors or departmentally depending upon the capacity and nature of the work. In the gewogs, works are executed through participation of the beneficiaries in case of maintenance works and through contractors for major investment works. Preparation of estimates, technical sanctions, maintenance of measurement books, issuing the completion reports and supervision of works for quality control are done through an Engineering Cell in dzongkhags for all the works both in dzongkhags and gewogs. Engineers are assigned with the responsibility for work inspection. Each engineer cannot be assigned more than 5 works in a year to ensure quality. Thromdes execute the works either through contractors or departmentally. They have their own set of engineers. 22. The procedure for fund releases is well established: fund flows to LGs follow the same processes as for line ministries of RGoB. The release mechanism for capital expenditures has been simplified and entails submitting a request to Department of Public Accounts, MoF indicating the amount and readiness for implementation of work. All releases are made electronically through the prevalent method of Letters of Credit (LC). The recurrent budgets are released quarterly for dzongkhags and half yearly for gewogs subject to timely submission of monthly accounts. Budget results and the percentage differences between the budget estimates and actual expenditure figures for aggregate expenditures excluding debt service payments, and donor funded project expenditure for a small sample of Dzongkhags and Gewogs provided in the tables below, show substantial deviations. Budget and Actual Expenditures (in Nu. million) 2014/15 2013/14 Unit Expenditure Expenditure Budget Expenditure Budget Expenditure out-turn out-turn Dzongkhags 9041.748 8733.298 (-) 3.4% 8102.333 7648.345 (-) 5.6% Gewogs 1342.873 1278.460 (-) 4.8% 1461.841 1415.833 (-) 3.1% Total for RGoB 44523.458 39425.329 (-) 11.5% 41362.907 37757.428 (-) 8.7% Source: Annual Financial Statements. 170 Bhutan: Public Financial Management Performance Report Procurement 23. For all RGoB funds, LGs are required to follow the Procurement Rules & Regulations, 2009 (PRR) issued under the Public Finance Act, as RGoB has not prescribed separate procurement rules for LGs and the PRR applies to all government agencies. The PRR provide threshold limits for each method of procurement and define the constitution of the Tender Committees of the dzongkhags and gewogs. The procurement processes are manual and not interfaced with the computerized budgeting and accounting systems. These weaknesses apply to procurement across RGoB and are not limited to LGs only. Also there is no requirement to prepare procurement plans and there are no commitment controls for checking budget availability before solicitation of tenders. 24. The PRR provide that any work with estimated value of up to Nu. 1.5 million (revised from Nu. 0.5 million since the previous PEFA) can be awarded to the local community provided it is endorsed by GT. The PRR also provide for the delegation of procurement at the LG level. Further, in case of remote areas where there are no potential bidders after open competition, the PRR allow that the work can be directly awarded to a single contractor provided the estimated value of work is less than Nu. 3 million and the quoted/negotiated amount is within the estimate. Accounting 25. The Public Finance Act 2007 mandates that all budgetary bodies shall base the accounting records on the accounting standards prescribed by the Ministry of Finance and these apply also to the dzongkhags and gewogs. Detailed accounting rules are elaborated in FRR 2001. Accordingly, accounting is done on PEMS as for all budgetary bodies. 26. The responsibility of maintenance and custody of books and records in dzongkhags is entrusted to the Administrative and Finance Division. In gewogs, gup and gewog accountants are responsible for the accounting records of the central funds; and gup and gewog clerks are responsible for the Current Account (Dzongkhags and Gewog Charthrims). Key books/records are generally maintained in both dzongkhags and gewogs. In dzongkhags, accounting records are prepared by the designated accountant and countersigned by the Accounts Officer and Dzongrab (Drawing and Disbursing Officer). 27. For the central funds, gewog accountant prepares the accounting record, which is countersigned by the gup, CEO of the gewog. This also includes any donor funds coming to LG through the budget. The gewog clerk prepares and maintains the accounting records for Current Account, which is countersigned by the gup. The dzongkhag’s Finance Officer also initially guides and monitors the gewog accountants on management of these financial affairs in gewogs. Internal Controls and Financial Reporting 28. Under the present circumstances where the LGs remain wholly dependent upon the central government for their funding, accountability arrangements are designed primarily to provide information on the use of funds provided by the central government so the LGs follow the same system as applicable to budgetary bodies. FRR-2001 lay out transactional control on all government receipts and payments procedures, which apply to all dzongkhags and gewogs. 29. LGs have service delivery standards for payment of bills i.e. within 30 days. Dzongkhags and gewogs have an internal control system for the bill payment process. They have a Bill Register in which all Annex 5: Financial Management in Local Government in Bhutan 171 bills received are entered and dated, to whom the bills are marked for processing the payment, and the date the bills are cleared and paid. The payment date can also be verified from the Cheque Book Register which shows when the cheque is written and also from the voucher details which shows date of voucher, cheque number, amount, date etc. 30. As per Finance and Accounting Manual of FRR 2001, LGs submit monthly accounts on receipt, utilization and deposit of funds in respect of each separate bank account allotted to the parent ministry within 20 days after the completion of the month with a copy to DPA. Each LG institution is required to forward monthly receipt and payment statements produced from PEMS for the funds received from central government for expenditures for programs approved in the budget. In case of dzongkhags, a copy of the expenditure statements pertaining to individual sectors is also sent to the PPDs of the corresponding sector headquarters. Reporting is timely due to the computerization both in dzongkhags and gewogs. Gewog reporting is monitored by the dzongkhags. The financial reporting of the LGs is for each bank account (LC/PLC) managed by the dzongkhags and gewogs. The reports of expenditures of the current account of gewogs are submitted to GTs with a copy to dzongkhags. These reports are not required to be submitted to DPA and are not incorporated in the AFS of the Government (however, balances in these accounts are disclosed in the AFS). 31. LGs do not prepare or publish annual consolidated financial statements. Reports from PEMS are forwarded to Ministry of Finance on a monthly basis and provided for external audit. Expenditures incurred at the LG level for the central government funds are incorporated into the AFS of RGoB. However, progress of implementation along with financial progress of dzongkhags and gewogs are reported to DT and GT respectively. 32. All donor funds for LGs are routed through their budgets and expenditures are reported together in the monthly accounts of the LGs. The accounting treatment for the donor funds is the same except that it is recorded under different Financing Item Code (FIC) to track the source of funds and is applicable to all levels of government. The funds from RGoB sources received from central government are coded under a separate FIC. Internal Audit 33. The Public Finance Act 2007, Internal Audit Charter and Code of Ethics and Internal Audit Manual govern the conduct of internal audit in RGoB. In June 2000, RGoB established Internal Audit Units (IAUs) for the first time in several ministries with a total of 17 staff selected from various disciplines within the civil service and the Royal Audit Authority (RAA). The coverage of internal audit was progressively extended to the LGs. Currently, internal audit of all the dzongkhags and gewogs is managed by the Internal Audit Section of Ministry of Home and Cultural Affairs (MHCA). Thimphu City Corporation has an internal auditor in place who carries out its internal audit. There is ample scope for strengthening the internal audit function in the country particularly in terms of quality, nature of audits carried out and response on internal audit observations. External Audit 34. The Royal Audit Authority (RAA) is the external independent auditor of the LGs. The RAA presently undertakes an audit of LGs (dzongkhags and gewogs) once every two years. The audits of LGs are conducted in accordance with Generally Accepted Auditing Standards and in conformity with the General Auditing Rules and Regulations (GARR) 2009. These standards require that the RAA plans 172 Bhutan: Public Financial Management Performance Report and performs the audit to obtain reasonable assurance about whether financial statements are free from material misstatements. An audit includes determining on a test basis, evidence supporting the amounts and disclosures in the financial statements. Audits conducted by RAA for LGs are transaction based covering 100% of transactions. Financial statements of the LGs are prepared and certified by an Audit Team which is included in the audit reports. Audit of LGs has been completed up to FY 2014/15 . The audit report is available in public domain for FY 2013/14. 35. Of the total audit irregularities of Nu. 233.147 million reported in the Annual Audit Report of 2014 (Nu. 932.177 million reported in the Annual Audit Report, 2008), irregularities at dzongkhags and gewogs amounted to Nu. 29. 913 million (Nu. 98.648 million in the 2008 report at the time of the previous PEFA) which is about 13% of total expenditure. 36. A system of resolution of audit observations has been instituted. The Finance Personnel are entrusted with the responsibility to respond to the audit report. Meetings are also held between dzongkhag officials and RAA Audit Team to discuss and resolve the memos. Individual officers responsible for lapses are held accountable and are dealt with. In extreme cases, litigation ensues. 37. Audit irregularities at dzongkhags and gewogs are summarized in Table 5. Fraud, corruption and embezzlement accounted for the largest amount of irregularities. During 2013/14, recoveries from Dzongkhags and Gewogs by the RAA were Nu. 31.765 million representing about 27% of the total recoveries made by the RAA that year. Table 5: Nature-wise audit observations at dzongkhags and gewogs in 2013/14  Nu. million Nature of Audit Observation Dzongkhags Gewogs 1. Fraud, Corruption & Embezzlement 14.912 0.121 1.1 Forgery & tampering of documents - - 1.2 Malpractices & abuses 2.206 0.121 1.3 Misappropriation 1.411 - 1.4 Intentional double bookings/irregular/un-authorized payments 0.536 - 1.5 Non/short accounting 10.759 - 2. Mismanagement 0.899 0.106 2.1 Mismanagement of funds - - 2.2 Mismanagement of properties - - 2.3 Mismanagement of human resources - - 2.4 Mismanagement of revenue and taxes 0.899 0.106 3. Violation of laws & rules 3.267 0.200 3.1 Violation of service rules 0.185 - 3.2 Violation of budgetary norms 0.572 - 3.3 Violation of accounting norms 0.083 0.200 3.4 Violation of procurement norms 2.427 - 3.5 Violation of Acts, Directives and Policies - - 4. Shortfalls, lapses and deficiencies 8.509 1.899 4.1 Over/inadmissible/irregular/double payments 5.043 1.732 4.2 Non maintenance of records - - 4.3 Improper maintenance of records - - 4.4 Non/improper recording in books - - Annex 5: Financial Management in Local Government in Bhutan 173 Nature of Audit Observation Dzongkhags Gewogs 4.5 Non-reconciliation/certification of balances 0.846 - 4.6 Irregularities in advances 1.426 0.167 4.7 Irregularities in recoveries - - 4.8 Irregularities in disposal & auction 0.725 - 4.9 Irregularities in property management - - 4.10 Non/short deductions 0.290 - 4.11 Non cooperation - - 4.12 Shortfalls & uneconomical operations 0.179 - 4.13 Missing documents/receipts - - Total 27.587 2.326 Source: RAA Annual Report 2014. Public participation 38. LG annual plans are decided through local community bodies and institutions (DT and GT). The DT and GT meeting are most important mechanism through which people can exert influence and also carry out the oversight functions and participate in planning. At the dzongkhag level, the DT is the final authority and is responsible for discharging its functions and is accountable to the citizens, and similarly GT at the gewog level. 39. LG Act mandates that the DT meeting should be conducted at least once in every six months. However, the Chairman may convene, if required, additional meetings of DT. Also, GT and thromde tshogde meetings should be held at regular sessions at least three times a year. All sessions of LGs are open to public to participate as audience except for closed door sessions. The LG Act 2009 also requires that all LGs have public notice boards visibly and prominently displayed at the entrance of the office of the LG. Agenda for the next session, annual budget, annual work plan and call for tenders and other relevant information must be displayed on public notice boards. Public access to fiscal information 40. The LG Act requires the LGs to publish their FYPs, annual plans and budget, publicly announce the dates of their sessions and announce the call for tenders, award of contracts, value of contracts, and projects under implementation through public media and publication of an annual report with prescribed contents. All dzongkhags have their websites, though information disclosed varies. Fiscal information is available as follows: zz The FYPs that provide the outlay for the LGs. zz The Annual Budget Report providing the annual dzongkhag and gewog budget allocation. zz The Annual Financial Statement provides the major items of financial statements for dzongkhags and gewogs. zz The Royal Audit Authority conducts audits of the dzongkhags and gewogs and key audit observations are contained in the Annual Audit Reports: – Information on resource allocations to primary service units at the dzongkhag and gewog levels is publicly available through the annual “Budget Appropriations for Fiscal Year” document 174 Bhutan: Public Financial Management Performance Report released by the Department of National Budget. The report is released subsequent to approval annual Parliamentary session. of the bi­ zz In-year Budget Execution Reports, but these are not compiled and published. zz Data on contract awards at the dzongkhags and gewogs are available in some dzongkhags. zz Annual reports are not available publicly. Staffing 41. In Bhutan, all appointments to all public services covering all organizations, institutions and agencies of the RGoB (except those specified) are governed by the rules and regulations framed and administered by the Royal Civil Service Commission (RCSC) which is constituted under a Royal Charter. The Bhutan Civil Service Rules and Regulations, 2012 provide that “the RCSC shall be the central personnel agency for recruitment and selection of a candidate in consultation with the employing Agency, and for approving the appointment against a position”. The rules further provide that thromdes can recruit, select and appoint non-professional positions in supervisory and support posts and dzongkhags and thromdes can recruit, select and appoint operational staff only. 42. The LG Act provides that officials of various sectors and agencies of the Government serving within the jurisdiction of a LG shall be administratively accountable to the head of the LG and technically to the concerned sector or agency. 43. The Dzongkhag Tshogdu is supported by a Tshogdrung, who is a civil servant. The Dzongdag is CEO and together with his team representing the technical sectors of line ministries are responsible for implementation and administration of dzongkhag plans. He is accountable to LG bodies (DT). 44. The Gewog Tshogde is supported by the Gewog Administrative Officer, who is a civil servant. Gewog Administrative Officer acts as the secretary to the GT (LG Act). Not all the gewogs presently have Gewog Administrative Officers (GAO) (193 being placed at present out of 205). The remaining vacancies are due to resignations and administrative issues resulting in termination). Gewogs also have accountants and there are some vacancies in these positions as well. 45. A Thromde Tshogde (City Corporation) is supported by the Executive Secretary, who is a civil servant. The Executive Secretary acts as the secretary to the Thromde Tshogde. All the staff in thromdes are civil servants and responsible and accountable to Thromde Tshogde. The Thromde Tshogde constitutes of Thrompon (elect) as the chairperson and members representing different constituencies in the thromde. Development partner support to decentralization in Bhutan 46. In 2008, RGoB launched the Local Governance Support Program (LGSP) with development partners, which provided a joint framework to support the realization of the good governance goals and objectives of the 10th Five Year Plan, with a focus on the decentralization aspects. The joint program was directly supported by Denmark, Austria, SDC, UNCDF and UNDP while JICA, EU and other development partners provided indirect support as part of their overall contribution to RGoB’s good governance and local government reforms. The program covered a period of five years from July 2008 to June 2013 and had a total budget of USD 17.58 million. The primary objectives of the LGSP included strengthening of local democratic governance; improving the efficiency and effectiveness Annex 5: Financial Management in Local Government in Bhutan 175 of the local governments in delivering their services; and contributing towards achieving the 10th Five Year Plan goal of poverty reduction and the realization of the MDG’s. Two major components of LGSP include the Gewog Annual Capital Grant Facility and Capacity Development of local governments. 47. The next phase of LGSP has been launched in 2013 for the years through to 2018 coinciding with the 11th FYP. The program has three major outcomes or ‘components’: (a) inclusive and equitable socio-economic development at local level; (b) conservation and sustainable use of environment at local level; and (c) strengthening good governance at the local level. The program is supported by Denmark, Switzerland, EU, UNDP and UNCDF. To sum up 48. There were significant developments in decentralization in Bhutan during the 10th FYP and RGoB took many initiatives. The introduction of the Resource Allocation Formula (since 2008/09) for budgeting of dzongkhags and gewogs has provided more clarity in terms of resource allocation and has facilitated local level planning. Use of MYRB for planning and PEMS for budget control and execution has resulted in greater efficiency and institutionalized a transparent mechanism and further helped by deployment of accountants to gewogs. Issue of LG Rules and other guidelines also brought clarity to the roles of the LGS. 49. However, weak human capacity in terms of numbers and skills, the inadequate resource base of own-source revenue of the LGs and bureaucratic administrative systems hampering efficiency and effectiveness are issues that need to be addressed by RGoB. The legal and institutional base for own-source revenue characterized by outdated rates and cumbersome collection procedures are areas of potential reforms (there are indications that collection cost of rural taxes by gewogs are more than the revenue). Capacity building is another identified need. 50. An elaborate entitlement framework has been prescribed for LG, but more needs to be done. LGs have limited own resources; most of the central funds are tied though there has been some relaxation on this; movable and immovable property are registered in the name of the LGs, but they have to follow country rules for disposal and they cannot retain the sales proceeds; and LGs cannot select and appoint officers as these have to be done by the RCSC. 176 Bhutan: Public Financial Management Performance Report Annex 6: Calculation of PI-1, PI-2 and PI-3 Variances as per 2016 Framework Administrative FY 2012/13 FY 2013/14 FY 2014/15 classification (ministry/ department/agency) Adjusted Actual Absolute Adjusted Actual Absolute Adjusted Actual Absolute Budget Budget Budget Budget Expend. Variance Budget Expend. Variance Budget Expend. Variance 1 2 3 4 5 6 7 8 9 10 11 12 Autonomous and 3,984 4,464 5,243 779 4,421 4,705 4,474 231 4,430 4,992 5,024 31 Constitutional Bodies Ministry of Home and 1,594 1,786 1,914 128 1,844 1,962 1,765 197 2,166 2,442 2,141 300 Cultural Affairs Ministry of Finance (excl. 2,598 2,911 3,187 276 2,939 3,127 5,883 2,756 3,065 3,455 4,156 701 interest, contingency and lending and repayments) Ministry of Foreign Affairs 524 587 538 49 573 610 567 43 662 746 556 190 Ministry of Agriculture & 2,482 2,780 2,570 210 2,503 2,663 2,601 63 2,885 3,252 2,739 513 Forest Ministry of Economic Affairs 1,034 1,159 774 385 1,173 1,248 702 547 1,335 1,505 794 711 Ministry of Works and 4,506 5,049 4,665 384 4,384 4,666 4,027 639 3,958 4,460 4,273 187 Human Settlement Ministry of Information and 1,239 1,388 1,325 64 1,058 1,126 698 428 541 610 918 308 Communication Ministry of Health 1,565 1,754 1,799 46 1,424 1,515 1,444 71 1,456 1,641 1,526 115 Ministry of Education 1,088 1,219 1,312 93 830 883 867 16 1,323 1,491 1,799 307 Ministry of Labour and 436 488 422 66 346 368 428 60 446 503 515 12 Human Resources Central ministries 17,068 19,122 18,507 0 17,072 18,168 18,981 0 17,839 20,104 19,417 0 Dzongkhags and Gewogs 9,193 10,299 10,136 163 9,065 9,647 9,064 582 8,302 9,356 10,012 656 Total expenditure excluding 30,245 33,885 33,885 2,643 30,558 32,519 32,519 5,631 30,571 34,452 34,452 4,031 interest and contingency PI-2 (i) % variance 7.8% 17.3% 11.7% Add back contingency 2,229 - 3,431 - 4,376 - Add back interest 2041 2642 2125 2090 2151 2025 Total expenditure 34515 36528 36114 34610 37098 36477 PI-1 actual/budget 105.8% 95.8% 98.3% Annex 6: Calculation of PI-1, PI-2 and PI-3 Variances as per 2016 Framework 177 178 Calculation of PI-2 (ii) FY 2012-13 FY 2013-14 FY 2014-15 Adj'd Absolute Adj'd Absolute Adj'd Absolute Budget Actual Budget Actual Budget Actual Budget Variance Budget Variance Budget Variance Recurrent expenditure- 7,862 8,895 7,890 1,004 8,247 8,733 8,208 525 8,359 9,318 9,976 659 personnel emoluments Recurrent expenditure- 4,797 5,427 5,173 254 5,173 5,478 5,193 285 5,575 6,214 5,844 371 goods and services Recurrent expenditure- 1,394 1,577 1,336 241 1,362 1,442 1,390 52 1,698 1,893 1,942 49 transfers Recurrent expenditure- 857 970 1,055 85 952 1,008 1,059 51 1,038 1,157 1,245 88 other, excl. intt. Interest 2,041 2,309 2,642 333 2,125 2,250 2,090 160 2,151 2,398 2,025 373 Total recurrent 16,951 19,178 18,097 1,917 17,859 18,911 17,940 1,073 18,821 20,979 21,032 1,540 expenditure Capital expenditure- 6,293 7,120 7,512 392 7,850 8,313 8,131 796 7,603 8,475 8,331 144 domestically financed only Donor-funded project 9,042 10,230 10,919 690 6,974 7,385 8,538 1,767 6,298 7,020 7,112 92 expenditure Total allocated 32,286 36,528 36,528 2,999 32,683 34,609 34,609 3,636 32,722 36,474 36,474 1,775 expenditure Bhutan: Public Financial Management Performance Report % variance 8.1% 10.5% 4.9% PI-2 (ii) Rating is B, as variance was < 10% in 2 years out of 3. PI-2 (iii) Expenditure 0 0 0 charged to contingency vote % of total expenditure 0% 0% 0% PI-2 (iii) rating is A, as the expenditure charged to the contingency vote was less than 3% of the original budget. PI-3 Calculation 2012/13 2013/14 2014/15 GFS code Adjusted Absolute Adjusted Absolute Revised Adjusted Absolute Estimates Actual Estimates Actual Estimates Budget Variance Budget Variance Estimates Budget Variance 111 Direct Tax 9,387.26 9,390.04 9,047.55 342.49 10,342.02 11,132.04 12,964.82 1,832.78 11,793.93 11,822.93 13,322.56 1,499.64 114 Indirect Tax 5,510.81 5,688.80 5,311.38 377.42 4,551.58 4,721.04 5,705.89 984.85 5,361.18 5,878.66 6,056.05 177.39 115 Customs Duty 363.099 305.535 349.96 44.42 406.671 312.788 509.81 197.02 414.243 536.868 467.93 68.93 116 Other Indirect 21.213 18.751 20.45 1.69 24.503 16.903 30.72 13.81 20.673 20.673 23.35 2.68 Tax Revenue 142 Admin. Fees & 351.913 331.064 339.18 8.11 437.789 349.215 548.82 199.60 420.782 420.782 475.32 54.54 Charges 141 Property 5372.877 5194.34 5,178.44 15.90 5904.24 6549.25 7,401.60 852.35 6338.44 6000.11 7,159.98 1,159.87 income 144 Other Non-Tax 25.062 84.273 24.16 60.12 56.491 81.02 70.82 10.20 107.111 107.111 120.99 13.88 Revenue 131/133 Grants 10,691.24 9562.636 10,304.34 741.70 8109.513 14236.353 10,166.14 4,070.21 7360.231 11153.268 8,314.21 2,839.06 Total revenue 31,723.48 30,575.44 30,575.44 1,591.86 29,832.81 37,398.61 37,398.61 8,160.83 31,816.59 35,940.40 35,940.40 5,815.99 3.1 Actual/ 96.4% 125.4% 113.0% budget % 3.2 Rev. 5.2% 21.8% 16.2% composition variance Reconciliation with reported revenue Reported revenue 21,157.46 21,101.69 21,860.89 23,244.61 24,599.03 24,900.12 Deduct capital revenue 125.227 88.892 137.593 82.356 112.982 112.982 Add grants 10,691.24 9562.636 8109.513 14236.353 7360.231 11153.268 Revenue per GFS 31,723.47 30,575.44 29,832.81 37,398.61 31,846.28 35,940.40 141= revenue from Gov't Depts, dividends, transfer of profit and interest receipt from corporations. Annex 6: Calculation of PI-1, PI-2 and PI-3 Variances as per 2016 Framework 179 Disclosure of Quality Assurance Mechanism (To be filled in by the assessment leader) The following quality assurance arrangements have been established in the planning and preparation of the PEFA assessment report for the Bhutan, final report dated September 1, 2016. 1. Review of Concept Note and/or Terms of Reference zz Draft concept note and/or terms of reference dated August 2015 was submitted for review on August 4, 2015 to the following reviewers: 1. Mr. Sonam Tobgyel, Royal Government of Bhutan 2. Ms. Karine Olislagers and team, European Union 3. Ms. Grabner Sonja, Austrian Development Agency 4. Ms. Holy Tiana Rame, PEFA Secretariat 5. Mr. Franck Bessette, Mr. Shanker Lal, Ms. Manvinder Mamak, The World Bank Final concept note and/or terms of reference: October 14, 2015 forwarded to reviewers, if necessary, on June 24, 2016, including a table48 showing the response to all comments raised by the reviewers. 2. Review of draft report(s) zz Draft report dated June 28, 2016 was submitted for review on July 13, 2016 to the following reviewers: 1. Mr. Sonam Tobgyel, Royal Government of Bhutan 2. Mr. Shouvik Datta and team, European Union 3. Mr. Johannes Binder and team, Austrian Development Agency 4. Ms. Holy Tiana Rame, PEFA Secretariat 5. Mr. Franck Bessette, Mr. Shanker Lal and Ms. Manvinder Mamak, The World Bank 3. Review of final draft report A revised final draft assessment was forwarded to reviewers on September 2, 2016 and included a table showing the response to all comments raised by all reviewers. This form, describing the quality assurance arrangements is included in the revised draft report. 4.  48 For minor comments (e.g. typos, language) a revised version of the document with tracked changes may suffice. 180 Bhutan: Public Financial Management Performance Report World Bank/IMF and RGoB PEFA Team Members with Other Government Officials 1818 H Street NW Washington, DC 20433-USA