Report No. 32595-GH Ghana 2005 External Review of Public Financial Management (In Two Volumes) Volume I: Main Report December 2005 PREM 4 Africa Region Document of the World Bank PEFA Public Expenditure and Financial Accountability PEM Public Expenditure Management PER Public Expenditure Reviews PETS Public Expenditure Tracking Surveys PPB Public Procurement Board PRSC World Bank-financed Poverty Reduction Support Credit R.F. Road Fund SF Statutory Funds VAT Value-Added Tax Vice President: Gobind T. Nankani Country Director: Mats Karlsson Sector Director: Sudhir Shetty Sector Manager: Robert R. Blake Task Team Leader: Marcel0 R. Andrade ... 111 TABLE OF CONTENTS EXECUTIVE SUMMARY ..................................................................................................... vi . 1 INTRODUCTION .................................................................................................... 1 2. MACROECONOMIC DEVELOPMENTS............................................................... 1 A . ECONOMICPERFORMANCE ......................................................................................... 1 B. AGGREGATE FISCAL DISCIPLINE ............................................................................... 2 c. MANAGING FISCAL R I S K S ........................................................................................... 4 3. BUDGET MANAGEMENT AND THE GPRS ......................................................... 7 A . REVENUEPERFORMANCE ........................................................................................... 7 B. PUBLIC EXPENDITURE MANAGEMENT ....................................................................... 8 c. POVERTY ORIENTATION OF THE BUDGET ............................................................... 13 D. CHALLENGES FOR PUBLIC EXPENDITURE MANAGEMENT ................... 16 4 . IMPLEMENTATION OF PUBLIC FINANCIAL MANAGEMENT REFORMS 24 .. A . THE LEGAL FRAMEWORK......................................................................................... 25 OF ACCOUNTING AND TREASURY FUNCTIONS TO MDAS .... B. DECENTRALIZATION 26 C . THE BUDGET AND PUBLIC EXPENDITURE MANAGEMENT SYSTEM (BPEMS)...... 29 D . MANAGEMENT OF THE PAYROLL.............................................................................. 32 E . ACCOUNTINGFRAMEWORK ...................................................................................... 33 F . COMPREHENSIVE ACCOUNTING AND BUDGETING ................................................... 36 G . OUTPUT AND OUTCOME FOCUS................................................................................. 38 H . PUBLIC PROCUREMENT ............................................................................................. 38 1. INTERNAL AUDIT ........................................................................................................ 39 J. EXTERNAL AUDIT ....................................................................................................... 42 List o f Tables Table 2.1: Macroeconomic Developments and Prospects. 2002-2007 ...................................... 2 Table 3.1 : Ministry o f Health Expenditure. 2004 ..................................................................... 12 Table 3 -2: Distribution o f Total Discretionary Expenditure, 2002-2005 ................................. 14 Table 3.3: Poverty Related Expenditure. 2002-2004 ............................................................... 15 Table 3.4: Wage Bill in Selected African Countries ................................................................ 17 Table 3.5: Education Sector Wage Bill .................................................................................... 18 List o f Figures Figure 2.1 : Central Government Operations. 2001-2007 ........................................................... 4 Figure 2.2: Trends in External Assistance .................................................................................. 6 Figure 3.1: Trends in Tax Revenue ............................................................................................ 8 Figure 3.2: Budget Deviation Index, 2002-2004 ........................................................................ 9 Figure 3.3: Implementation o f MTPPs ..................................................................................... 16 Figure 3.4: Variance o f Donor Flows by Type o f Funding...................................................... 21 iv ACKNOWLEDGEMENTS The 2005 External Review o f Public Financial Management (ERPFM) has been carried out by several Multi-Donor Budget Support (MDBS) development partners assisting public financial management reform in Ghana. The report builds o n the outcomes o f a mission carried out from March 29 to April 14,2005. The mission benefited from taking place in the context o f a MDBS- PRSC review and overlapping with an Article I V mission conducted by the IMF. The mission involved Marcelo Andrade (Task Team Leader, AFTP4), Willem Olthof (Co-Chair - MDBS, European Commission), Carlos Cavalcanti (Co-Chair - MDBS, World Bank), Paul Walters (MDBS PFM Sector Lead, DFID), Daniel Arghiros (Governance Advisor, DFID), Roberto Tibana (PFM Advisor, MDBS), Erik Rasmussen (DANIDA), Wolfgang Weth (KfW), Daniel Boakye, Hayat Abdo (AFTP4), Smile Kwawukume (AFTPR), Evelyn Awittor, Benoit M i l l o t and Eunice Dapaah (AFTH2), Tsri Apronti (AFTPC), Gert Van Der Linde and Fred Yankey (AFTFM). Allan Gustafsson and Peter Fairman (consultants financed by World Bank) also joined the ERPFM mission. The report also benefits from the dialogue that took place during 2004 and 2005 in the context o f the joint MDBS-PRSC review missions. The 2005 ERPFM team i s grateful to the Ministry o f Finance and Economic Planning for the excellent cooperation and assistance without which this report would not have been prepared. The team also greatly benefited from meetings with the Auditor General, the Chairman o f the Public Procurement Board, the Chairman o f the Internal Audit Agency Board, the Controller and Accountant-General Department, and teams o f the Ministries o f Education and Sports, Health, and Roads Transport. The preparation o f this report was led by Marcelo Andrade (AFTP4) and involved Carlos Cavalcanti (AFTP4), Hayat Abdo (AFTP4), and Roberto Tibana (PFM Advisor, MDBS). M i k e Stevens, Peter Fairman, and Allan Gustafsson, all World Bank-financed consultants, were also actively involved in the preparation o f this report. Marta Berhane, Pierre Lenaud, Judite Fernandes (AFTP4), and Emmabel Hammond (AFC10) provided secretarial support to the team. The report was written under the supervision o f Robert Blake, Sector Manager o f AFTP4, and Mats Karlsson, Country Director for Ghana. The detailed comments provided by the peer reviewers Bill Dorotinsky (PREM Public Sector) and Nicola Smithers (Public Expenditure and Financial Accountability Secretariat) are gratefully acknowledged. V EXECUTIVE SUMMARY MAIN MESSAGES 1. Macroeconomic developments in 2004 were favourable. Despite rising o i l prices, prudent macroeconomic management enabled Ghana to break with i t s past record o f slippages in elections years. Sustained commitment to sound fiscal and monetary policies, coupled with progress on the country’s policy reform agenda, should enable strong economic growth to continue, accompanied by poverty reduction and employment creation. 2. The main messages o f the External Review are: Aggregate fiscal discipline has improved since 2002. Discretionary spending financed from the Consolidated Fund (CF) was much closer in total to the voted budget in 2004. 0 The Ghana Poverty Reduction Strategy (GPRS) i s increasingly influencing budget allocations. Domestically-financed poverty-related spending is growing as a share o f GDP and the balance between wages and other items i s improving. The Government will need to continue aligning the budget with GPRS priorities, as the latter i s updated. 0 Predictability of the budget in terms of actual spending against appropriations remains a challenge both at the level of ministries, departments and agencies (MDAs), and at the item level (economic classification). This i s a concern because uncertainty o f funding discourages spending units from making and implementing work plans, and exacts a toll in service delivery efficiency. Increasing budget predictability to MDAs will be a major challenge in the years ahead. 0 The Medium-Term Expenditure Framework (MTEF) could be made a more useful tool for strategic resource allocation and improving predictability o f external assistance. Action i s also required to reduce shortfalls and delays in cash releases, improve timeliness and accuracy o f fiscal reporting, and expand the budget preparation timetable. T o improve control over the wage bill, staffing and salary decisions need to be more fully integrated with the budget process. Currently, much o f the growth in the annual wage bill stems from both staffing and pay increases, and i s handled in contingency provisions. 0 A new regulatory framework for public financial management i s taking shape with increased Government ownership o f the reforms. Implementing the new framework, will continue to require, however, close coordination between the new regulatory bodies and Ministry o f Finance and Economic Planning (MoFEP), which must retain i t s overall stewardship function. I t will also require a greater willingness than before to hold spending ministries accountable. 3. The findings o f the External Review are intended to support the policy dialogue between the Government o f Ghana and the MDBS development partners, as they agree the details o f the 2005-2006 program o f budget support. I t i s timed to take place after the budget for the current financial year has been approved, and after preliminary accounts o f spending in the previous year have become available, yet before the Government has initiated the process o f preparing the next year’s budget. The review looks at macroeconomic developments and overall fiscal vi management, the link between the budget and the GPRS, and the Government’s efforts to strengthen public financial management. In this sense there is a continuity o f topics covered in External Reviews. At the same time the External Review also provides an opportunity for M D B S development partners to flag issues for dialogue, analysis and support in the coming year. The remainder o f this executive summary elaborates on the key findings and assessment o f the review and summarizes main recommendations. FINDINGS AND ASSESSMENT A. MACROECONOMIC DEVELOPMENTS 4. Overall, macroeconomic developments in Ghana in 2004 have been favorable, notwithstanding a significant rise in the cost o f o i l imports. This positive outcome reflects sound fundamentals, and good macroeconomic management. Economic Performance 5. In a challenging year when the Government had to contend with both a sharp external o i l price shock and the running o f national elections, macroeconomic performance has been good. Real GDP growth accelerated to 5.8 percent in 2004, inflation fell to 11.8 percent and the imports coverage o f gross international reserves rose to nearly 4 months. This commitment to prudent fiscal and monetary policies and economic and social reforms helped Ghana reach the Heavily Indebted Poor Country (HIPC) Completion Point in July, 2004, ensuring irrevocable debt relief that frees up considerable budget resources to finance the country’s priority poverty reduction efforts identified in the GPRS. 6. With continued sound macroeconomic management, the prognosis i s favourable. Real GDP growth i s projected to average about 6 percent a year over the medium term, inflation is forecasted to fall to 6 percent, gross international reserves are planned to increase to over four months o f imports coverage and external debt is expected to remain within sustainable bounds. Aggregate Fiscal Discipline 7. Aggregate fiscal discipline has improved since 2002, despite the looser than planned fiscal stance in 2004. Revenue increased by almost six percentage points, between 2002 and 2004, to more than 23 percent o f GDP. This revenue mobilization effort, supported by HIPC debt relief, allowed Government to both reduce its reliance on domestic financing o f the deficit and to increase domestically financed primary expenditure to 23 percent o f GDP in 2004, up from 17 percent in 2002. As a result, by 2004 discretionary spending financed from the Consolidated Fund (CF) was much closer to the voted budget. However, three factors in 2004 lead domestic financing to exceed i t s initial target: (i) an increase in the wage bill; (ii) the decision by Government to increase subsidies to the state-owned o i l refinery, rather than adjust domestic prices to rising global prices; and (iii) an overrun o f capital and poverty-related expenditures, linked to higher than programmed foreign financing (including from HIPC debt relief). These factors notwithstanding, the Government’s medium-term fiscal strategy i s sound. I t calls for a reduction o f the fiscal deficit to about half o f the 2004 level (3.6 percent o f GDP) and i s expected to plan for a reallocation o f expenditures to priority spending as the GPRS is updated in 2005. vii Managing Fiscal Risks 8. The fiscal outlook i s positive if present policies are maintained and the Government tackles the challenges outlined by the Review. The Government projects negative domestic financing over the medium term, leading the domestic public debt to GDP ratio to fall below 10 percent by 2006. The likelihood o f this outcome i s enhanced by the record o f prudent fiscal management, as well as three ongoing and expected reforms. First, the new petroleum sector deregulation, which began to be implemented in February, 2005, and will diminish the risk to public finances o f further large subsidies to State owned enterprises. The petroleum deregulation adds to actions already taken to reduce risks arising fkom contingent liabilities, such as the cross settlement o f debts among utilities at end-2003, and other ongoing reforms to improve the efficiency o f these enterprises. Second, the new Subvented Agencies Bill will help rationalize the operations o f these agencies and strengthen government oversight. Third, Ghana’s actions to engage the development partners, and ensure predictability o f funding from them, will strengthen the country’s revenue prospects, since these partners account today to close to one-third o f the country’s budget resources. B. MANAGEMENT BUDGET AND THE GPRS 9. There have also been improvements in public financial management in the past year, with hrther reforms to ease other structural constraints expected to lead to improved outcomes. Revenue Performance 10. The government’s revenue performance in recent years has been robust, although the strength o f revenue out-turns i s due largely to the performance o f indirect and international trade taxes. These taxes contributed largely to the increase in the tax to GDP ratio o f about 4 percentage points, rising to 22 percent o f GDP from 2002 to 2004. Over the longer term, however, trade taxes are vulnerable to fluctuations in international commodity prices, suggesting that efforts must also be directed to further strengthen mobilization o f direct tax and non-tax revenues. Also significant in achieving this outcome was the compliance by several public entities, in 2004, with the Financial Administration Act requirement to remit profits to the budget and to disclose their internally generated funds (IGFs). As stated in the GPRS, most o f the opportunities for h r t h e r revenue strengthening are linked to improved tax administration. In this context, the Government i s implementing a tax reform program with the assistance o f the IMF. Budget Execution 11. Predictability o f the budget has improved, although to a lesser extent at the MDA and economic classification levels. At the MDA and the economic classification levels, the budget outturn deviates considerably from the approved budget. M D A s in the social sectors tend to overspend and their wage bills show considerable variance relative to the budget plan. These outcomes are due largely to overruns in the wage bills for education and health sectors. As a result, spending by other MDAs, and on other recurrent spending and capital assets, falls short o f budget plans. Quasi-fiscal operations o f parastatals have also been a source o f significant degree o f budget variance, largely due to higher than anticipated subsidies to the Tema O i l Refinery (TOR). Finally, in 2004, actual total investment was much higher than programmed ex ante. Overall, while the budget has become a relatively effective instrument for ensuring ... Vlll macroeconomic stability, there is still scope to improved budget predictability at the MDA level and by economic classification. Actions on this front would help to ensure alignment o f spending with voted priorities and the provision o f services on a cost effective basis. This suggests that the operational efficiency o f budget expenditures could be an area o f focus for future Reviews. 12. Another issue o f concern is that large contingency provisions held by MoFEP, which comprise almost a “budget-within-a-budget”, detracting from budget transparency. These provisions increased from only 1 percent o f the domestically financed discretionary budget for M D A s in 2002 to 8.5 percent, in 2004 and are budgeted at 15.7 percent in 2005. MoFEP is aware o f the problem, and has indicated it will reduce contingency provisions to no more than 8 percent by 2007. Furthermore, to deal with national emergencies, the Government has indicated i t will bring into being a Contingency Fund, as provided for in the Constitution, during 2005. The Government’s approach o f separating national emergencies from financial contingencies i s correct, and this External Review recognizes that, even when the Contingencies Fund has been created, MoFEP will s t i l l need to budget for contingent liabilities o f a financial nature, and that provisioning for contingencies is normal in a finance ministry’s vote. Both the current amount and the proposed ceiling for 2007 are however s t i l l very high and MoFEP should bring the provision for contingency to an amount below the 5 percent threshold. 13. The Government has done well to better reflect GPRS priorities in the budget. Domestically-financed poverty-related spending is increasing in terms o f ratio to GDP and the proportion o f wages in this spending i s falling. W h i l e the predictability o f poverty expenditures improved over the 2002-2004 period, further progress is s t i l l needed in the coming years. For instance, the executed 2004 budget and the 2005 appropriated budget bear a reasonable correspondence to the aggregate GPRS sector shares, though the shares o f economic services and infrastructure fall short o f the targets, while social services exceed the initial target. Similarly, the Medium Term Priority Programs (MTPP) expenditure targets are closer to being met at the aggregate level, but are falling short in the infrastructure sector. Over the medium-term, poverty related expenditures are expected to continue to increase in relation to GDP. Wage Bill Management 14. Budgeting for the wage bill requires improvement, since i t i s a source o f significant budget variance and a major reason for a large contingency reserve planned for 2005. The current procedure i s to budget for the wage bill on the basis o f existing numbers and pay rates and to provide a contingency for the increases in the wage bill projected for the coming year. Increases in the wage bill during the year typically derive from two sources. The first source i s growth in public service employment, which should be consistent with existing policy, affordable within existing MTEF sector envelopes, and consistent with annual establishment decisions. In Ghana’s case, wage bill i s driven by new hiring, particularly o f teachers. The magnitude o f these increases should be known beforehand, and either approved and budgeted for or denied in the budget preparation process. 15. The second source o f increase in the wage bill results from salaries and wages being increased at the time o f negotiations with unions or at the time o f the introduction o f new wage scales following a salaries commission review. Pay increases present a problem to the finance ix ministry if the size o f the increase i s not known by the time the budget i s submitted to the legislature. If pay negotiations are s t i l l underway when budget preparation i s concluded there may be no realistic alternative to a provision in the MoFEP’s vote to cover the anticipated cost o f new pay scales labeled specifically as a salary provision. Alternatively, the Government could submit a Supplementary Appropriation Bill after the financial year has begun for the new salary scales, once agreement has been reached. Although this might be viewed as theoretically better, political considerations may make the first course o f action more practical. Inthe medium term, the Government needs to move ahead with public service reforms (as it i s currently considering), addressing the staffing level and policy cost drivers o f the wage bill, and developing a new pay policy that gives greater regard to the local labor market for professionals and skilled technicians. Also, if possible, the staging o f pay negotiations should be synchronized with budget preparation, so that negotiations are completed ahead o f submission o f the Appropriation Bill. In this manner, a decision is made on the size o f the annual adjustment, and included in the Estimates under the personal emoluments item o f each head. This in turn would reduce the need for a large financial contingencies line in the finance ministry’s vote. Improving Budget Comprehensiveness and Transparency 16. The Government recognizes the need to strengthen the comprehensiveness o f the budget and increase transparency. For the first time, the 2005 Appropriations Act shows allocations o f Internally Generated Funds (IGF). Budgeting for HIPC debt relief funding will be integrated with the regular budget preparation process for 2006. The Government i s aware o f the need to make the spending plans o f statutory finds as transparent as possible. These could be shown in the budget documents, as a memorandum item, or summarized in the Budget Statement, in l i n e with the international best practice. 17. The ring-fenced nature o f public finances in Ghana, noted in the 2004 External Review, i s unlikely to change in the near term. This i s because some o f i t arises from policy decisions o f previous governments, now fixed in law, to treat certain categories o f expenditure in specific ways, and also because o f the way in which some external aid resources are made available. Nonetheless, fragmentation imposes rigidities, creates transactions costs and causes operational inefficiencies which make it more difficult for the Government to align the strategic allocation o f all public finds with i t s objectives and priorities, and use resources efficiently and effectively. Being structural, these constraints are not easily addressed Fragmentation arises partly from multiple statutory finds created by act o f Parliament outside the CF. Although governments typically have their reasons for creating statutory funds outside the CF, such as directly linking revenues with spending, there may well be p o w e r f i l political reasons for creating these funds, but this comes at the cost o f the unity o f the budget. 18. Both the Government and the External Review have a common view on how such funds work. The creation o f a statutory fund, in effect, takes an area o f spending outside the annual budget process, and puts i t on auto pilot. Although the budget will normally show the amount o f money that should be transferred from the C F into the fund, this i s typically a single line item. In the case o f Ghana, for the D A C F and GETF, the legislature approves how the transfer will be used and will get at year’s end, an account o f how the resources have been spent. I t meets the democratic standard since before a S F can be created, the legislature must pass the legislation setting up the find and listing the purposes for which public funds must be used. However, A unlike spending from the CF, spending authorization from a SF does not lapse at the end o f the year. While such h d s may have a political logic, they detract from the unity o f the budget and can make the management o f the budget more difficult. Improving Predictability o f External Assistance 19. Donor funding modalities are a major source o f budget fragmentation. Despite the general movement from projects to budget support, project aid in Ghana might very well increase as a proportion o f total aid, notwithstanding Ghana’s progress in improving public finance management in recent years. Development partners need to help the Government reverse this trend since it complicates the strategic allocation role o f the budget and the operational efficiency o f spending. In the meantime, donors and MDAs jointly could cooperate to improve the accuracy o f estimates o f aid commitments and disbursements. During the External Review, deficiencies were s t i l l identified in this area, despite the attempts by the MoFEP and M D B S to improve donor aid recording procedures. The Government, o n i t s side, is anxious to improve the reporting o f donor aid flows, not just for budget transparency reasons, but also because better information i s needed for budget management purposes. I t s approach i s to work first to improve information o f major flows, recognizing that there are multiple smaller categories o f assistance, for which goods and services are procured offshore by the aid agency directly, which are very difficult to capture. Strengthening the MTEF 20. Late in 2004, the Government committed itself to conduct an internal review o f the Medium Term Expenditure Framework (MTEF) system’s workings. This worthwhile exercise i s needed, given the s t i l l unrealized potential to help the Government allocate resources strategically, manage fiscal shocks, improve policy coherence and enhance operational efficiency. The latter i s especially important, given that improvements in tax effort have resulted in more domestic resources than before passing through public financial management systems. 21. As part o f the MTEF, the Government has taken some steps towards an increased focus on the outputs and outcomes o f public activities. An initial step towards outcome/output oriented budgeting was taken with the introduction o f the objective, output, and activity dimensions in the chart-of-accounts. Amongst other things, the MTEF review could look at whether the present objective/output/activity classification system needs simplification and how i t could provide for a stronger operational link between the GPRS and the annual budget. Improving Cash Management and Fiscal Reporting 22. The Government has acted to reduce delays and cutbacks in cash but more remains to be done (e.g. streamlining process o f preparing invoices for payment, M D A s need to send their Commitment Control System reports on time). Enabling Parliament to pass the Appropriation Bill before the start o f the financial year will also help budget execution. Improving the timeliness and accuracy o f fiscal reporting will be critical to the success o f accounting decentralization, and would also help increase donor confidence in government financial systems, thereby inducing more budget support in place o f project support, with consequent gains in operational efficiency. xi Budget Preparation Timetable 23. The External Review concurs with the Government decision to lengthen the timetable for budget preparation. In the past, there has been limited time in the budget preparation calendar to engage the Cabinet on fiscal strategy and spending priorities before issuing the call circular. There i s also limited time afterwards for MDAs to study program costs, examine trade-offs and make their budget submission less incremental and more strategic. While for the Budget 2006 the budget calendar gave MDAs up to 4 months to prepare their estimates, for the Budgets 2004 and 2005 that period was only around 3 weeks. Challenges remain to submit the Budget * Estimates and Appropriation Bill to Parliament in time for approval before the start o f the new financial year. In this regard, early in November 2005, the Government has delivered on the commitment made in the 2005 Budget Statement that i t would submit the 2006 Budget to Parliament in sufficient time for enactment before the new financial year begins. There may also be a case for improving the presentation o f the budget estimates in the near future. c. MANAGEMENT IMPLEMENTATION OF PUBLIC FINANCIAL REFORMS 24. The Government continues to carry out an ambitious program o f public financial management reforms, comprising the installation o f new systems, shifting more responsibility to spending departments, and updating the legal framework for public financial management. Financial Administration Act and Regulations 25, The Financial Administration Act (FAA) and the Financial Administration Regulations (FAR) are both forward looking and provide, with the Constitution and the new procurement and internal audit agency laws, a strong legal framework for public financial management. In particular, the FAA and FAR should strengthen the MoFEP as the apex body in the government, ensuring that public funds are properly controlled and spent, and fiscal risks are identified and managed. Close coordination between MoFEP, the Public Procurement Board (PPB) and the Internal Audit Agency (IAA) will be essential, as will dissemination o f the new rules and training. As the new framework i s implemented, Government may find i t necessary to adjust and adapt in the light o f emerging demands (eg: clarifying the role o f the Chief Director o f MoFEP in assisting the Minister implement the F M A R , and the relationship between IAA and MoFEP). Public Procurement 26. The implementation o f the Public Procurement Act passed in December 2003 seems to be on track judging both from the clarity o f purpose o f the PPB three-year Strategic Plan and what has been achieved since the passing o f the Act. The Secretariat o f the PPB is operational since October 2005 and this i s expected to contribute for the implementation o f the Act to come up to full speed. Close coordination with MoFEP i s essential because o f the latter’s financial stewardship role. xii Internal Audit 27. A new Internal Audit Agency (IAA) Act was also passed in December 2003. The IAA has been established and i t s Board and Director General were inaugurated in August 2004 and October 2005, respectively. The IAA will serve as an apex oversight body to co-ordinate, facilitate and provide standards and quality assurance for internal audit activities in MDAs / MMDAs. All M D A s / MMDAs will establish internal audit units (IAUs), to be staffed by competent auditors under the guidelines o f the IAA. 28. The initial start-up phase should be completed as quickly as possible, in order to ensure that the IAA Act is vigorously implemented in the months ahead. To guide the fiture actions o f the IAA, the three-year strategic plan ought to be firther developed by defining specific medium term output milestones against which the IAA and other stakeholders can benchmark progress in the process o f strengthening internal auditing across the GoG. Given the overlapping mandate with MoFEP, which under the Financial Administration Act (FAA) i s responsible for the management o f the Consolidated Fund (CF), cooperation between the two bodies will be essential. Decentralization of Accounting and Treasury functions to MDAs 29. The Action Plan for the Implementation o f the FAA and FAR stipulates that the accountinghreasury staff will be transferred to the MDAs along with checks and treasury functions while a single treasury account will be maintained. This transfer i s scheduled to be launched early in 2006. Although this transfer i s desirable fi-om the perspective o f empowering the MDAs, the accounting in the MDAs must first be strengthened and it i s o f utmost importance that an accurate flow o f accounting information from the M D A s to C A G D i s ensured before the treasuries that currently operate on behalf o f the MDAs are eliminated. To recruit adequately trained accountants for the MDAs, the Government might need to design employment packages that compete with the private sector, and eventually make their pay arrangements consistent with a new pay policy for Government. Giving MDAs greater responsibility for accounting needs to be accompanied by measures to strengthen the accountability o f vote holders for adherence to financial management and accounting regulations. Here, the External Review believes the roles o f MoFEP, the PPB and the IAA are critical, and must be coordinated. The Budgeting and Public Expenditure Management System (BPEMS) 30. I t is clear that the Government i s filly committed to the implementation o f BPEMS. The MoFEP has f i l l y taken over the management o f the project and the deployment o f the system is now funded entirely and directly by GoG. The system i s now almost ready for roll-out. What i s holding up deployment i s the Wide Area Network. Though the connectivity i s in place, the speed o f the network i s currently very slow. MoFEP has therefore decided to extend the IPPD fiber optic network to the BPEMS sites. 31. It is also clear that the BPEMS r o l l out - initially to 14 sites in 8 MDAs - will require a concerted effort, an effort that should be guided by a systematic critical path implementation plan. An important milestone in such a plan should be the date when BPEMS would replace National Expenditure Tracking System (NETS) for the production o f the accounts for the Consolidated Fund. Such a date can and should come well before Oracle Financials - in which xiii BPEMS i s developed - i s deployed to all M D A s and all cost centres. At non-connected MDAs and cost centres, the accounts can be done manually and the information subsequently entered at central or regional locations connected to BPEMS. 32. The External Review notes the recent change in BPEMS management responsibility. The CAGD, as principal user o f BPEMS, has been given formal system management responsibility. Unifying the overall responsibilities for all the elements - conceptual, technical, institutional, procedural, and human - that are required for the move to BPEMS should increase the likelihood o f success. Management o f the Payroll 33. The Government’s two track approach to payroll system modernization i s pragmatic. To ensure the continued management o f the payroll, the original SIGAPIP system i s now being rehabilitated to keep i t operational. I t is important that the “stabilization” o f IPPD 1 be completed successfully. For the future i t makes sense, however, that SIGAPIP be replaced. The choice made by the Government to replace i t with a system compatible with BPEMS makes good sense. The decision by the Government to go ahead and finance the development o f IPPD2 o n i t s own, just as it has with BPEMS, i s highly commendable and signals clear ownership. In future the development and deployment o f IPPD2 should be closely coordinated with the deployment o f BPEMS, including in the planned area o f the communications network. 34. The Government has decided to implement in 2005 a computerised system to strengthen personnel and payroll management o f subvented agencies (SAs). I t has also decided that when IPPD2 i s up and running, it should also be used for the preparation o f the payroll o f subvented agencies. This i s positive but i t i s important to underline that this will not automatically solve the problem o f payroll overruns. Improved control through a central system must be combined with reforms that reduce the incentive for SAs agencies to overrun on the payroll, and generally strengthen the governance o f these agencies, as the SAs Agencies Bill has the potential to do. Accounting Framework 35. The FAA and FAR reflect the decision by the Government to move to accrual accounting. While accruals bring important benefits, the External Review considers the transition from cash to accrual accounting i s a complex process that will take many years to plan and implement. Meanwhile, the authorities should focus o n achieving the most effective operation o f the current cash accounting system, which BPEMS will facilitate, in accordance with appropriate international accounting standards. As accrual accounting i s gradually introduced, senior staff o f MDAs will need to be trained in how to use more accrual information in management. The transition to accrual will be more successful if M D A s themselves feel a need for accrual information in the management o f their portfolios 36. The Government could also consider simplifying the chart-of-accounts. The present 47 digit code-string divided into ten dimensions can be shortened and simplified substantially without reducing i t s information content. xiv The Coverage o f Accounting, Budgeting and Fiscal Reporting 37. To meet Government Finance Statistics (GFS) standards for comprehensive fiscal reports the Government i s preparing to collate financial statements from the different statutory funds combining this information with the financial statements for the Consolidated Fund including IGF. The Government at this point in time has not yet been able to include external direct funding in the C A G D fiscal reports. The External Review recognizes the difficulty in collecting such data, and that if a start i s made, i t should be with the larger sources that the Government requires more information on, anyway, for i t s o w n fiscal management purposes. Nonetheless, the Review believes that all sources o f external financing fall within the Constitutional definition o f “public funds”, and to the extent practical, data should be collected and reported. This will support the broader effort to align all assistance with national priorities, and improve the transparency and comprehensiveness o f Ghana’s public financial management system. While the practical difficulties o f producing an accurate account o f direct external assistance should not be underestimated, the Government should continue to strive for more comprehensive reporting, and development partners should provide much more assistance in, periodically, making available information on aid usage. External Audit 38. The legal framework for external audit was revised several years ago and still provides a good foundation for this function. The focus o f the Government has been on timely completion o f annual accounts and financial statements. Good progress has been made by both the C A G in completing annual accounts and financial statements and by the Auditor-General with the reduction o f external audit backlogs, in compliance with the statutory timetable. Additional resources may be required to sustain the progress made, especially in view o f the retirement o f key staff in the near future. I t will be important for MoFEP, acting with the Financial Administration Tribunal as appropriate, to follow up on audit findings and ensure corrective action i s taken by the responsible vote holders. xv 1. INTRODUCTION 1.1 The 2005 External Review o f Public Financial Management (ERPFM) consists o f two volumes. The first volume i s the main text, while the second volume comprises statistical annexes. I n the first chapter o f volume I ,after this introduction, macroeconomic developments are assessed, including aggregate fiscal discipline and the risks to the fiscal outlook and macroeconomic stability. The next chapter focuses o n budget management and the GPRS. After a brief review o f recent revenue trends, public expenditure management (PEM) is assessed in more detail through examining budget predictability and reliability and the implications for the strategic resource allocation role o f the budget and the operational efficiency o f public spending. The extent o f alignment o f the budget with GPRS i s also reviewed. Finally, challenges to improving public expenditure management are discussed. The last chapter examines accountability issues through an assessment o f the progress in implementing the new regulatory framework for public financial management, including the Financial Administration Act, the Public Procurement Act and the Internal Audit Agency Act, as well as the Budget and Public Expenditure Management System (BPEMS) and Integrated Personnel and Payroll Database (IPPD) systems. Volume I1presents three annexes with information complementing the analysis o f the main report and a Statistical Annex. 1.2 This report follows from the external review conducted by the World Bank in 2004, jointly with a number o f donors involved in the MDBS, as finalized in the report “Supporting Reforms for Accountable and Transparent Public Expenditure Management” (September, 2004). The main message from the 2004 External Review was the need for Government to focus on: (i) maintaining aggregate fiscal discipline; (ii) curtailing budget fragmentation to better align the budget with the country’s strategic priorities; and (iii) improving the efficiency and effectiveness o f public spending in support o f better service delivery. 2. MACROECONOMIC DEVELOPMENTS A. ECONOMIC PERFORMANCE 2.1 Despite the shock o f rising o i l prices during the year, the Ghana economy performed well in 2004, and the Government’s macroeconomic management was sound. Real GDP accelerated to about 5.8 percent during 2004, up from 5.2 percent in 2003 well above the GPRS target o f 5.0 percent. Buoyant cocoa (record harvest) and gold exports (higher prices) and record remittances from Ghanaians living abroad broadly offset the adverse impact o f the rise in petroleum prices on the international markets during the year (average 37 percent). Gross international reserves improved to almost 4 months o f imports coverage and the nominal exchange rate for the cedi remained broadly unchanged during the year. Inflation f e l l sharply to 11.8 percent at the end o f 2004 from 23.6 percent the year before. Overall, prudent macroeconomic management enabled Ghana to break with i t s past record o f fiscal slippage in election years. 2.2 As a consequence o f improved macroeconomic performance and progress in economic reform, Ghana reached the HIPC completion point in July 2004. This provides Ghana with irrevocable debt relief o f about $2.2 billion in net present value terms. Debt relief has helped to bring the country’s debt burden indicators to manageable levels and should keep debt servicing on a sustainable path in the medium and long term, provided the country follows sound 1 economic policies and i s not affected by permanent adverse shocks, or a combination o f shocks. In the near future, debt relief provides annual savings to the budget which average about 2 percent o f GDP. Table 2.1: Macroeconomic Developments and Prospects, 2002-2007 -- 2002 2003 -- Act. Act. Real G D P Growth (%) 4.5 5.2 Inflation (% change, end-year CPI) 15.2 23.6 Fiscal balance/GDP (%, excluding grants) -9.9 -9.1 Fiscal balance/GDP (%, including grants) -6.8 -4.4 NFV o f total government debt (% o f GDP) 88.0 89.8 O f which, external debt 64.1 71.5 Gross international reserves 1.9 3.2 (months o f imports o f goods and services) N P V o f external debt 157.4 175.7 (% o f exports o f goods & services) External debt service due 18.4 14.5 (% o f exports o f goods and services) Source: Ghanaian authorities and IMF staff -- 2.3 The solid macroeconomic performance i s expected to be maintained during 2005. Real GDP i s anticipated to grow by 5.8 percent, driven by buoyant cocoa, construction and mining activity. The substantial increase in petroleum prices in February, following the introduction o f a new pricing mechanism, however, has put pressure o n prices; year-end inflation i s projected at 14 percent. Projected large capital inflows will help sustain international reserves at about four months o f imports coverage. 2.4 Macroeconomic prospects over the medium t e r m are favorable (Table 2.1). Annual GDP growth o f 6 percent i s feasible, supported by prudent macroeconomic and fiscal policies, strong investment, including in infrastructure, and increasing productivity in agriculture. Headline inflation i s projected to decline to about 6 percent by 2007. Gross international reserves are projected to increase slightly to over 4 months o f imports. Public debt i s projected to remain within sustainability bounds. In terms o f economic growth performance, the country i s well positioned to make M h e r progress in implementing i t s poverty reduction strategy and meeting the Millennium Development Goal (MDG) o f halving poverty by 2015. B. FISCAL AGGREGATE DISCIPLINE 2.5 Aggregate fiscal discipline has improved since 2002, contributing towards the favorable macroeconomic situation. In 2004, however, i t was looser than originally anticipated. The fiscal deficit fell to 3.6 percent o f GDP in 2004 from 4.4 percent o f GDP in 2003, continuing the downward trend o f the last few years. However, net domestic financing o f the deficit amounted 2 to 0.5 percent o f GDP in 2004 significantly lower than during 2000-2002, but higher than in 2003 and higher than the programmed financing o f negative 1.4 percent o f GDP that would have allowed the Government to make net financial resource transfers into the domestic banking system. The reasons were higher expenditure than programmed and inflation-linked bond savings being lower than projected (Table 1 and 2, Statistical Annex). 2.6 Revenue and grants continued to increase during 2004. Revenue grew to 23.8 percent o f GDP during 2004, from 20.8 percent in 2003. The setting up o f a one-stop system for dealing with large taxpayers, the introduction o f Ghana Customs Management System, the Debt Recovery Levy on petroleum products, the compliance by several public entities with the Financial Administration Act requirement to remit profits to the budget, and the implementation o f the National Health Insurance Levy, approved in 2004, contributed to strengthened resource mobilisation. Grants increased to 6.4 percent o f GDP in 2004 from 4.7 percent in 2003, with project and program grants both higher than programmed. 2.7 Total expenditure rose to 33.3 percent o f GDP in 2004, from 28.8 percent in 2003. Expenditure was considerably larger (by about 4.5 percent o f GDP) than programmed due to: (i) higher capital and poverty-related expenditure (by 3 percent o f GDP), particularly that financed by development partners and HIPCs; (ii) unprogrammed subsidies (almost 1 percent o f GDP) to Tema Oil Refinery (TOR), due to the shock o f rising crude o i l prices during the year and the GoG’s decision not to allow retail prices o f petroleum products to be adjusted upwards; and (3) overspending on wages and goods and services. The additional capital expenditure was mainly self-financed from external sources. However, the higher than programmed domestic revenue was more than offset o n the expenditure side. In turn, this contributed to the higher than programmed domestic financing and delayed the plannedrepayment o f domestic debt. 2.8 The Government appointed after the December 2004 general election has reaffirmed its commitment to maintain aggregate fiscal discipline over the medium t e r m in support o f macroeconomic stability. The overall fiscal deficit i s projected to fall to about 2.6 percent o f GDP in 2005 and decline further over the medium term (Figure 2.1). The fiscal strategy anticipates domestic resource mobilization to be kept at about 24 percent o f GDP and aims at containing expenditure pressures from the wage bill and from quasi-fiscal operations o f the state. By 2007, the first i s planned to fall to about 30 percent o f total primary spending and the latter to become negligible. As a result, domestic financing o f the deficit i s projected to continue to fall, allowing domestic debt to fall below 10 percent o f GDP by 2006. This should free up resources that will be available to implement the GPRS, currently being updated, and contribute to almost double poverty-related spending (in nominal terms). 3 1 Year Table 2 of lfic Statistical Aitncs SOIJXCL": Quasi-Fiscal Subsidies 2.12 Nevertheless, the Government has been acting to improve public enterprise finances. In i t s letter o f intent submitted to the IMF under the current PRGF arrangement, the Government committed to eliminate SOE cross debts and take measures to improve efficiency. I n this way the balance sheets o f enterprises are being cleaned. Each company i s required to produce a monitorable financial performance plan and submit performance reports to the Ministry o f Finance and Economic Planning (MoFEP). Also, the Government has committed to implementation o f the automatic formulae for adjusting water and electricity tariffs. Efficiency improving measures started to be implemented during 2004 in the three utility companies. Finally, the Government i s continuing to divest i t s holdings in a number o f joint venture companies. Divestiture receipts amounted to 0.5 percent o f GDP in 2004 and similar performance i s projected in 2005 and 2006. By these measures the Government i s reducing fiscal risks o f the state enterprise sector, which are lower than they were a year ago, and likely to remain so over the medium term. Wage Bill Overruns and Their Effect on Non-Wage Spending 2.13 Part o f the spending overrun has stemmed from the wage bill. The wage bill has averaged about 70 percent o f the total discretionary spending financed from the Consolidated Fund (CF) over the last three years and i s already at the high end o f the range for African countries as a share o f GDP. The pressure for additional spending on wages has been offset by cuts in voted non-wage spending. W h i l e this releases resources to pay wages and salaries, it lowers budget predictability. At one level, the problem lies with the difficulty the GoG has experience in budgeting fully for the wage bill during budget preparation. More fundamentally, the problem i s structural. At current levels o f pay and numbers the government wage bill i s already very large and strains public finances. Yet government pay scales make i t difficult to attracthetain professional and skilled technical staff. Furthermore, existing policy in several areas, such as education, requires the government to continue hiring. Government pay policy and the wage bill remain critical areas o f concern for external partners. In turn, as the Government recognizes the challenges, it has relaunched a Public Service reform agenda. The issue o f the wage bill i s discussed in more detail in Sections B and D o f the next chapter. 2.14 Non-CF financing sources have largely offset the cuts in CF non-wage spending, but the fragmented and ring fenced nature o f these sources detracts from their ex ante reliability. The 2004 External Review commented on the fragmentation o f public finances and the adverse effects this has on PEM. Encouragingly, the Government i s taking steps to increase the transparency o f public finances. First, the 2005 Appropriations Act shows allocations o f IGFs and to a degree i t also covers Statutory Funds. Second, the 2005 Budget Statement provides improved coverage o f external assistance flows. Third, HIPC debt relief funded expenditures will be included by MDAs in the 2006 budget estimates. And transfers to statutory funds (as opposed to spending from the SFs) have always had to be voted through the budget.’ Although This i s inherent in the nature o f a statutory fund outside the CF. B y approving the law creating a SF, the legislature, in effect, gives up its right to scrutinize ex ante spending in the area covered by the fund, and instead votes a block transfer. I t does, however, under the terms of the law, determine the purposes for which expenditures out of the fund may be made, and requires annually the CAG to present the opening and closing balances of the fund, together with information on spending, to be presented by the SF to the parliament. Thus creating a statutory fund takes the details of spending out o f the budget estimates approval process. And by creating the SF separate to the CF, balances in the SF, and thus spending authority, do not lapse at the end of the financial year. 5 ciplirie i f i t i s prcdi o f flows i s ~ C C C S ing programs. In t emaf assistance to u G pcrccnt o f GDP J n osifion o f donor flows 2.16 Thc t.r.cdium ity o f external assistance, rough QXI fhe country's h t benefit a t r ~ l to thc sealing up o f ~ ~support ~ n ~ ~ ~ l ect aid (cfoscr to 70 pcrcc a concern from the 3. BUDGET MANAGEMENT AND THE GPRS 3.1 In recent years, domestic revenue performance has improved considerably. Although expenditure management has also been improving, as confirmed in the 2004 HIPC AAP, it s t i l l requires considerable upgrading to bring i t to a level comparable to that o f other good performing Sub-Saharan African countries. In this connection, the HIPC-AAP framework itself i s evolving towards the PFM Performance Management Framework developed by the multi- donor Public Expenditure and Financial Accountability (PEFA) Secretariat based in the World Bank. This framework i s a set o f high level indicators which draws on the HIPC expenditure tracking benchmarks, the IMF’s Fiscal Transparency Code and other international standards. The Framework has been developed as part o f the “Strengthened Approach” to supporting PFM reform and was adopted in June 2005 by the PEFA Board. It emphasizes country-led reform, donor harmonization and alignment around the country strategy, and a focus on monitoring and results. A country’s performance against the 28 indicators in the framework should be assessed periodically, and the information should constitute a common set o f PFM measurements to be used by both government and development partners to track progress towards agreed goals. The framework for the first time contains a section evaluating donor practices in areas like predictability o f budget support, willingness to use country. systems, and the adequacy of financial information provided to government by donors. MDBS partners and the Government are discussing the feasibility o f integrating the PEFA P F M Strengthened Approach into the M D B S process, which already incorporates many o f i t s features. This chapter briefly examines the recent revenue trends, followed by a detailed analysis o f expenditure management. A. PERFORMANCE REVENUE 3.2 Government’s revenue performance in recent years has been robust. I n each o f the last three years, the Government has exceeded i t s domestic revenue-generation budget forecast by between 1.0 percent and 6.0 percent. Tax revenue as a percentage o f GDP has increased by about four percentage points over the last three years, reaching almost 22 percent o f GDP in 2004. The encouraging revenue out-turns are largely due to strong performance o f indirect and international trade taxes. With regard to non-tax fevenue, o f greater significance i s the fact that IGFs by MDAs have been better accounted for in 2004. As a result, IGFs collection i s estimated to have doubled compared to 2003 (about 1 percent o f GDP) and they are now captured in the budget statement and the Appropriations Act. 3.3 Ghana’s tax revenue mobilization gains place the country among the best performers o f non-natural resource rich Sub-Saharan African (SSA) countries (Figure 3.1). I t needs to be acknowledged that much o f the revenue increase in recent years has come from international trade which in the longer t e r m are vulnerable to fluctuations in international commodity prices. Ghana would need to make progress as far as direct tax mobilization is concerned (Figure 1 and 2, Statistical Annex). As correctly stated in the GPRS, most o f the opportunities for Wher revenue strengthening are linked to improved tax administration, but this is likely to be a gradual process. Widening the tax net i s critical to better performance in domestic resource mobilization. 3.4 Progress achieved in revenue mobilization is largely associated with the strong mandate given to the Revenue Agencies Governing Board (RAGB) by the Revenue Agency Act o f 2000. There i s also a tax reform program developed in cooperation with the IMF, which the 7 Government is implementing. RAGB i s the apex entity responsible for ensuring the supervision and co-ordination o f the three revenue agencies (Internal Revenue Service - IRS, Customs & Excise Preventive Service - CEPS, and Value Added Tax Service - VATS) and developing and maintaining an effective, fair and efficient revenue collection system. The IRS, CEPS and VATS account for 32 percent, 56 percent and 12 percent o f fiscal revenues, respectively. The first is mainly responsible for collecting direct taxes. The second is mostly accountable for collecting taxes levied on international trade. The third collects the domestic-value-added tax and excise duties. A Taxpayer Identification Number has been implemented and in April 2004, the Large Taxpayers Unit (LTU) was formed to provide approximately 360 large taxpayers with “one stop shop” services. I n2002, the Ghana Community Network Services (GCNet) I T system was introduced into CEPS to determine electronically tax obligations o f importers. The system i s linked to all seaports, airport and major land borders o f the country. The introductions o f the L T U and GCNet have impacted very favourably in revenue collection. As for non-tax revenue, progress made being made results from the setting up in MoFEP, in 2002, o f the Non-Tax Revenue Unit (NTRU) with a mandate to facilitate the collection, accounting and timely reporting o f non-tax revenues, work with all agencies to increase their revenue generation potential, ensure compliance with the policy on State Assets Management, and ensure that those institutions capable o f generating sufficient IGFs for their operations, are moved from subvention status. Figure 3.1: Trends in Tax Revenue (% o f GDP) 25 20 i IS H 2002 a ./ 2003 10 0 2004 5 0 I Ghana Kenya SouthAfrica Tanzania Uganda I Source: Table 2, Statistical Annex and IMF data. B. MANAGEMENT PUBLIC EXPENDITURE 3.5 Good PEM aims at a reliable and predictable budget that allocates resources according to the strategic objectives and priorities o f the government’s development strategy, and does so in a way that supports operational efficiency. Significant deviations from the budget plan indicate that spending programs are not being implemented as programmed and that policy objectives are being compromised. Inefficiencies in budget preparation and execution (e.g. weak wage bill forecasting, delays in cash releases, releases not reaching intended targets and inadequate value 8 of the b t' in t c m s anced d, as npprovcd by P thc A~prop~iatior~s Act. The only about half of thc rest bcing fhinccd statutory funds and don ~ j s b ~ r ~ j ~ ~ direct1 in teniis aF the broad 3.8 Deviations at the MDA 1 inistry o f Wcaltli tt'as nt amounts (Tables 4 0x1 tvagcs, partly offset 'erC overspent by 7 e11t and 42 percent, 9 respectively (Table 5, Statistical Annex). Wage overruns, in turn, reflect under-budgeting o f staff increases (teacher trainees), staff benefits (ADHA), or pay increases or inadequately controlled SAs. In 2004, wage overruns in the social sectors were more than twice the wage reserve contingency. MDAs with relatively l o w labor-intensity have tended to underspend (Table 6 o f Statistical Annex). 3.9 The overspending on the wage bill thus appears to be structural in character, and can be brought under lasting control only when the Government i s ready to tackle deep seated public service reform issues, and, specifically, the policies which drive wage bill costs in critical sectors like education and health. Budget Predictability and the Contingency Reserve 3.10 In Ghana, at the aggregate level, the budget outturn does not differ considerably from the original budget. However, deviations o f the budget as spent from the approved budget, by MDAs and economic classification, are s t i l l considerable. The main issues that need to be addressed in order to improve budget predictability are elaborated on in more detail in Section D. 3.11 The contingency reserve, shown under the MoFEP’s vote has increased sharply since 2002, from 1 percent o f total domestic discretionary spending to 8.3 percent in 2004 and i s budgeted at 15.7 percent in 2005 (Table 6 o f Statistical Annex). I t is divided between the four main economic classification items (wages, administrative services, other goods and services and capital assets). Out o f 870 billion cedis budgeted in 2004 as contingency 560 billion cedis were spent on items 2, 3 and 4. The unaudited accounts for 2004 do not break the contingency allocation down by MDA, so i t i s not possible to tell the extent to which it affected deviations. As Table 6 in the Statistical Annex indicates, over the years, most o f the wage contingency appears to have been allocated to the wage bill for education (the wage bill for education in 2004 was 600 billion cedis higher than budgeted while the wage contingency was 3 11 billion cedis). 3.12 Contingency provisions o f this magnitude are an undesirable budget practice as i t weakens the principle o f Parliament approving the budget ex ante according to pre-stated public policy objectives. Large contingency reserves provide excessive discretion in resource allocation. I t could be argued that Parliament knowingly approves the contingency reserves through the Appropriations Act, but, in practice, legislators approve a contingency provision without knowing the details on what the money will be spent. Thus, a contingency provision within the finance ministry (or anywhere else in the budget) if i t grows too large, becomes a “budget-within-a-budget”. This calls into question the transparency o f the budget as a whole. 3.13 One way to address the problem i s to separate the different types o f contingencies the Government must provide for. Many countries have a special Contingency Fund, set apart from the CF, which may be drawn down in the case o f an unforeseen national disaster. Typically, the authority to spend i s given to the president, but he must inform the legislature immediately, and seek the replenishment o f the fund as soon as possible through a supplementary budget. The Constitution (Articles 175, 177) in fact provides for a Contingency Fund, for urgent and unforeseen needs, as authorized, in Ghana’s case, by a special parliamentary committee. The Government intends to activate such a fund in 2005, precisely for national emergencies. 10 3.14 Contingency funds o f this type are intended for emergency use, usually if there i s a natural disaster. Contingency funds are normally neither used for unforeseen financial contingencies (such as claims against the government arising from a SOE failure), nor for spending requirements which arise in the course o f the year because poor financial planning prevented them from being anticipated and budgeted for. The correct way to budget for the first type o f contingency spending i s to have each year a financial contingencies item in the finance ministry’s vote - often termed “contingent liabilities”. The second type o f contingency is best addressed by improved budget preparation - ensuring that MDAs properly anticipate the costs they will have to meet in the course o f the year, and to either budget for them or change policy to avoid the costs. 3.15 The contingency reserve shown in the MTEF for 2005-07 o f 8 percent o f total domestic discretionary spending by 2007 (Appendix Table 5 o f 2005 Budget Statement) is large, and should be reviewed to reduce i t to below the 5 percent threshold. But the MTEF i s a spending plan, not an annual budget, and in this sense a contingency amount in the outer years o f the MTEF may serve a different purpose. In other countries3 i t can be a mechanism for identifying the “headroom” available for new policy. H o w to handle contingency amounts in the outer years o f the MTEF is an issue to be considered by MoFEP. Performance of Public Expenditure Financed from all Funding Sources 3.16 From a broader perspective, budget predictability continues to show considerable variance when the “budget” i s examined from a broader perspective than the CF. I n 2004, the shortfalls in CF budget execution for economic services and infrastructure and for items 3 and 4 were more than offset once the non-CF funds are included, particularly H P C s and donor funding (See Tables 5 and 10, Statistical A n n e ~ ) . ~ 3.17 The pattern o f public spending indicated above is confirmed in the health sector. Data by source o f funds and economic classification for 2004 i s presented in Table 3.1 below, as extracted from the unaudited accounts for the Ministry o f Health (MoH). I t confirms that the GoG financed 43 percent o f total health expenditure in 2004, but financed 97 percent o f wage expenditure and only 1.4 percent o f capital expenditure. The preparation o f Table 3.1 by the M o H as part o f i t s end o f year accounts is a welcome development and hopefully other ministries will follow the example for the 2005 accounts. The Ministries o f Education and Roads Transport produced similar tables for the ERPFM review, and these are summarized in Table 11 and 12 in the Statistical Annex. The patterns are similar, with the Consolidated Fund financing the wage bill but only a small proportion o f items 3 and 4. 3 In South Africa, which has a w e l l developed MTEF, i t serves this purpose. But in this case it i s a true residual since existing programs are h l l y costed. 4 2004 i s the first year for w h i c h ex ante estimates o f spending o n a functional and economic classification basis are available for non-CF funding sources. 11 HIPC h n d 2.8 22.2 5.5 141.2 Total 100 100 100 100 100 2578.1 % o f Total Expend. 39.5 10.6 28.7 21.2 100 Expend. (billion cedis) 1018.7 272.6 740.3 546.5 2578.1 Source: 2004 Unaudited Accounts o f Ministry o f Health. 1/ Health Sector Program financed by IDA. 3.18 While the table provided by the Ministry o f Health on health spending is very clear on the different sources financing health sector expenditure, it reveals the fragmentation o f Ghana’s public finances. The financing o f non-wage expenditure from other sources o f finding i s far from ideal, however, and greatly complicates the ability o f the government to allocate its resources according to its strategic objectives and priorities. The ring fencing nature o f other finding sources puts the brunt o f adjustment on the CF in the event o f expenditure overruns or revenue shortfalls, with adverse consequences for both the operational efficiency and effectiveness o f spending programs. Moreover, the modalities for other funding sources tend to be less efficient than funding through the CF. Transactions costs tend to be high due to the involvement o f different agencies, and the higher costs o f donor projects relative to government- executed spending. Donor projects also may distort wage incentives and can undermine efforts to increase capacities within government. 3.19 The 2005 Appropriations Act and subsequent MoFEP statements indicate progress towards reducing fragmentation. Internally Generated Funds (IGF) are included for the first time by MDA and economic classification and GoG indicates that the same will happen for HIPCs for the 2006 budget. The transfers to SFs are shown in the Appropriations Act. The expenditures financed by these SFs are legally difficult to include in the Appropriations Act as they are covered by other legislation. But at least the spending plans o f these fbnds should be shown in the budget documents, in line with the international best practice treatment o f the expenditure o f extra-budgetary finds in other countries. The 2005 Budget Statement also provides, for the first time, comprehensive information on actual donor flows, both grants and loans. This issue i s analyzed in more detail in section D o f this chapter. 12 c. POVERTY ORIENTATION OF THE BUDGET 3.20 Assessing the poverty orientation o f the budget requires, first comparing the sectoral composition o f the budget with the planned expenditures as laid out in GPRS and, second, within each sector, reviewing the extent to which spending i s poverty-related and represents a reasonable balance between wage and non-wage spending. The spending base for the first should be the same as the second, but in Ghana they are not, thus complicating assessment. The sectoral composition targets under GPRS (Table 5.1 in GPRS) are based on discretionary spending financed by CF and donors, while the definition of poverty-related spending in a sector is based o n non-interest spending including HIPC and Statutory Funds but excluding donor- financed spending. The sector proportions can differ sharply between the two cases. For example, the 2004 Budget envisaged that economic services plus infrastructure should comprise 20 percent o f total discretionary spending in 2004 (Table 3.2 below). Using total domestically- financed discretionary expenditure as a base, economic services and infrastructure comprises 10 percent o f planned spending in 2004, the difference representing donor funding (Table 8, Statistical Annex). Medium Term Priority Programs (MTPPs) 3.2 1 Poverty-related spending should therefore be the sum o f domestically-financed poverty related spending plus that financed by donors, which are largely identified in the Medium Term Priority Programs (MTPPs). These cover projects and programs under “themes” that are mainly donor-financed and largely cover investment costs.5 Adding in donor-financed spending and spending financed by IGFs would provide a complete picture o f the sectoral composition o f public poverty-related spending per sector. IGF finances only about 5 percent o f total public spending, but a much larger share o f social services spending (about 10 percent). At present, however, i t i s not possible to differentiate between non poverty and poverty spending financed by donors and IGFs. GPRS and Budget Spending Compared 3.22 In the next page, Table 3.2 reviews the sectoral composition o f discretionary government spending (defined as spending out o f the CF plus donor spending) with that envisaged under the GPRS. In 2004, due to donor aid being more than double the expected amount, and more than offsetting the shortfall in CF funding, the spending share for economic services (including infrastructure) was much higher than initially budgeted for and closer to the GPRS share. The share for social services was also sharply higher than the budget estimate, due both to donor aid being double the projected amount and funding from the CF much higher (reflecting the wage overspend). The share for social services was also well-above the GPRS target. The shares for general administration and public safety were lower than budgeted, but close to the GPRS targets. 3.23 In the 2005 budget, the share for infrastructure i s lower than the one planned for under the GPRS while the share for social services i s higher. The outturn for social services in 2005 The annual budget speeches contain footnotes differentiating between domestic poverty-related spending and MTPPs. M T T P s focus mainly o n growth” (footnote to para. 914 o f 2005 Budget Speech). 13 will most likely be even higher, reflecting the under-budgeting o f wages for education (as discussed below). To cover the latter, funds are likely to be taken out o f the contingency reserve. Table 3.2: Distribution o f Total Discretionary Expenditure, 2002-2005 lsector I 2002 I GPRS I 2003 I GPRS 1 2004 I 2004 I GPRS 1 2005 I(in percent) 1 1 2003 Target 1 Budget Outturn 1 2004 Target ~ Budget 1 Budget Outturn ~ ~ Budget dministration 19.8 14.2 14.8 13.3 17.3 13.6 13.3 13.5 Economic 18.0 9.7 9.1 10.3 8.9 9.6 10.3 10.3 Infrastructure 17.2 17.2 15.5 19.1 10.9 18.6 19.1 16.8 Social 34.7 38.1 38.7 34.3 38.8 42.2 34.3 37.4 Public Safety 9.7 11.1 11.5 9.0 11.9 8.8 9.0 6.9 btilities ... 1 - 1 2.8 1 2 . 7 1 3 . 2 1 2 . 5 1 0 . 5 1 3 . 2 1 1 . 7 Revenue Agencies 3.1 3.0 2.7 2.7 Contingency 0.6 6.9 4.6 10.8 6.7 4.0 10.8 10.7 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Poverty Spending Financed from the Consolidated Fund 3.24 The deviations between budget plans and budget execution for the CF are reflected also in the poverty-related areas o f the CF budget. The weighted average budget deviation o f poverty-related spending was 19 percent, relative to 16 percent for the budget as a whole (Tables 16 and 4, Statistical Annex). In terms o f poverty-related spending funded by GoG resources, the main overspenders were the Education (mainly reflecting the wage bill overrun) and Public Safety sectors (Tables 16, 18 and 20, Statistical Annex). Most other sectors underspent, including health. 3.25 Similarly to what happened with government spending financed by non-CF sources, other finding sources ( H P C and Road Fund) helped to make up for shortfalls o f poverty-related expenditures under the CF, although underruns occurred in some key sectors (health and rural water) (Table 16, Statistical Annex). The tables prepared by C A G D only report spending from CF and HPCs, which were 7 and 35 percent higher than initially planned, respectively (Tables 18 and 20, Statistical Annex). Most o f the shortfalls in transfers to GETF and D A C F were accommodated by cuts in their contribution to financing poverty-related expenditures (Tables 3, 18 and 20, Statistical Annex). Trends in the Share and Composition of Poverty Spending 3.26 Rapid primary expenditure growth, o f which about h a l f financed additional subsidies to the petroleum sector, resulted in domestically-financed poverty-related spending being higher than planned for 2004. As a ratio to GDP, they were more than h a l f a percentage point above the initially anticipated level o f 6.9 percent (Table 17, Statistical Annex). However, as a share o f 14 total primary spending, the outturn o f domestically-financed poverty related expenditures in 2004 (27 percent) was somewhat lower than that in 2003 (28 percent), being planned to reach 30 percent in 2005. Considerable progress was made in improving the balance m i x between wage and non-wage pro-poor spending. Overall, the share o f wages in poverty-spending has fallen considerably, although ending slightly above the level initially envisaged (Table 3.3 below, Table 15, Statistical Annex). The picture i s mixed for poverty spending in each sector, in particular due to spending shortfalls in critical sectors such as primary health care and rural water. Detailed assessment o f the poverty focus o f the 2005 budget is not possible by sector as the savings from HIPC debt r e l i e f (1.6 trillion cedi) have yet to be allocated (Table 22, Statistical Annex).6 However, at the aggregate level, the Government is determined to increase poverty- alleviation spending to 8.3 percent o f GDP and scale up the share o f the non-wage component to almost 50 percent. It i s worth noting that the share o f wages in poverty-related spending i s falling in all sectors except basic education and rural electrification. In the former, i t appears to have stabilised at about 77 percent o f total sector spending (Table 15, Statistical Annex). Table 3.3: Poverty Related Expenditure, 2002-2004 MTPP Spending 3.27 The performance o f MTPP spending programs, which represent, so to speak, a cut-down version o f the GPRS with a bias towards investment, i s summarized in Figure 3.3 (see also Table 6 “Other” poverty spending has been adjusted downwards t o reflect HIPCs funding for education, primary health care (to include sanitation) and rural water channelled through Ministry o f Local Government and Rural Development. 15 s ~ Source: Table 23. Statistical Annex elated spending contiitues losses apply xs for total largely being n ~ ~ i ~ ~ ~ ~ j t i e d . DP, the increase being d j s t ~ i b ~ ~ e d ccn outconlc data. The Review iXe bringing tu the fore in the ~~~log ue between the . Thc rest o f tlii "oil. The second is iniprovr'ng p r ~ ~ i ~ to ~ b i ~ ~assistance. f external ~ y Thc fourth i s rcdticing shortfalls and delays in cash releases. The fifth i s timeliness and accuracy o f fiscal reporting. The sixth i s expanding the budget preparation timetable. Collectively, these should improve both strategic allocation and operational efficiency. Controlling the Wage Bill 3.31 Improving budget performance over the medium term hinges on how effectively the Government is able to control the wage bill. Presently, the wage bill accounts for more than two thirds o f discretionary (Le. non-statutory) expenditure out o f the CF. Overall, the government wage bill approaches 9 percent in relation to GDP. There are several other countries with similar wage bill shares, but only those with higher relative domestic revenues are able to sustain a large public sector wage bill without fiscal strain. Table 3.4: Wage Bill in Selected African Countries Source: IMF, most recent published Article IV Consultation. Data for Ghana i s planned for 2005. 3.32 But these comparisons should be made with caution, as the Ghanaian budget is strained by the heavy demands the wage bill makes on CF discretionary resources (68 percent). The large wage bill crowds out other categories o f spending in the domestically financed current budget and making their hnding over-dependent on the assistance o f development partners. Some comparator countries are also struggling to meet their wage bills. Furthermore, the underlying structure o f pay it represents i s insufficient, certainly for professional, managerial and technical grades, to properly motivate staff. 3.33 Over the longer term, the wage bill i s driven by policy decisions on the scope o f government and the manner in which services are delivered. These issues are expected to be addressed by the public service reform programs, re-launched earlier in 2005. More immediately, the wage bill i s influenced by both budgeting and technical issues. On the budgeting side, MoFEP’s control over the wage bill is complicated by the staffing increase demands o f MDAs. Discussions on the wage bill requirements for next year’s budget happen late in a compressed budget preparation calendar (discussed later in this section). An allocation is determined for the overall increase in the wage bill, and appears in the Appropriations Act as a “contingency reserve”, to be distributed later on during the year, as discussed in chapter 2. For 2005, the Ministry o f Education has already requested MoFEP for an increase in i t s wage bill provision by 530 billion cedis (of which about 60 percent i s for MOE and GES and the remainder i s for tertiary education) (Table 3.5 below). As in the past, the strongest driver o f wage bill costs i s the education sector, specifically the GES and the NTEC. 17 Table 3.5: Education Sector Wage Bill (inbillion cedis) Division 2005 Request Shortfall 2004 2004 Difference budget Budget Actual M a i n Ministry 159.3 215.6 56.3 158.5 200.4 41.9 GES 2949.8 3224.8 274.9 2392.6 2961.3 568.7 Tertiary 510.4 707.7 197.2 464.4 464.4 0 TOTAL 3619.5 4148.1 528.4 3015.5 3626.1 610.6 Source: Ministry o f Education 3.34 Although the contingency provision budgeted for 2005 under the CF is sufficient (over 1 trillion cedis) to cover the extra wage bill, the process o f budget preparation would have been better served if the wage bill increase had been properly costed as an integral part o f the Ministry’s budget submission. In that way, the wage demands o f the education sector could have been examined in relation to the claims for resources by other sectors and perhaps savings could have been found, or the increase in staffing denied. Providing fully for the wage bill during budget preparation would strengthen the credibility o f the MTEF and the hard budget constraints reflected in the call circular, and, moreover, underpin the principle o f Parliament giving prior approval to spending o f public funds through the Appropriations Act. 3.35 A possible justification for a wage bill contingency might be uncertainty over the magnitude o f new hiring, but this is not the case in Ghana. The numbers o f new staff coming on board at the start o f the school year in October are accurately known in advance and there i s no need to assume, as with current practice, that staff strength will remain the same. For example, i t was known that 9000 graduate teachers were expected to j o i n the GES in October 2004. Thus the magnitude o f these increases should be known beforehand, and costed and budgeted for in the Ministry’s submission, which can then be accepted or disallowed. 3.36 A more justifiable source o f uncertainty i s adjustments to pay, the outcome o f periodic negotiations between the GES and teachers unions, and likewise in the health sector. There is a case for looking afresh at how wage increases should be handled in the budget. If pay negotiations are still underway when budget preparation i s concluded, the Government choices are limited. One option i s to include a special salaries provision in the MoFEP’s vote to cover the cost o f new pay scales. Alternatively, when the amount o f wage bill cost i s known, the Government could return to Parliament with a Supplementary Appropriation Bill to cover the cost o f the new scales, and to indicate how they will be financed. Although this might be viewed as theoretically the correct way to proceed, it may be impractical from a political perspective. A third option would be to ensure that pay negotiating bodieshalaries commissions complete their work ahead o f finalization o f the budget estimates, and that the new salaries and wages commence with the start o f the FY. I n the medium term, the Government intends to move forward with public service reforms. I nthis way i t can address the staffing level and policy cost drivers o f the wage bill, and develop a new pay policy which places greater regard to the local labour market for professionals and skilled technicians. 18 3.37 Technical problems also impede control over the wage bill. The MoFEP has considerable control over the IPPDl wage bill, through i t s I T and reporting systems through which names and correct pay rates are verified. Payroll audits since 2000 have succeeded in cleaning up the payroll, with thousands o f ghost workers removed from the payroll, particularly in the GES; the number o f ghost workers identified in GES fell to less than 100 in 2004. The “ghosts” problem is not yet eliminated, however, and continual payroll cleaning exercises are n addition, the I T system for IDDP1 i s antiquated and in danger o f becoming non s t i l l required. I operational (the next chapter discusses this issue further). 3.38 An adequate degree o f verification i s not available for the SAs. Although the payroll l i s t is reported to the MoFEP, the latter has no independent means o f verifying this. The situation i s even more problematic for tertiary education, as the wage bill i s paid to the umbrella organisation National Council for Tertiary Education (NCTE), which then pays out to the SAs falling under it. The situation has arisen that the SAs use part o f the wage bill provided to them to increase their non-wage spending. This partly explains the discrepancy between C A G D estimates o f spending for SAs under items 1 and 2 and SAs estimates. The MoFEP i s considering imposing control over the S A payroll through having just one payroll for all the SAs. 3.39 Better control o f the wage bill over the longer term requires comprehensive public sector reform, through rationalising o f the number o f government agencies. I t also requires revisiting the way in which current policies are delivered, and the dividing line between the state and privatehommunity provision. GoG i s aware o f this and o f the fact that such reform i s a long term task. However, improved wage budgeting practices, better technical solutions, regular payroll audits and bringing the SAs wage bill under control can be achieved in the near future. Improving the MTEF as a Strategic Resource Allocation Instrument 3.40 The MTEF should serve as the main strategic resource allocation tool for ensuring that the m i x o f spending programs i s consistent with GPRS objectives (and orientations drawn from the Annual Progress Reports) and also that the GPRS itself i s consistent with a sound aggregate fiscal strategy. The 2005-07 MTEF (Appendix Table 5 o f 2005 Budget Speech) suggests some improvements in functionality. In the past, the MTEF showed constant sector shares derived mechanically, thereby rendering i t o f little use as a resource allocation tool. This year, however, recommends some variation between sectors indicating a degree o f strategic prioritisation. The share o f general administration falls from 13.5 percent to 10.7 percent and the share o f the contingency falls from 15.7 percent to 8 percent, which i s more reasonable but s t i l l too high. The shares o f economic and social services, and public safety also increase (Table 14, Annex). 3.41 The MTEF would be more effective if i t were comprehensive in terms o f sources o f funds. At present it captures GoG and donor expenditures but omits HIPCs, IGFs, GETF, D A C F and the Road Fund which in total represent about 30 percent o f broadly defined public spending (Table 9, Statistical Annex). N o w that Ghana has reached the HIPC Completion Point, the annual magnitude o f debt relief i s known with considerable certainty. Including HIPC resources in the M T E F should therefore not represent a major challenge and i s consistent with the Government’s recent decision that HIPC funding will be integrated in the regular 2006 budget process. With IGF appearing for the first time in the 2005 Appropriations Act by MDA and economic classification item, i t should also not be difficult to incorporate these into the MTEF. 19 As for the Statutory Funds, external partners acknowledge existing structural constraints, unlikely to change in the near future, and suggest that the Government considers (a) synchronizing the preparation o f the SFs spending plans with the timetable o f the budget elaboration, and (b) including them in the budget statement documents in a manner that suits existing rules and regulations. Expected expenditures from the SFs could be shown as a memorandum item, with the transfers into them; as funds to be voteda7 3.42 There is also scope for using the MTEF more strategically, as an instrument to improve management o f aid flows (particularly project aid), rather than allow spending to be driven by variations in external finance availability. 3.43 Late in 2004, the Government committed itself to conduct an internal review o f the MTEF. This worthwhile exercise i s needed, given the s t i l l unrealized potential to help the Government allocate resources strategically, manage fiscal shocks, improve policy coherence and enhance operational efficiency. Amongst other things, the MTEF review could look at whether the present objective/output/activity classification system needs simplification and how it could provide for a stronger operational link between the GPRS and the annual budget. Improving Predictability o f External Assistance 3.44 During the last three years, the Government o f Ghana made substantial progress in mobilizing external financial assistance to implement i t s poverty reduction agenda. ADMU estimates that about US$2.2 billion were contracted in the period 2002-2004, o f which slightly less than half was in the form o f grants and the rest in soft loans (Tables 28 to 33, Statistical Annex). This has rejuvenated the country’s foreign assistance portfolio, and resources disbursed in 2004 were largely made from loans and grants signed over the period in reference. Still, about 70 percent o f those resources are available for the period 2005 onwards. While debt relief in the context o f the HIPC initiative has also freed-up significant resources, the country’s financing requirements identified in the GPRS, including those needed to meet the MDGs, will continue to be substantial and preferably contracted in grant and concessional loan terms to preserve debt sustainability. 3.45 The weak predictability o f external funding and the fact that large amounts flow off- budget pose major challenges to both the Government and the donors as they affect the reliability and comprehensiveness o f the budget and adversely impact on the efficiency o f the country’s programs. In 2002, ADMU instituted a standardised format for reporting on donor inflows for project and budget support. This effort has received broader cooperation and i s yielding a more comprehensive reporting. An application system CSDRM 2000+ i s operational in MoFEP, CAGD and BOGto handle all aid and debt management o f the government. The 2005 budget statement provides a much improved coverage o f foreign assistance, both planned for the current year and outturn data for 2004. Notwithstanding this achievement, accounting for external flows remains a significant challenge and the variance between budget estimates and actual disbursement continues to be excessively high (Figure 3.4 below and Table 9, Statistical Annex). ’This would enable a comparison t o be made between the planned spending o f SFs and their actual outturns. In the case o f the GETF, a sizable proportion o f the transfers to it, in recent years, seem to have been invested in financial assets rather than spent o n current outlays. 20 The 2005 Budget statement indicates that all MDAs will be required to submit to MoFEP (as established in the FAA) quarterly financial reports detailing receipts o f grants and loans. I t also states the need to ensure an appropriate ex-post integration o f donor disbursements in the financial reports o f MDAs. These actions fit well with the intention o f ADMU to implement, shortly, a system o f periodic reconciliation o f grants and loans involving MDAs. Figure 3.4: Variance o f Donor Flows by Type o f Funding Average 2002-2004 20.0 15.0 % 10.0 5.5 5.0 0.0 I’roject Grniit5 and Project Program HI Pc‘ Assictanre Loans + HlPC (Yl\.lultilateral~) 3.46 Despite the worldwide trend from projects to budget support, project aid in Ghana might very well increase as a share o f total aid (Figure 2.2) in the absence o f a major concerted effort by Government and donors. One reason for this trend might be that donors and MDAs still lack confidence in the ability o f MoFEP to manage public finance due to large deviations at MDA level in budget execution, cutbacks in non wage spending and delays in cash releases. 3.47 Administration o f donor support outside the Government budget weakens budget management and accountability, particularly with donor flows financing about one third o f the budget. Tackling this problem calls for a stronger partnership between the Government and donors and requires that the Government demonstrates resolve to improve budget management, transparency and accountability. The principles recently agreed in the paper ‘‘Harmonization and Alignment in Ghana for Aid Effectiveness: a common approach for Ghana and i t s Development Partners” provide a good platform to move forward. The Government is conscious o f the need to collect better information on directly provided aid resources, but at the same time i t is aware that i t s own capacity to obtain this information is limited, and that donors cannot be compelled. Its priority, therefore, i s to collect as much information as it can about the directly provided assistance o f major program donors. 21 Reducing Shortfalls and Delays in Cash Releases 3.48 In recent years MoFEP has improved the system for the release o f cash to MDAs and strengthened commitment control. Nevertheless, there i s s t i l l some distance to go. Delays in cash releases and incurring o f payments arrears still occur, as evidenced by the considerable deviations between the budget as approved and the budget as spent, both across MDAs and within economic classifications. A key message o f this review is that these deviations detract from budget predictability, a vital attribute o f a well functioning budget system that delivers cost-efficient public services. Ministries tend to complain about MoFEP delaying cash releases or releasing less cash than indicated by the quarterly cash ceilings. The Auditor General’s Office raises this as an issue in its report on the Ministry o f Health’s financial statements for 2003. The picture i s not obvious, however, as clear information was not available o n this issue. However, MoFEP also indicates that MDAs do not always submit monthly fiscal reports, on which cash planning depends. 3.49 M a i n reasons for delays/shortfalls in cash releases and/or for arrears build up are: 3.50 Preparing o f invoices for payment i s a time consuming process involving several steps; for example, an invoice submitted by a roads project contractor operating in a district relatively far away from Accra can take several weeks to process. Arrears may be incurred if the expiry date for payment has passed. Arrears will then mount if the contractor charges interest penalties, as has happened in Ghana. But once the invoice i s approved, then, according to the Budget Department o f MoFEP, cash release should soon follow suit. M D A s do not send in their Commitment Control System (CCS) reports on time. Under CCS, for which 2004 was the first full year o f operation, M D A s are not allowed to commit more than the cash available under the quarterly cash ceilings. This is mainly the case for items 3 and 4, as items 1 and 2 are paid automatically within the quarterly cash ceiling (e.g the payroll bill). Monthly reports on commitments and payments have to be submitted to MoFEP in order to obtain the cash release for the following month. Complaints from MDAs about delays in cash releases may also stem from their failure to submit these reports on time. MDAs may deliberately overcommit in violation o f CCS, resulting eventually in payments arrears. The Budget Department in MoFEP i s satisfied that the CCS i s working well and i s aware o f the need to keep a close watch on the system in order to guard against underreporting o f commitments. Delays in cash releases due to attempts to meet the net credit to government ceilings under the PRGF. 3.51 Monitoring o f the accounts payable o f agencies with large contracts would be worthwhile in order to identify potential problem areas. The Notes to the Financial Statements o f the Road Fund include information on accounts payable by the different roads agencies. They show a doubling o f accounts payable (representing contractors certificates presented to the agencies but not paid at the end o f the year) to about 270 billion cedis. These are not necessarily arrears, but nevertheless the sharp increase should be noted. According to MoFEP, outstanding commitments totaled 45 billion cedis at the end o f 2004. 22 Timeliness and Accuracy o f Reports 3.52 Since August 2005, monthly budget execution reports are finalized by C A G D 6 weeks after the end o f the month in question. With regard to annual reports i t i s encouraging to note that C A G D has again succeeded in formally transmitting i t s report on the public accounts to the Auditor General within the statutory deadline o f 3 months following the end o f the fiscal year. 3.53 C A G D prepares bank reconciliation reports every month. Entries into cash books (reflecting revenues and expenditure commitments) are reconciled against bank statements showing credits and debits. Reconciliation records (unedited) o f Ministry o f Health for the end o f 2004 were reviewed in the context o f the ERPFM. The reconciliation errors were a very small proportion o f total transactions indicating that recording o f revenue and expenditure i s reasonably accurate. This does not guarantee that the expenditure being accurately reported is the budgeted expenditure, but internal control systems appear to be capable o f ensuring that only spending provided for in the budget is approved for execution. 3.54 In recent years, Ghana has made considerable progress in improving fiscal reporting and the preparation o f end o f year accounts. As Ghana makes the transition to an integrated financial management system, it will be important to sustain these gains. Improving the timeliness and accuracy o f fiscal reporting will be critical to the success o f accounting decentralization, as discussed in the next chapter. I t will also help increase donor confidence in government financial systems. Expanding the Budget Preparation Timetable 3.55 In the past, the timetable for preparing the budget has been compressed. This has several drawbacks. First, there is insufficient time for presenting the Government’s overall fiscal strategy to the Cabinet and generating consensus behind the MTEF spending priorities. Next, MoFEP needs time to translate the outcome o f cabinet’s discussion o f policy priorities into resource envelopes to be communicated to the M D A s through the call circular. Third, M D A s need more time to review existing and new programs, make trade-offs between alternatives, and ensure that their budget submissions reflect a strategic rather than incremental view on planned spending. Evidence o f this i s the incomplete way in which the wage bill is estimated in some ministries. Fourth, the Parliament needs enough time to review and debate the budget estimates, and approve the Appropriation Bill before the start o f the new financial year. 3.56 One o f the reasons provided by MoFEP for the delay in starting budget preparation is that estimates o f available resources are not finalized until late in the year. Uncertainty o f resource availability should not, however, be a reason for delaying budget preparation as the MTEF implies that spending should not be driven by year-to-year revenue and aid availability, but by a medium term view on the share o f national resources channeled through government spending. Firm spending ceilings could be provided earlier in the year, allowing MDAs to start preparing their budgets by looking at the efficiency and effectiveness o f present spending in relation to sector policy objectives. 3.57 The Government i s determined to expand the budget preparation timetable. In this regard, for the Budget 2006 the budget calendar gave MDAs up to 4 months to prepare their 23 estimates, much longer than a period o f around 3 weeks for the Budgets 2004 and 2005. Also, early in November 2005, the Government has delivered on the commitment made in the 2005 Budget Statement that it would submit the 2006 Budget to Parliament in sufficient time for enactment before the new financial year begins. 3.58 At present, the Budget presented to Parliament i s complex. It consists o f the Minister’s Budget Statement combined with several volumes o f detailed MDA Estimates. The latter, includes a detailed listing o f objectives, outputs, activities and costing o f activities; as a result the amount o f documentation i s massive. W h i l e detailed costing o f activities i s obviously commendable, the details are used primarily for internal working purposes. There may be a case for improving the presentation o f the budget estimates in the near future’. 4. IMPLEMENTATION OF PUBLIC FINANCIAL MANAGEMENT REFORMS 4.1 The GoG i s in the process o f implementing a number o f interdependent reforms, which together constitute a significant modernization o f public financial management in Ghana. The most important elements o f these reforms are: decentralisation o f the authority to execute the budget to the MDAs accompanied by the unification o f public accounting at the MDA level (eliminating Treasury accounting in its present form); computerisation o f MDA accounting and change o f system to produce consolidated accounts o f the Consolidated Fund (CF) through the roll-out o f the Budget and Public Expenditure Management System (BPEMS); strengthening o f payroll management; modernisation o f the accounting framework; making the public accounts and the budget more comprehensive, to include IGFs, direct donor funding and statutory funds; increasing the focus on outputs and outcomes; improving public procurement; and strengthening internal audit. In this chapter o f the report, developments in each o f these eight components o f the Government’s reform program plus development in the area o f external audit are reviewed and commented upon. Here the purpose o f the report shifts from budget review and analysis, with its focus on budget provision and outturn data, to an assessment o f the important PFM process changes underway. Thus the report both describes the reforms that the Government has embarked upon, discusses how implementation i s proceeding, and also offers some suggestions 8 While Governments should always err o n the side o f providing more information than less, there i s a case for looking afresh at the information provided in the Estimates presented to Parliament alongside the Appropriations Bill. The Performance Measurement Framework adopted, in June 2005, by the Public Expenditure and Financial Accountability (PEFA) Secretariat provides standards that could usefully be considered. 24 as to next steps, including how some technical challenges might be addressed. The starting point for the review is the three Acts, on Financial Administration, Procurement and Internal Audit respectively, the draft “Action Plan for the Implementation o f the F A A and FAR” prepared by C A G D as well as a draft “Action Plan on the Stabilisation o f IPPD 1” and a draft “IPPD 2 Implementation Plan ”. Other documents were also reviewed such as the “Broad Guidelines for a more Comprehensive Collation o f Annual Accounts ”, the draft three-year “Strategic Plan ” prepared by the Public Procurement Board, and the draft “Strategic and Resource Plan” prepared by the Board o f the Internal Audit Agency, respectively. A. FRAMEWORK THELEGAL 4.3 The legal framework for the reforms i s provided at the highest level by the finance chapter in the constitution, which contains 16 articles covering such matters as the authority o f parliament over taxing and spending, the operation o f the Consolidated Fund and the Contingency Fund, the annual estimates and the appropriation act, the raising o f loans and the servicing o f public debt, the role o f the Bank o f Ghana, the statistical service and the Auditor- General. 4.4 Next in level o f importance is the Financial Administration Act (FAA), 2003, Act 654, which i s Ghana’s organic finance law, and prescribes the roles, responsibilities and powers o f those responsible for public financial management, such as the Minister o f Finance, the Controller and Accountant general (CAG) and the Principal Spending Officers (effectively the Vote holders) in the line ministries. In June 2004, the FAA was complemented by the Financial Administration Regulations (FAR). The FAR consists o f 3 13 regulations divided into 15 parts. The FAR represents a considerable effort for which the Government should be commended. I n addition, there are laws which govern public procurement, internal audit, financial management at the sub-national level, and the roles and responsibilities o f the external auditor. 4.5 To regulate financial administration in the midst o f a multiplicity o f reforms i s obviously difficult. On the one hand there i s a need for a legal mechanism to drive the reforms. At the same time the rules and regulations must establish the procedures that should be followed here and now. These two objectives may lead to tensions and to some extent this is reflected in the FAA and FAR. For example: it is stated (in 0 186 o f the Regulations) that “The Public Accounts and other government accounts shall generally be prepared on an accrual b a s i ~ ” ~ While . this i s a commendable goal, at present is not possible for the MDAs to live up to i t - and it will not be for some time. Another example: The A c t vests the authority to execute payments in the heads o f department while in practice that authority i s still with the treasuries. And it will probably only be possible to phase out the latter gradually. 4.6 There can also be tension between different components o f the legal framework. The parts need to fit together to support a coherent concept o f public financial management and clear accountabilities. Generally, this has been done, though there are some areas (such as with internal audit, discussed later in this chapter) where there i s overlap on roles and thus a potential for disagreement which the Government may have to manage. There can also be gaps. For 9 Albeit with the caveat that “the specific basis and procedures for preparing the accounts shall be determined by the Controller and Accountant-General” 25 example, the Memorandum to the FAA says that the Act describes the key roles o f the Minister o f Finance and the Chief Director. In the law, this i s done fully for the Minister, but nowhere i s the Chief Director mentioned. In other countries there may be a Finance Secretary, equivalent to the Chief Director, who has a statutory responsibility to assist and advise the Minister in the carrying out o f his functions. This clarification o f roles, which i s missing in the FAA, could contribute to strengthen the effectiveness o f the Ministry. 4.7 A way to handle the contradiction between the present and the future would be to regularly amend the Regulations - changing specific paragraphs as and when the reforms are implemented - effectively making it a loose-leaf system and thus make it a living document. Another approach, which for example was adopted in South Africa, is to specify in the Regulations from which date specific paragraphs shall apply. The Government may also have to update the various Acts from time to time in the light o f implementation experience" and to ensure that the various parts o f the legal framework for PFM continue to cohere. 4.8 The FAA and the FAR should also be looked upon as living documents in the sense that they should be widely and actively disseminated and made a cornerstone o f systematic and recurring training efforts directed at all Accounting Officers in Government and their staff. B. OF ACCOUNTING AND TREASURY FUNCTIONS TO MDAS DECENTRALIZATION Background 4.9 In accordance with the new FAA and the FAR the expenditure part o f the budget is executed in the following major steps: 0 By the issue o f warrants signed by the Minister o f Finance departments are authorised to commit funds; 0 By the issue o f cash release instructions the Controller and Accountant General i s authorised to disburse funds to the special bank account o f the departments; 0 Heads o f department exercise budgetary control over the activities o f the department; and e Pavments out o f the special bank account relating to an appropriation are made under the direction and control o f the head o f the department. 4.10 The FAA and the FAR thus vest the authority to exercise budgetary control and to execute payments in the heads o f departments. Noticeable is the lack o f -reference to the treasuries which hitherto have had a central role in this process. Under the previous system budgetary control was likewise devolved to departments, but payments were executed by treasuries staffed by C A G accountants, often in the same building, on instructions issued by departmental spending units. loBut this i s likely to be less frequent, since an organic finance law, such as the FAA, should be concerned primarily about roles and responsibilities and general principles o f public financial management, leaving implementation details t o the regulations issued under the law. 26 Conclusions and Recommendations 4.1 1 There are two issues arising from the implementation o f the Government’s plans to decentralize accounting and treasury functions to MDAs. The first has to do with the recruitment o f the professional manpower needed for successful decentralization. The second i s the implications for treasury management. Below, the review also covers issues related to transitional arrangements as BPEMS i s rolled out, conditions for successful decentralization o f accounts and managing fiscal risks. Recruitment of qualified accountants 4.12 With the implementation o f the FAA and FAR, the accountingltreasury staff will be transferred to the MDAs along with checks and treasury functions while a single treasury account will be maintained. This transfer i s scheduled to be launched early in 2006. At the same time CAGD considers that the full transfer o f responsibilities to the MDAs will require that qualified accountants to be placed in the MDAs. The decentralization o f accounting to MDAs makes i t essential that their accounting units be headed by a fully qualified professional accountant. Thus the view o f the C A G that professionally qualified accountants be recruited to head MDA accounting units i s endorsed. Four are already in place in the ministries o f Education, Health, Roads and Transports, and Agriculture. Unless some very drastic measures are taken, filling the remaining posts poses a challenge given the difficulties in recruiting qualified accounting staff to the public sector. With wage differentials vis-&-vis the private sector o f up to 400 percent, either the organisational set-up will have to be rethought or ways found that will make i t possible for the MDAs to offer competitive salaries to accountants.” 4.13 One option may be to bring in qualified accountants on time-bound - three to five years - contracts at remuneration levels that can compete with the private sector as well as with privileged government institutions such as the IRS. To complement such a measure i t could be worth looking at the possibility o f establishing a corps o f roving qualified accountants that each could assist a number o f MDAs until the day when all the positions o f chief accountant in the MDAs are filled.12 4.14 Success in decentralizing accounting to MDAs will also depend on a government-wide determination to hold budget controllers accountable for the use o f their votes. Here the new FAA and FAR provides a strong framework for enabling the MoFEP to exercise i t s stewardship role, and for MDAs to regularly report the use o f funds and be accountable for the control and recording o f expenditures. Treasury management 4.15 I t will be important that the shift in departmental accounting responsibilities to MDAs does not end up in weakening the Government’s ability to conduct efficient treasury Behind this i s a structural issue o f pay adequacy across the Public Service for professionals and skilled technical staff. The report “Towards a N e w Public Service for Ghana”, published by the GoG in June 2004, recommends the .” progressive adoption o f “paying transparent, competitive cash salaries to c i v i l servants., 12 I t should b e noted that there are actually n o qualified accountants in the treasuries. At CAGD there at present seventeen. 27 management. It i s critical the issue o f how the responsibilities o f the MDAs new professional heads are defined, and what i s provided for in the new C A G approved accounting instructions, including daily reporting o f balances and the role played by the Central Bank. Transitional arrangements as BPEMS is rolled out 4.16 I t i s imperative that the CAGD, fully supported by the Ministry, take a proactive role in this process to ensure that the MDAs assume responsibility for putting the necessary human and other resources in place for them to be able to assume the responsibilities that follow from the devolution o f authority. 4.17 I t i s important to point out, however, that the devolution o f authority to the MDAs does not hinge on and should not be made dependent on the full deployment o f BPEMS. The accounts can be done manually and by using simple Excel-templates in the different cost centres around the country and the information can be entered into BPEMS at central or regional locations. 4.18 Manual accounting will coexist with computerised accounting in many o f the MDAs as BPEMS i s gradually being rolled out. To handle this situation, paper forms that mimic BPEMS screen templates are being developed. Using these forms it will be possible to record the same information as when using the computerised system, including that related to purchasing. The information is then entered into BPEMS at regional or central MDA centres. 4.19 At present two sets o f accounts that relate to the Consolidated Funds are prepared: 1) those based on the recording by the treasuries o f transactions carried out by them on behalf o f the MDAs, and 2) the accounts o f the departments themselves. As a consequence o f the transfer o f execution and payment authority to the MDAs the treasuries will eventually become extinct and with them the duplicate recording o f cash transactions relating to the CF. 4.20 The basis for the consolidated accounts prepared by C A G D will thus in future have to be the accounts kept by the MDAs. This requires that the MDA accounts are accurate and that the simple logistics o f getting the accounting information from the different cost centres to their respective MDAs and on to C A G D (or directly to CAGD) i s in place and can be complied with in a timely manner. Conditions for Successful Decentralization of Accounts 4.21 To ensure this may take some time. For that reason i t may be necessary to phase out the treasuries gradually. Full authority should be turned over to an MDA only when there are assurances that i t s accounts are o f a required quality and the routines for capturing the data are in place. The carrot would be that, once this capacity i s proven, the authority to issue checks would be transferred from the respective treasuries to the cost centres. 4.22 Routines have been established to digitise the information in the cash books presently kept by treasuries and then have i t transferred to CAGD. Transactions are already coded using the new 47 digit code-string and they can and have been entered directly into BPEMS. To 28 facilitate data entry, the BPEMS project has developed an Excel template and an Application Desktop Integrator interface for entering this information into Oracle Financials.l3 4.23 However, as the BPEMS has not been the primary system for producing the consolidated accounts for the CF, this entry o f data has lagged seriously behind. Priority has instead been given to the entry o f the same information into the National Expenditure Tracking System (NETS) using a transformation table from the 47 digit code string to the old one used in NETS. 4.24 The transfer o f accounting data as it i s being done today i s shown graphically in Annex B o f Volume I1 which also contains charts describing how i t will be done during the transition phase, and once BPEMS i s fully deployed. ManagingJiscal risks 4.25 Transferring payment and accounting functions to MDAs means that the C A G no longer has the comfort o f knowing that his own staff is discharging these functions across government. C A G D i s expected to continue to be responsible for the recruitment and posting o f staff to the MDAs and MMDAs. However, i t will have to rely upon MDAs staff correctly observing government accounting rules. I t will be important, therefore, for the MoFEP to pay close attention to: Regularity o f monthly fiscal reporting by all departments; 0 Drafting and approving Departmental Accounting Instructions and to periodically inspect accounting units in MDAs (in accordance with FAR 33) to ensure adherence to government accounting rules; and 0 Determined action by M o F E D to hold Principal Spending Officers accountable for the effective discharge o f their enlarged financial management responsibilities as vote controllers under the FAA. 4.26 In addition, steps will need to be taken to reflect the new arrangements for decentralized accounting in the existing accounting cadre/service rules, and to ensure that uniform standards in the recruitment and promotion o f accounting staff o f all grades continue to be applied. C. THEBUDGET MANAGEMENT AND PUBLIC EXPENDITURE SYSTEM (BPEMS) Background 4.27 The development o f BPEMS - which i s a prerequisite for the implementation o f important components o f the FAA - has taken a long time with a series o f stops and goes. Some encouraging progress has been made in the last year. The MoFEP has fully taken over the management o f the project and the consultant team that replaced Ernst & Young has been phased out. The development and deployment o f the system is now funded entirely and directly by GoG. 4.28 Progress has also been made on the systems front. Responsibilities, security and profile options have been defined and set up on the system. The assignment o f responsibilities to the l3This template can be used either by a treasury or an MDA. 29 staff in the eight pilot MDAs that originally will be using the system has been completed. The configuration o f the Purchase Order, Accounts Payable, General Ledger, Accounts Receivable, Public Sector Budgeting and Cash Management modules for the 14 sites has also been completed. Core functionalities (General Ledger, Purchase Order and Accounts Payable modules) have been deployed to MoFEP, CAGD, M o H and GHS. The 8 MDAs already connected to BPEMS will be ready to use the system early in 2006. 4.29 Training manuals have also been prepared and training has been provided to the users in the MDAs that will be part o f the first deployment phase. Due to the delay in deployment, most staff that has received training will, however, receive some refresher sessions throughout the implementation period at all the M D A s sites. Current Status 4.30 A year ago the Government estimated that BPEMS would be rolled out to 14 sites in 8 pilot ministries at the beginning o f 2005. This has not happened. The singly most important factor that holds up deployment i s the non-operation o f the Wide Area Network (WAN). A 19 node wireless local loop system has been installed and was running properly for a year. Starting August 2004 technical problems have led to a dramatic reduction in transmission speed to the point that the network i s for all practical purposes unusable. But for contractual reasons those problems have taken time to be resolved and the roll-out has been delayed. Though the connectivity is now in place for the 8 MDAs, the speed o f the network is very slow. MoFEP has therefore decided to extend the IPPD fiber-optic network to the BPEMS sites, an action expected to be completed in all 8 M D A s early in 2006. In the meantime, the Government i s committed to the signing o f the maintenance contract with Siemens. 4.31 Another factor affecting the roll-out i s the delay in relocating o f all central BPEMS equipment from i t s present temporary quarters to the MoFEP’s Financial Information Centre. A year ago the Ministry reported that the move was due any day. I t i s now planned to be completed early in 2006. 4.32 A problem that needs to be resolved i s that, in order to go live, say from January 2006, opening balances must be correct. The bare-bone General Ledger information from the other MDAs discussed above has only partially been entered into the system. In fact the backlog goes back to 2003. Consequently the closing balances would be incorrect and could not be used as opening balances even if BPEMS ran parallel with NETS this year. 4.33 There are two immediate options: (1) concerted efforts could be made to eliminate the backlog and make all cash book information up-to-date; and (2) the partial information that i s in the system could simply be purged and the 2005 closing balances from NETS used. MoFEP has decided that BPEMS will be purged to allow for data to be used with effect from 2006. 4.34 Another set o f issues that will need to be addressed i s how the accounting information from the MDAs that are not connected, as well as information from the remote cost centers within the linked-up MDAs will be entered into the system. This information will continue to be prepared manually and subsequently uploaded into BPEMS after being entered at the central or 30 regional locations by using an Application Desktop Integrator that has been installed and configured to capture the approved budget and transaction data into the General Ledger module. 4.35 Regardless o f the responsibility for entering data into BPEMS, for safety reasons, MoFEP has decided that for an interim period data will be entered and run in parallel into ACCPAC and NETS for the production o f the accounts for the Consolidated Fund. 4.36 A general issue that has now been resolved i s the managerial ownership o f BPEMS. Until recently, the development o f the system has been organised as a distinct and separate unit within MoFEP answering, as from last year, directly to the Chief Director. It i s clear that the changes in the management set-up implemented since last year have been positive. Development has shifted from being a consultant driven process to one genuinely owned by the Government. At the same time, it must be recognised that progress has been uneven. 4.37 Once in production, BPEMS will be critical and any failures o f the system will have serious repercussions on the function o f Government and will discredit Government vis-a-vis Parliament, the public and i t s international partners. Experience shows that i t i s prudent to make the institution and people that are immediately responsible for the contents o f the system also responsible, in a managerial sense, for the system as such. As a result, MoFEP has recently decided to transfer management responsibility to BPEMS principal user, the CAGD. 4.3 8 Unifying the overall responsibilities for all the elements - conceptual, technical, institutional, procedural, and human - that are required for the move to BPEMS should increase the likelihood o f success. C A G D is now deeply engaged in the final development o f the BPEMS system to be rolled out. It must also take the steps necessary - not the least in terms o f human resources - to ensure that i t i s capable o f assuming the responsibility. Conclusions and Recommendations 4.39 The Government i s fully committed to BPEMS implementation. In order to manage the process, the Government would be well advised to prepare and follow a critical path action plan. The action plan should take as its starting point a target date for making BPEMS the primary system for the accounts for the Consolidated Fund. For that to be possible the connectivity problem will need to be resolved. Timely implementation o f the recent decision to extend the IPPD fiber-optic network to the BPEMS sites will solve the connectivity problem and also make it possible to get the eight first-wave MDAs up and running. 4.40 Making BPEMS the primary system for the accounts for the CF, and giving the eight MDAs access to the full functionality o f BPEMS, requires more than just solving the connectivity problem. A l i s t o f critical issues - including those already discussed above - that a critical path action plan would need to address includes: Resolving all outstanding contractual issues that impede or risk impeding BPEMS deployment and maintenance (Siemens, Oracle, HP, building contractors, etc.); Developing and implementing contractual arrangements that will make i t possible to contract and retain key accounting and IT-staff; 31 e Budgeting immediate, short-term and medium-term financing requirements and ensuring that adequate C F funding is made available when needed; e Creating necessary technical and human capacity at C A G D to feed information into and run the BPEMS and ACCPAC and NETS in parallel - until ACCPAC and NETS can be decommissioned; e Ensuring the required technical and human capacity in the MDAs to run BPEMS; a Taking steps to ensure that BPEMS will be purged to allow the system to go live; and e Ensuring that all staff is trained or refreshed and that MDA in-house training capacity i s created. 4.41 The above l i s t just illustrates the different types o f issues - technical, contractual, institutional, human resource - that need to be resolved in order for a roll-out to be successful. To ensure these benefits are maintained, i t will be in the Government’s interest to ensure, from time to time, that the operation o f the system is reviewed by external assessors from the perspective o f functional quality. D. MANAGEMENT OF THE PAYROLL Background 4.42 Work on the payroll system has for a long time proceeded along two tracks. The original payroll system IPPDl was installed in 1993. The system, a French system SIGAPIP developed in COBOL i s no longer supported and the Government has since 1998 been determined to replace it with a modem system. The development o f the latter system (IPPD2) has, however, encountered countless problems o f a nature similar to those that have marred the BPEMS project. Funding problems and contractual conflicts have bedevilled the relationship with consultants. 4.43 To ensure the continued management o f the payroll, the original SIGAPIP system is being rehabilitated to keep it operational. Separate funding has been made available for a “stabilisation project” to ensure that the hardware, most importantly the servers, o n which IPPDl depend i s adequate. The Action Plan on the Stabilisation o f IPPDl i s being executed and will be completed shortly. 4.44 For the future, however, the Government is determined to replace SIGAPIP. The choice made by the Government to replace i t with a human resource system including payroll management from Oracle makes good sense in view o f i t s choice o f Oracle Financial for its accounting and budget control system. Common database infrastructure and programme logic makes for an easy interface between the two systems; an interface that ought to be established as soon as possible after the first roll-out o f BPEMS i s accomplished. Conclusions and Recommendations 4.45 Current efforts to stabilize the original SIGAPIP system makes good sense as a stop gap measure. As payroll management is an absolutely critical process, the Government must ensure that there i s a system in place to do it. The Government can take no risks in this area and it i s important that the ongoing stabilization project i s successfully completed. 32 4.46 In a related development, the Government i s determined to strengthen the management o f the payroll o f SAs. Earlier in 2004, MoFEP determined that SAs had to submit returns o n their previous month’s expenditure before their current month’s allocation would be released. The government estimates that there are currently about 150 subvented agencies and acknowledges that management o f SA’S staffing needs to be strengthened. While some progress has already been achieved, the government has decided to implement, by end 2005, a computerised system to ensure an efficient and improved process to manage and control SA’S personnel and payroll data. The Government’s decision i s encouraging in view o f the fact that an important share o f wage-bill overruns in recent years i s associated with the SAs. I t is the Government’s intention to centralise the management o f the payroll o f the SAs using IPPD2, once i t i s up and running. 4.47 In future the development and deployment o f IPPD2 should be closely coordinated with the deployment o f BPEMS. One area where coordination i s imperative i s in regard to the communications network. The same applies to hardware in the MDAs. Training is another area where coordination would keep costs down. 4.48 I t is important to underline, however, that using a central system for preparing the payroll o f the SAs i s a stop gap measure to solve the problem o f payroll overruns in the latter. The Government should carefully analyse what incentives SAs have - or rather do not have - to control their payroll. Effective control in the long term may require changes in that incentive structure. The present soft budget constraint will have to be replaced by a hard one. This issue could usefully be dealt with as the governance framework for SAs i s under revision, and a Subvented Agencies Bill is planned to be submitted to Parliament by the end o f July, 2005. 4.49 One o f the problems with developing adequate support for payroll management i s that it has been dependent on project financing. The decision by the Government to go ahead and finance the development o f IPPD2 on i t s own, just as i t has with BPEMS, is highly commendable and signals clear ownership and high priority being given to strengthening payroll management. The Government should, however, be aware that substantial costs will be involved and if the move to IPPD2 i s to be met, there can be no delays in releasing funds to meet these costs. 4.50 Just as in the case o f BPEMS, i t i s critical to take care o f outstanding contractual issues, and ensure that, as planned, IPPD 2 successfully runs in parallel with IPPD 1 during 2006, before the latter can be decommissioned. E. ACCOUNTING FRAMEWORK Background Accruals 4.51 The FAA and FAR reflect a decision by the Government to move to accrual accounting. This decision must be considered correct in view o f the information, control and management needs incumbent on the Ghanaian public sector. However the transition from cash to accrual accounting i s a complex process. It should be guided by a clear reform strategy and carried out in steps. I t i s a process that requires a series o f reforms and capacity improvement on a number o f fronts. Developing and codifying the accounting model must go in step with institutional 33 changes, the improvement o f staff capacity and the development and implementation o f IT- system support. 4.52 Accrual accounting in the public sector is relatively new, but Ghana has the advantage - in relation to the very early adopters - o f being able to draw o n standards developed by the International Public Sector Accounting Standards Board o f the International Federation o f Accountants. The Institute o f Chartered Accountants (Ghana) i s a member o f IFAC. W h i l e the focus o f I F A C is the definition o f best practice, the Institute recognises and emphasises that the move to accruals can not and should not be done in one fell swoop, and certainly not in a country where trained accountants are in short upp ply.'^ Chart of accounts 4.53 The chart-of-accounts which has been implemented in BPEMS is made up o f ten dimensions: a) functional group as per COFOG, b) institution (MDA), c) fund type, d) CF Source, e) sector, f) broad economic category (personal emoluments, administration, services, investment), g) objective, h) output, i)activity, and j) location o f treasury. Altogether the different dimensions add up to a code string o f 47 digits. 4.54 In the 2004 Public Expenditure Management Review comments were offered on the present appropriation structure and the chart o f account^.'^ I t was recommended that the chart-of- accounts be rearranged and simplified. In this vein the Government has taken an initiative to "standardise activities on the medium term framework". Conclusions and Recommendations Accruals 4.55 To guide the transition to accruals i t behooves the Government to formulate a medium and long t e r m strategy and a broad and timed road map for reform as the transition from cash to accrual accounting i s a complex process. 4.56 What will facilitate and most likely catalyze the transition in Ghana i s the roll-out o f BPEMS. Thus rather than being a subordinate, albeit crucial component o f a reform process, in Ghana the deployment o f a modem accounting system i s likely to, to some degree, drive the process. The fact that the system is built on a very complete and standard platform makes further reform o f the financial management system a lot easier. Moreover, the system has the advantage of being capable and flexible enough to accommodate the entire transition. There will thus be no need to change the accounting sofhvare as the different phases towards full accruals run their course. l4 Accounting standards for the public sector as well as reflections o n the transition process can be found at: http://www.ifac.org/PublicSector/ 15 Refer to the m a i n text as w e l l as Annex 7. 34 4.57 The deployment o f BPEMS is likely to drive the move towards accruals because the potential o f improving the accounts will be obvious and more or less easily at hand. For example: 0 Through the use o f the Accounts Payables and Accounts Receivables16 modules the individual M D A s as well as Government as a whole will, once fully rolled out, have immediately at hand a complete record o f arrears in regard to payment to be made from the CF; a With some additional effort the recording and management o f all traditional financial assets and liabilities - advances and loans to staff, other advances and loans, deposits, trust moneys, investments, etc. - can be done through BPEMS; a Likewise with some additional efforts, it will be possible to bring accounting information regarding the external and internal debt into BPEMS; ‘ 0 The most difficult and therefore the likely last step in the reform o f the accounting framework will be to bring all physical assets in to BPEMS and on to the balance sheet. That may very well have to wait a few years. 4.58 Besides enhancing the information content and the coverage o f the account, moving to BPEMS will also greatly improve the integrity o f the accountkg system. There will be a complete audit trail and the possibilities o f tampering with the accounts will be reduced. Audits will be facilitated as i t will be possible to give the AG direct reading access to the system permitting the auditors to base their audits on systematic risk assessments. 4.59 Notwithstanding that the benefits o f modernizing the accounting framework and exploiting the full potential o f Oracle Financial are obvious and thus likely to spontaneously move the process forward, there would be clear benefits to having the reform process be guided by a carefully considered strategy. Such a strategy would inform the preparation and systematic revision and extension o f the accounting manual. I t would also provide guidance to all the other steps o f an organizational and human resource nature that will need to be taken if the benefits listed above are to be reaped. 4.60 A critical part o f this will be the need to train senior MDA managers, and especially Principal Spending Officers, in what the progressive adoption o f accrual accounting means for public financial management, and how they will be expected to use accrual information to improve departmental performance. Chart of accounts 4.61 The draft set o f “standardised activities” referred to above bear all the characteristics o f what would normally be considered to be instances o f an economic expenditure classification: external professional services, construction and acquisition o f buildings, acquisitions of vehicles etc. The exercise thus points to the possibility o f actually eliminating Activity from the chart-of- accounts rather than just reducing the number. When pondering this possibility, the drafting team 16 The recording accounts o f accounts payables and accounts receivable i s per se a first step towards accruals. I t implies recording initially a liability and an asset respectively - before recording the ensuing payment. 35 for the accounting manual might also consider replacing the Objective and Output dimensions with a single Progrumme/Project dimension as suggested in the 2004 report. 4.62 Furthermore: Fund Type may not be needed because each Source o f Funds could, in an auxiliary table, be tagged with Fund Type. In the same manner Sector could be eliminated and in an auxiliary table tagged to either the Orgunisation or to the suggested Progrumme/Project dimension. Once the authority to issue checks i s fully transferred to the cost centres, the Locution of Treasury dimension can be eliminated. 4.63 Collapsing the “performance-oriented” dimension into one and eliminating some others would free up space for recording other important transaction characteristics. A counter-party dimension may be needed unless Oracle Financial can be set up in some other way to ensure correct elimination o f intra-governmental transactions. If direct donor support i s to be brought into the accounts, it may be necessary to allow for the recording o f a donor specific economic classification so as to make i t possible to report back to the donors in a way that meets donor needs. F. COMPREHENSIVE ACCOUNTING AND BUDGETING Background 4.64 As already mentioned, at present two set o f accounts capturing the transactions o f the Consolidated Fund are prepared: a) those based on the records o f the treasuries and compiled by CAGD, and b) those prepared by the M D A s . The MDA accounts also - in principle - include the internally generated funds and related expenditure. Donor budget support, both grants and loans, i s captured in the C A G D accounts as revenue or financing. I t is also captured as expenditure (though not linked to source) in the MDA accounts because they become part o f the Consolidated Fund. Direct donor financing, on the other hand, i s not captured in the Consolidated Fund accounting system. Block transfers to the statutory funds are captured in the C A G D accounts. Any direct revenue to the statutory funds and the details o f total statutory fimd spending i s captured only in the accounts o f the statutory funds. 4.65 To meet GFS standards for comprehensive fiscal reports that cover everything that pertains to “public funds” the Government is preparing to collate financial statements from the different statutory funds combining this information with the financial statements for the Consolidated Fund. In keeping with the FAA, the Government i s also keen to include information on IGFs. The Government i s also determined to include direct sector and project support in C A G D fiscal reports. 4.66 In regard to the budget, o n the other hand, the Government has as from this year extended its coverage by including fully IGFs and their application - and as much information on direct donor support as MOFEP has been able to garner. The information i s incomplete due to the difficulty o f obtaining data from some donors but the ADMU o f the MOFEP i s making concerted efforts to improve the coverage. 36 Conclusions and Recommendations 4.67 The main theme o f the 2004 External Review was the fragmentation o f public financial management in Ghana and its adverse effect on aggregate fiscal discipline as well as on the possibilities o f reorienting public spending so as to reflect political priorities. 4.68 The C A G D has created a Departmental Accounting Unit which compiles a “Memorandum Statement” o f revenue and expenditure o f GoG accounts drawn on the treasury system in particular as well as from other inflows and outflows o f M D A s . Collating information from the different “financial jurisdictions” in order to produce more comprehensive fiscal reports i s a step in the right direction and actually the only thing that can be done today given the present accounting framework and the systems support for it. 4.69 Direct sector and project aid still stand in the way o f the Government attaining the goal o f comprehensiveness both in the budget and fiscal reporting. The practical difficulties o f collecting data on aid flows not under the control o f the Government should not be underrated, and for them to be resolved, development partners will have to provide more assistance in terms o f regular information on aid usage. Despite the difficulty to produce an accurate account o f direct external assistance, the Government should not give up i t s efforts at more comprehensive reporting. In the first place, Article 176 o f the Constitution, in our view, supports a broad definition o f revenues and other moneys that typically cover grant flows. Second, comprehensiveness is a basic principle o f public financial management, contributing to transparency and thus underpinning democratic accountability (and consistent with GFS guidelines). Third, to refrain from doing could send the wrong signal to donors, perhaps suggesting that direct assistance need not be oriented with national p r i o r i t i e ~ . ’ ~Here, the Government i s taking a pragmatic approach. I t acknowledges the desirability o f comprehensive reporting o f all donor aid in budgets and accounts, but recognizes that this i s an ideal that can be attained only gradually. I t s focus, therefore, i s on improving the reporting o f major flows, the priority for i t s own fiscal management purposes. 4.70 The deployment o f BPEMS will make it possible to go beyond the piecing together o f information from different sources and actually base the fiscal reporting on comprehensive accounts. To begin with BPEMS will make i t possible to merge the accounting o f the IGFs with that o f central funds. The chart o f accounts is designed so as to be able to handle different Sources 0fFund.s. Thus the accounts for IGFs can be done using BPEMS and the information merged with that pertaining to the CF. Provided that the article o f the FAR on bank accounts for departments i s respected, i.e. that all department bank accounts should be part o f the CF, BPEMS can also be used for the bank reconciliation o f IGF. 4.71 For the same reason i t will be possible for BPEMS to be used for the accounting o f direct donor funding. Because o f the possibility to classify transactions by source o f funds, the system can produce separate reports for each project. If, in addition, the direct donor fimds provided ” Article 176 o f the Constitution uses language very similar to that found in other countries with similar financial management traditions. I t provides that: “There shall be paid into the Consolidated Fund.. .all revenues or other moneys raised or received for the purposes of, or on behalf of, the government.. ..” In other countries wording like this has generally been interpreted to include directly provided aid funds. 37 were held in a sub-account o f the Consolidated Fund account in BOG, it would have the additional benefit o f improving government liquidity and thus cash management.’ 4.72 What applies to direct donor funding also largely applies to the statutory funds. Without prejudicing the statutory authorities’ control o f the funds accruing to them they could use / be instructed to use BPEMS for their accounting. G. OUTPUT AND OUTCOME FOCUS Background 4.73 The Government has taken some initial steps towards an increased focus on the outputs and outcomes o f public activities with the inclusion o f performance information in the budget documents produced under the MTEF. An initial step towards outcome/output oriented budgeting was created with the introduction o f the objective, output, and activity dimensions in the chart-of-accounts. 4.74 Another hint at an output/outcome perspective is Article 41 in the FAA: “Notes that form part o f the accounts which shall include particulars o f the extent to which the performance criteria specified in the estimate in relation to the provision o f the department’s output were satisfied.” Conclusions and Recommendations 4.75 Overall, the MTEF remains a highly desirable tool, but one that has yet to yield i t s full potential. The investment o f time and effort in preparing the current MTEF information is yielding few dividends. Last year’s external review report indicated that in the future, the present objective/output/ activity hierarchy could usefully be replaced with a simpler programmatic structure. However, to do so requires a good deal o f efforts, including far- reaching consultations with the immediate stakeholders. In this light, the Government planned to conduct an MTEF review which could determine whether simplifying the objective/output and activity classification and eventually replacing it by a simpler programmatic classification might be the way forward. This would be a useful exercise, and should result in an action plan to improve the relevance, coverage and effectiveness o f the MTEF. H. PUBLIC PROCUREMENT Background 4.76 The Public Procurement Act (PPA) was passed in 2003. It establishes the principle o f open, competitive tendering for goods, works and services for all public entities, and provides for a new regulatory body, the Public Procurement Board (PPB), to issue procedural rules and standard documentation and to oversee procurement implementation. The Public Procurement Board has now been created and the Chairperson and most o f i t s staff has been appointed. The Secretariat o f PPB is operational since October 2005. In the meantime, as o f end-September, T h i s i s one o f the core benefits o f single treasury accounts or, what i s a better term, group accounts - the pooling o f liquidity. 38 encouraging progress has been made in setting up the procurement institutions at central and ministerial levels. In this regard, about 97 percent o f Tender Review Boards (TRBs) and Entity Tender Committees (ETCs) have been set up. At local (MMDAs) level, progress has also been achieved with 62 percent and 54 percent o f TRBs and ETCs having been established. 4.77 A comprehensive 3-year Strategic Plan including a listing o f outputs and activities for the period 2005 - 2007 has been adopted. Standard Bidding Documents have been prepared and are being used in the M D A s . At the end o f the trial period, legislative instruments and Guidelines/Manuals will be issued. Preparation o f operational manuals and regulations has also been contracted out. 4.78 I t i s s t i l l difficult to ascertain how broadly the act is being applied. However, the number o f tenders advertised in the press has increased and several M D A s have submitted procurement plans. The PPB Board has adopted a monitoring and evaluation tool and, later in October 2005, launched an evaluation o f 100 entities. This exercise i s expected to establish evidence o f the extent to which the act is being implemented. 4.79 An initial capacity building program to meet immediate needs has been carried out nationwide through awareness workshops. With a view to improve compliance with the act, later in the year, the Board will launch a training program for ETCs and TRBs. Conclusions and Recommendations 4.80 The implementation o f the Public Procurement Act seems to be on track judging both from the clarity o f purpose o f the Strategic Plan and progress since the passing o f the Act. 4.81 What to some extent has slowed down the operations o f the Secretariat to the Board was the delay in the appointment o f the Chief Executive o f the Secretariat and some o f the other key staff. This has had a negative impact on the training in the use o f the tender documents, the dialogue with the Public Service CommissiodOffice o f the Head o f C i v i l Service on the career paths o f procurement personnel, and on the preparation o f short, medium and long term monitorable Action Plans by MDAs. 4.82 Traditionally public procurement policy setting has always been a Ministry o f Finance and Economic Planning function, given that ministry’s overall stewardship role for the proper use o f public moneys, and for managing fiscal risks. The Act acknowledges this role, given that the PPB reports to the Minister o f Finance, advises the Minister o n the issue o f regulations, and vests in the Minister (Clause 14) the power to override the PPB’s prescribed procedures in the national interest. Thus i t will be important for the PPB to work closely with MoFEP, particularly the Chief Director and the CAGD, to ensure that the goals o f both the PPB and the FAA are achieved. I. INTERNAL AUDIT Background 4.83 The GoG has a long-standing system o f internal control for government as a whole. But deficient application o f relevant laws, financial regulations and the principles o f effective, 39 efficient and economical management results in significant losses and a reputation o f inadequate governance. This has been confirmed in a number o f audit reports, previous CFAA’s, HIPC assessments and also the PETS studies. The control system i s largely static and not responsive to risk. The main focus i s on compliance with laws and regulations, but in general this i s not actively backed by a system o f incentive? and sanctions to influence staff behaviour. Also missing i s a sense that management should use its system o f internal controls to achieve i t s objectives whilst managing i t s risks. 4.84 Internal auditors, until recently under the operational supervision and direction o f the CAGD, carry out four main types o f audit: Pre-examination o f payment orders; Physical verification o f goods received (equipment and stock); Reviews o f control systems; and Ad hoc investigations. 4.85 The first two account for most o f the time spent by internal auditors. The C A G D issued guidance to internal auditors in the form o f circulars but no formal audit standards or internal audit guidelines existed. 4.86 To improve the effectiveness o f the internal control system several initiatives have been launched and implementation has been initiated. 4.87 A new Internal Audit Agency Act (IAA) was passed (Act 658) in December 2003. Under this act the IAA would be established as an apex oversight body to co-ordinate, facilitate and provide standards and quality assurance for internal audit activities in MDA’s / MMDA’s, with a view to enhance efficiency, accountability and transparency in the management o f resources in the public sector. The IAA i s governed by a Board that i s accountable to the President. All MDA’s / M M D A ’ s must establish internal audit units (IAU’s), to be staffed by competent auditors under the guidelines o f the IAA. Internal auditors would report to their relevant management with copies to the IAA and the Auditor General. 4.88 The IAA has now been established and its Board was inaugurated in August 2004. A 3- year strategic plan has been developed, including a proposed organizational structure, work plan and budget. The Director-General o f the IAA has been appointed in October 2005 and progress has been made in the process to appoint deputy directors-general and administrative staff. 4.89 The number o f entities in the audit universe has been defined and full staffing o f IAU’s o f all MDA’s / MMDA’s is planned over a 3-year period. The Agency i s currently developing Audit Standards and Programmes for all M D A s and MMDAs. Conclusions and Recommendations 4.90 The legal basis and role o f the IAA, anchored in the accountability o f the IAA Board to the President, i s intended to increase the managerial and parliamentary oversight focus on the effectiveness o f the internal control and audit systems in the GoG. 40 4.91 Substantial value would potentially be gained from the implementation o f the F M A R and the deployment o f BPEMS. However, to full reap the benefits o f these reforms, the IAA would need to ensure the effectiveness o f I A U ’ s in MDA’s / MMDA’s. Without effective I A U ’ s in M D A ’ s / MMDA’s, the role and potential benefit o f establishing the IAA will be lessened. 4.92 Ensuring effective MU’Sis highly dependent on their independent operation, with appropriate audit standards, audit approaches, systems and audit resources. The IAA therefore needs to actively campaign, monitor and support the independence o f IAU’s, and indicate that i t would do so through the establishment o f Audit Implementation Committees in MDA’s/MMDA’s and by ensuring that it receives audit reports o f appropriate quality. More precise definition and measurement o f i t s constitution, membership and impact over the medium term will also benefit the process o f introducing effective internal audit in the GoG. 4.93 Quality assurance needs to be underpinned by adopting and monitoring compliance with international internal audit standards and best practice audit approaches. In this regard active support from a professional body for the development and accreditation o f internal auditors will benefit the IAA in delivering on its mandate. 4.94 Staffing capacity and audit resources should be determined from and monitored against the overall definition o f the risk universe, the most effective audit approach to it, potential synergies between external and internal auditing, and previous audit results. 4.95 The 3-year strategic plan o f the IAA is largely inward looking, focusing on setting and staffing the IAA secretariat. To guide the future actions o f the IAA, the strategic plan ought to be further developed by defining specific medium term output milestones, against which the IAA and other stakeholders can benchmark progress in the process o f strengthening internal auditing across the GoG. 4.96 Specifically the implementation o f the following aspects o f the action plan could benefit from a more precise definition o f actions and benchmarking over in the medium term as they constitute potential stumbling blocks to achieving the stated objectives o f the reform: The attraction and retention o f qualified professional staff for key positions. The IAA has defined post hierarchies, designations and professional qualifications for MDA’s / MMDA’s, but i t i s unclear what plans are in operation to ensure adequate supply and retention o f appropriately qualified professional staff for key positions. In addition, the role o f and interaction with a professional internal audit body, such as the Institute o f Internal Auditors, in supplying qualification and accreditation systems that the GoG can use, i s not clearly defined. The introduction o f risk-based auditing in the GoG. Like in any enterprise, it i s a fact that not all transactions and activities in the GoG can, or should be, subjected to internal audited. The cost to do this will be prohibitive and the value questionable. Given the traditional internal audit approaches, i t i s imperative for the IAA to ensure that audit in GoG i s risk based. 4.97 Ultimately, the effectiveness o f the internal audit function i s critically dependent on the demand o f internal audit services by heads o f departments, and above them, Accounting Officers 41 who are statutorily responsible for: (i)the Votes approved by Parliament through the Appropriation Act; (ii) the revenues to be collected; and ( iii ) the public assets to be managed. While the establishment o f the IAA should strengthen the supply o f internal audit capacity, the demand for effective control systems will increase only if Principal Spending Officers and their staff are held accountable for the use o f public moneys. This in turn depends crucially on the way in which the finance ministry sets the climate for public financial management and imposes sanctions, through the actions o f the Finance Administration Tribunal, on those whose conduct cause public losses. 4.98 I t should be noted that the IAA Act defines the roles and responsibilities o f the Agency very broadly, duplicating (Clause 3 o f IAA Act) the Minister o f Finance’s stewardship role specified in the FAA (Clauses 1 and 2). Furthermore, while the Minister i s ex oficio a member o f the IAA Board, the latter’s Director General has considerable independence. Under some circumstances, this could weaken the Minister’s ability to ensure control systems are in place across government to safeguard public funds and assets and promote economy, efficiency and effectiveness in their use. A s the Agency goes forward, it will be important that it works closely and harmoniously with the MoFEP, and each complements the other in the discharge o f their joint stewardship mandates. J. EXTERNAL AUDIT Background 4.99 The legal framework for external audit was revised several years ago and s t i l l provides a good foundation for this function (Audit Service Act, 2000). As a result, the focus o f the Government i s on ensuring compliance with existing rules and regulations. 4.100 Good progress has been made by the Auditor-General with the reduction o f external audit backlogs. The lag between the end o f the fiscal year and submission to Parliament o f the audited Public Accounts for MDAs was reduced from 16 months (April 2004) for FY 2002 to 9- 10 months for FY 2003 (September 2004) and FY 2004 (October 2005). A s for the audited Public Accounts for the Consolidated Fund, the same lag was reduced from 20 months (August 2004) for FY 2002 to 17 months (May 2005) for FY2003 and 12 months (December 2005) for FY 2004. 4.101 The recently completed audit reports for MDAs and Consolidated Fund produced by the Auditor General (or by private accounting companies under contract to the Auditor General) are a very useful source o f information on the accuracy o f the financial statements and the strength n Ghana’s case they permit interested outsiders to understand better the o f internal controls. I financial linkages and the accounting for the several different sources o f funds. 4.102 The goal o f the Office o f the Auditor General i s to submit the financial audit work for the Consolidated Fund for FY 2005 within the legally established period o f 6 months after the end o f the fiscal year. 4.103 The Auditor-General indicated to the mission that effort and additional resources will be required to sustain the good progress made, especially in lieu o f retirement o f key staff in the near future. 42 Recommendations 4.104 The review recommends that succession planning for key staff in the Ghana Audit Service be assessed by the Public Accounts Committee and appropriate action taken to prevent future slippage in the completion o f audits due. 4.105 The key to effectiveness o f the external audit system is the extent to which (i) the finance ministry takes action on audit findings, both during the financial year, and after P A C review o f the Auditor-General’s report, and (ii) mechanisms for sanctioning financial malfeasance are operated. In this connection, it is necessary to complete the appointment o f the members o f the Financial Administration Tribunal, as provided for in the FAA, so that i t can become operational and initiate sanctions against those whose conduct cause public losses. 43