2018 FEMM: Improving Public Finance Management In The Pacific

FORUM ECONOMIC MINISTERS MEETING

AND

FORUM ECONOMIC OFFICIALS MEETING

25-27 April 2018

Koror, Palau

 

STANDING AGENDA ITEM:

Improving Public Finance Management In The Pacific

 

Summary of Issue
This paper which has been prepared by PFTAC provides (i) an update since the 2017 FEMM, on public expenditure and financial accountability (PEFA) assessments and public finance management (PFM) roadmaps in Pacific Island countries (PICs) and PFM reforms more generally; and (ii) an update on revenue administration.
 
  1. PEFA AND PFM ROADMAP UPDATE

 

  1. PEFA Self-Assessments

Since the last update provided at the 2017 FEMM, PEFA self-assessments have been undertaken in Kiribati and Tokelau. PFTAC assistance in facilitating self-assessments places an emphasis on local staff involvement which allows for greater country ownership of the process and understanding of the results.  PFTAC provides an initial orientation on the PEFA framework and rating methodology, and then validates the appropriateness of the ratings determined by local officials based on the evidence presented.  Self-assessment demonstrates that PIC officials are capable of fairly applying the PEFA rating criteria on the PFM processes in their countries.  Forty-three PEFA type exercises have been undertaken from 2005 to 2017 (see Table 1).

  1. Updating of PFM Roadmaps
    1. Since the 2017 update, PFTAC has helped update the Tuvaluan PFM roadmap that was endorsed by the Government in July 2017. FSM has developed a draft, whilst Nauru, Kiribati, and Tokelau have undertaken PEFA self-assessments that will be a major input into drafting/reviewing their plans. Four countries do not have a PFM roadmap. The status of roadmaps across the regions is outlined in Table 2.

 

Table 1 – Summary of PEFA Exercises in the Pacific Context 2005 to 2017

Country First Recent Total Final Self Asses Draft
Cook Islands 2011 2015 3 2 1 0
Fiji 2005 2013 3 1 1 1
Kiribati 2009 2017 2 0 1 1
Marshall Islands 2012 2012 2 1 1 0
Micronesia 2013 2016 2 1 1 0
Nauru 2010 2016 2 1 1 0
Niue 2011 2011 1 1 0 0
Palau 2013 2013 1 0 1 0
Papua New Guinea 2005 2015 5 3 1 1
Samoa 2006 2014 5 3 2 0
Solomon Islands 2008 2012 3 2 1 0
Timor Leste 2007 2014 3 3 0 0
Tokelau 2017 2017 1 0 1 0
Tonga 2007 2014 3 2 1 0
Tuvalu 2007 2015 3 2 1 0
Vanuatu 2006 2015 4 3 1 0
Total 2005 2017 43 25 15 3

 

Table 2 – Summary of Roadmaps by Country

Country Comment
Cook Islands Public Financial Roadmap 2016-2020 issued by Government in November 2016. Major focus is on implementation of a new FMIS across Government.
Fiji Public Financial Management Improvement Program 2016 – 2019 was endorsed by the Government and focuses on improving compliance, expenditure management, strengthening procurement, debt management, and internal audit.
Kiribati Support for the Development of a Public Financial Management Plan (PFMP) for Kiribati. A preliminary draft was issued in March 2011. The initial draft was focused on several strategic objectives.
Marshall Islands The last draft of the Public Financial Reform Roadmap 2013 to 2015 was prepared in April 2013. The plan contains a significant number of activities to be undertaken over the medium term.
Micronesia First draft of the Public Financial Management Roadmap 2017-2020 developed.
Nauru No Roadmap drafted.
Niue No Roadmap drafted.
Palau No Roadmap drafted.
Papua New Guinea Public Expenditure and Financial Accountability Roadmap 2015-2018 endorsed by Government in July 2015 that focused on improving on accounting processes and the rollout of the Integrated Financial Management System (IFMS)
Samoa Public Finance Management Reform Plan (2015-2017) endorsed by Government in August 2014 that focused on legal and regulatory institutional arrangements, management systems framework, and capacity considerations.
Solomon Islands Public Financial Management Reform Roadmap July 2014 to June 2017 endorsed by Government in June 2014. Focused on strengthening institutions, improving service delivery and expenditure quality, and advocating the importance of good PFM.
Timor Leste Budgeting for a sustainable future: Towards a Roadmap of Budgetary Governance Reform in Timor-Leste endorsed by Government in 2017. Focused on modernising the budget process.
Tokelau No Roadmap drafted
Tonga Tonga’s Public Financial Reform Roadmap 2014/2015 to 2018/2019, endorsed by Government in October 2014.  Covering a variety of PFM activities.
Tuvalu Public Financial Management Reform Roadmap 2017 to 2021 endorsed by Government in July 2017. Focused on consolidating reforms to core PFM functions.
Vanuatu Public Financial Management Reform Roadmap 2017-2020 is in draft, but focusing on a sustained fiscal strategy with reduced exposure to fiscal risks ad improved transparency.

 

  1. Progress
    1. The results of repeat PEFA assessments over the last two calendar years (2016-17) in four PICs (Kiribati, Nauru, Vanuatu, and Federated States of Micronesia) have demonstrated outcomes in the following areas:
  • Budget reliability – Slight improvement overall driven by improvement on the information on resources and performance included in budget documentation.
  • Expenditure control – Improvement predominantly driven by strengthened controls on expenditure, and the establishment of risk based internal audit functions.
  • Fiscal reporting coverage and quality – Slight improvement driven by availability of audited financial statements that are scrutinised by Parliaments.
  • Asset and liability management – Improvement driven predominantly by better cash management forecasting and the disclosure of assets.
  • Managing fiscal risks – Improvement driven by greater central oversight by central governments over public corporations and sub national governments.

 

  1. Planning for PFM reforms is a complex and challenging process. Most countries need to focus on improving basic processes around core PFM areas and ensure that they are a normal function of operations, such as:
  • the budget preparation process, classification and documentation;
  • Cash Flow Management;
  • controls on all expenditure (payroll and non-payroll); and
  • in-year fiscal reporting.

 

  1. A major aspect in strengthening formal PFM institutions are the significant investments over coming years in new financial management information systems (FMIS), including in the Marshall Islands, Federated States of Micronesia, Cook Islands, Kiribati, and Tonga.

 

  1. Remaining Challenges
    1. Several countries are also undertaking climate change finance readiness assessments. The fiduciary component of these assessments rely heavily on the PEFA indicators. Ultimately, countries that wish to attain National Implementing Entity (NIE) accreditation will need to ensure that basic core PFM functions are undertaken as a normal course of business.

 

  1. Average PEFA scores in countries with repeat PEFA assessments have shown some improvements, although performance remains weak in some core areas.

 

Policy-focused Budget Preparation with a medium-term time frame

  • Budgets demonstrating linkages with policy and containing a multi-year focus remains extremely weak. No PIC has received either an “A” or “B” rating in their most recent PEFA.  Despite most PICs with repeat PEFAs showing improvement, performance remains weak in this area. In workshops conducted over the past two years, PFTAC has introduced a simplified approach to “Getting Started with Medium-term Budgeting”.  Continued discussion of these approaches and the sharing of basic templates for getting started will be emphasised during upcoming workshops conducted by PFTAC’s Macroeconomics/Forecasting advisor and PFM advisors.

 

  • Organisational separation of planning, budgeting, and aid management (even within one ministry) that hinders better integration of planning, budgeting, and aid management.

 

  • Separation of the “current budget” from the “capital budget”.

 

  • Varying timelines for preparation of plans (corporate, annual, sector) and budgets (current and capital) with many separate documents (national strategies, corporate plans, annual plans, sector plans, budgets) that hinder a more focused and cohesive approach.

 

  • Budget preparation periods are too short to allow meaningful policy focus and prioritisation of competing demands.

 

Budget Execution, including internal audit

  • There has been progress in some countries, but challenges remain, particularly for cash/debt management, procurement, payroll controls, and internal controls for non-salary expenditures.

 

  • Efficient cash management is being constrained by the lack of policy and/or adequate banking technology to enable daily consolidation and monitoring of cash balances maintained in several bank accounts, including the extra-budgetary funds that are often advantageous to commercial banks. Capacity for in-year cash forecasting is being addressed by some countries, but progress is slow.

 

  • Prudent debt management is affected by the lack of clear policy and criteria for direct lending, on-lending, and issuing guarantees to SOEs.

 

  • Continuing weak integration between personnel records and payroll data, caused by the lack of integrated HR/Payroll systems, commitment control of personnel expenditures, and weak coordination between MOFs and Public Service Commissions (or equivalent), and between Finance and Personnel units in the line ministries.

 

  • Inadequate procurement regulations and/or non-compliance to these regulations which may be caused by lack of regular awareness and training program for new procurement staff.

 

  • There has been progress in a few countries, but in general internal audit is still in its development stage with only seven countries having an internal audit unit or contracted audit services, mostly focusing on special investigations, not on systemic risks.

 

Accounting and Reporting

  • In the last two years, some countries have adopted international public sector accounting standards (IPSAS)-cash basis. These countries have progressed in reporting key assets and liabilities, either in the body of the financial statements, or as disclosures. However, the limited implementation of accounting control procedures affects data reliability.

 

  • Several countries have disclosed the information on outstanding loan guarantees and other contingent liabilities in their reports; but there is limited transparency of contingent liabilities and other fiscal risks due to a lack of systematic oversight, monitoring, and analysis of financial performance of public entities outside the central government, such as statutory authorities, state-owned enterprises, and local government units. In some countries, oversight of SOEs and local government units is mandated to another ministry, and the need for better coordination with MOFs has been identified.

 

  • The timeliness of submission of financial statements for audit has slightly improved in some countries, but the timeliness of audit has yet to improve due to capacity challenges of audit offices. Some countries have not yet established timely publication of audited financial statements and regular in-year budget monitoring and reporting process. The intention to publish these reports exists but is yet to materialise.

 

  • There is ongoing support from development partners for some countries to upgrade their FMIS. The use of this technology to maximise the organisation, analysis, and consolidation of data, and reporting, as well as implementing fiscal controls is another challenge that needs to be addressed.

 

  • Transparency and accountability of individual public entities in most countries is weak due to the absence of external reporting policy at this level.  Most countries have external reporting only at consolidated central government level.

 

  1. Recommendations to improve PFM roadmap planning and implementation
    1. As with PEFA assessments, PFTAC’s approach to assisting with PFM reform roadmaps is to emphasise country ownership through greater participation of PIC officials and staff in their overall preparation. PFTAC also advises countries to ensure harmonisation/integration, and prioritisation of the various proposed reforms, and to be more reasonable and realistic in the sequencing and timing of the reforms considering limitations in institutional capacity with a greater focus on ensuring core areas remain the priority.

 

  1. Structural reforms require more time for advocacy, changing mindsets, amending legal frameworks, and reconfiguring systems. Sustainable capacity development strategies should also be integrated into PFM Roadmaps.

 

  1. Conveying a clear sense of priority for reforms in roadmaps can be an important input to the regular discussions between donors and PIC governments over the policy reform obligations that are developed for budget support.

 

  1. The development of a roadmap is just the beginning of reform management. It requires translation into an operational work plan; consultation and coordination among stakeholders; as well as monitoring of implementation and periodic updating and evaluation of progress.

 

  1. This approach is consistent with the recommendations arising from the recently published report “Strengthening Public Financial Management Reform in Pacific Island Countries”.

 

 

  1. UPDATE ON TAX DEVELOPMENTS
    1. PFTAC’s Revenue Administration and Policy program is delivered by a single resident advisor with extensive support of short-term experts – predominantly tax administration specialists and to a limited extent tax policy and tax legislation experts, with the former backstopped by the Fiscal Affairs Department (FAD) and the latter by the Legal Department (LEG). PFTAC’s fifth phase of operations commenced on November 1, 2016 and is geared to strengthen capacity of PICs to enhance domestic revenue mobilisation by implementing their tax regimes in an efficient manner. The program covers a wide range of revenue administration and supportive policy and legal issues to assist the region and member countries towards two broad objectives:
  • Strengthen revenue administration management and governance arrangements,
  • Strengthen core functions evidenced by an accurate taxpayer base, taxpayer services supporting voluntary compliance, and improvements in filing, payment, and audit activities.

 

  1. PFTAC continues to support PICs in adapting their business models towards a function based approach with greater emphasis on risk management. This entails moving from an organisation structure based on tax type to one arranged around core functions such as taxpayer audit, taxpayer services, and enforcement rather than replicating those functions for each type of tax that is duplicative and fails to provide a ‘whole-of-taxpayer’ perspective. Despite these being relatively new concepts for the region, progress has been impressive with several countries moving to a functional model while simultaneously rolling out Compliance Improvement Strategies which in some countries are already starting to show results. Box 1 provides a high-level overview of PFTAC technical assistance delivered during the most recent fiscal year.

 

  1. The formal establishment of the Pacific Island Tax Administrators Association (PITAA) in 2017 and setting up a permanent secretariat in Fiji is a significant achievement and puts in place a solid foundation for the creation of a respected regional tax administration association. PFTAC continues to build on our relationship with PITAA by working together towards common regional objectives, regional training and capacity building initiatives which this year included a VAT Fraud Workshop, a workshop for Senior Managers, and a workshop on the interpretation and analysis of corporate financial statements. The first PFTAC/PITAA joint training delivery initiative took place in Kiribati during April 2017 where a 2-day VAT audit training session was delivered – the second initiative, a taxpayer services workshop for Palau, RMI, and FSM was also supported by PITAA participation.

 

 

 

 

Box 1. PFTAC – TA Delivered/Planned in Fiscal Year 2018 (May 2017 – April 2018)

Fiji

·         Strengthening Compliance Risk Management

·         Developing a taxpayer services strategy

·         Expanding self-assessment

·         Improving on-time filing and on-time payment of taxes

·         Strengthening the audit function and building a strategy to address compliance in the high-net worth individuals segment

·         Advising on the implementation of a new IT system

Kiribati

·         Facilitating implementation of a new function based structure

·         Developing a high-level reform implementation plan

·         Strengthening core tax functions

Republic of the Marshal Islands

·         Strengthening core tax functions

·         Training to improve the delivery of services to taxpayers

Federated States of Micronesia

·         Strengthening core tax functions

·         Training to improve the delivery of services to taxpayers

Papua New Guinea

·         Design of a Medium-Term Revenue Strategy (MTRS)

·         Development of an IT strategy

·         Development of a new corporate strategy

·         Design of a Large Taxpayer Office

·         Establishment of a design unit

·         Design of a new taxpayer services department

Palau

·         Developing a taxpayer services strategy

·         A project plan to introduce policy and legal reforms

Niue

·         Design of a new functional structure

·         Strengthening core tax functions

Solomon Islands

·         Improving on-time filing and payment of taxes

Samoa

·         Improving core tax functions

Tonga

·         Strengthening the audit function

Vanuatu

·         Development of a reform project plan

·         Facilitating the implementation of a new function based structure

·         Strengthening core tax functions

·         Improving compliance risk management

 

  1. An IMF Fiscal Affairs Department (FAD) mission reviewed tax policy and administration reforms in Pacific Island countries that included visits to Fiji, Kiribati, Samoa, Solomon Islands, and Tonga during February 2017. The last FAD strategic review of tax policy and administration reform in the Pacific was completed in 2008 – the latest mission provided interesting insights regarding the impact of reform over the past eight years, lessons learned, and identified possible areas for future reforms. The study also provides guidance for donors and technical assistance providers on focus areas for future technical assistance. Box 2 Below provides more insights into the Study.

 

Box 2. PICs: Review of Selected Country Tax Reforms –

Lessons for Future Revenue Mobilisation

The study showed that tax reforms have had a positive impact when assessed against the key measures of a good tax system: revenue, equity, efficiency, and simplicity. Average tax revenues for PICs, as a share of GDP, have increased, albeit at a slower pace. However, for some countries the reforms have had a significant impact on reversing declining revenue trends. The focus on indirect tax reforms has led to a clear change in the tax mix, with a greater share of revenue from indirect tax, declining revenue from trade taxes, and a small rise in income taxes. Furthermore, the study showed that tax administration efficiency is improving, but that there is scope for significantly further improvement.

 

Several factors contributed to successful reforms that included strong political will and leadership, strong leadership and management in key government institutions, especially the tax administration, and the existence of a tax policy reform unit to guide reforms.

 

Lessons learned highlighted ongoing challenges for PICs like the need for good data for tax policy analysis and for reviewing tax administration performance, difficulties in getting small businesses to comply, slowness in implementing complex reforms that have been legislated, for example, transfer pricing rules and capital gains tax.

 

Taxpayer compliance with core obligations (registration, filing, and audit) remains low. A key concern identified is that PIC tax administrations do not appear to have enough critical mass to carry out their mandate and even less to invest in future planning with staff to populations comparisons being low compared to for example the Caribbean Islands.  An IMF Working Paper published in early 2017 reviewed tax reforms in the Caribbean over a similar time-period that had benefited from technical assistance from CARTAC, the equivalent IMF center to PFTAC based in the Caribbean. The two studies reflect revenue reforms across most of the world’s Small Island Developing States (SIDS), with valuable insights between and across regions. To this end, a joint seminar is planned in mid-2018 that will be co-hosted by PFTAC and CARTAC to bring senior tax administrators together from both regions to share and leverage off the experiences of each other.

 

 

  1. A fundamentally new approach to strengthening countries’ ability to raise revenue is gaining traction through the implementation of a Medium-Term Revenue Strategy (MTRS). Under an MTRS a carefully sequenced overhaul of the tax system and its three core components – tax policy, administration and legal framework – will be needed. Box 3 below provides background on the MTRS concept and its importance in supporting modernisation efforts.

 

  1. Demand for revenue policy and administration technical assistance has exceeded the ability and resources of PFTAC to deliver, with pressures building for even more assistance given the anticipated impact of the Pacer Plus trade agreement for some PICs to find new revenue sources to offset declining trade tax revenues, as well as the wider revenue mobilisation priorities arising from the international Financing for Development agenda. To this end, a possible scaling-up of the PFTAC revenue program is being explored with donors for the remaining four years of Phase V. Notwithstanding good progress and results in recent years noted in the recent FAD/ PFTAC review of Pacific revenue reforms, there is a large unfinished agenda in many PICs, particularly across core tax administration topics as well as select issues in tax policy and legislation that a larger PFTAC revenue program would help address.

 

 

Box 3. Concept of a Medium-Term Revenue Strategy

 

What is an MTRS?

An MTRS is a high-level road map of the tax system reform over the coming 4-6 years—covering policy, administration, and legal components. It embodies a government strategy to mobilise resources through the tax system to finance spending needs and secure macroeconomic sustainability, while reflecting distributional considerations and creating appropriate incentives for economic and social development.

 

An MTRS should be a public document, since wide consultation with the tax system’s stakeholders is desirable in its development, including to promote accountability of all concerned.  An MTRS thus becomes a government-led and country-owned effort, supported at the highest political level—critical, given the broad reach of the tax system.

Some countries may wish to have external support with development and implementation of their MTRS. The formation and implementation of the MTRS will then require support from development partners that is aligned and subordinated (notably in sequencing) to the government-led strategy.

Why an MTRS is needed?

A medium-term and comprehensive approach to reform the tax system’s components is beneficial because:

ü  A medium-term tax policy enables governments to have a clearer picture of their likely revenues over a meaningful planning period, and taxpayers to have more certainty on how they will be treated and what the tax implications of their investment and other decisions will be.

ü  Tax priorities are too often driven by short-term considerations. Commitment to reforms over the medium- term can help prioritise intermediate objectives, such as increasing the number of high value taxpayers.

ü  Institution building in tax administration is complex and needs sustained effort over several years.

ü  The legal framework requires timely change to support evolving policy and administration.

ü  Successful reform requires continued commitment and trust among a wide range of stakeholders.  An MTRS provides a setting to achieve these critical goals.

For further information contact David Kloeden DKloeden@IMF.org (PFTAC Coordinator) or Stan Shrosbree (PFTAC Revenue Administration Advisor) Sshrosbree@imf.org or visit the PFTAC website to access

 

 

Pacific Financial Technical Assistance Centre (PFTAC), Suva
February 2018