Cambodia; assessing progress in public finance management reform july 2011
CAMBODIA: ASSESSING PROGRESS IN PUBLIC FINANCIAL MANAGEMENT REFORMS July 2011 By Jean-Marc Lepain Public Finance Specialist 1. IntroductionEffort s to reform the Cambodian PFM system started in 1995 with a number of initiatives mostlydonor-driven, which achieved a limited impact on the overall system. In 2001, a more systematicapproach was taken with the Technical Cooperation Assistance Programme (TCAP), which ran until2004. If the TCAP failed to affect serious transformation to public finance management in thecountry, it helped to raise awareness in the Government that PFM reforms are critical for achievingother Government objectives such as improvement in public service delivery, modernization of thecountry’s infrastructure, reducing poverty and stimulating economic growth. It also helped inunderstanding how PFM reforms are linked to other Government reforms such as the reform of thecivil service and decentralization.At the end of the TCAP the RGC conducted a soul-searching investigation to understand the TCAP’sfailure to produce significant reforms. An external evaluation concluded that it had only limitedeffects, primarily due to the lack of capacity and change management in MEF, poorly remuneratedand demotivated civil service, lack of political support and technocratic ownership and the absenceof strategic plans linking improvement in PFM with the Government’s wider initiatives for reform.Based on this report, the RGC launched an eighteen month consultative process for formulating anew strategy. This consultative arrangement not only involved MOE, but all major stakeholders inGovernment, line-ministries and service delivery units. The outcome was a set of three priorities:increasing revenue collection, reducing fiduciary risks, and giving high priority to civil service reform,including merit-based performance incentives. It was also understood that PFM reforms can onlycommence when there is a clear vision of the role of the state and when missions and responsibilitiesof the various Government agencies are clearly defined. Following that diagnostic, it was decidedthat determining the correct sequencing of reform is a critical success factor and that reform shouldbe engaged with a long term perspective.These new priorities resulted in the formulation of the current Public Finance Management ReformProgramme which was launched in 2005 and is now considered as highly successful. This reformprogramme is articulated around four ‘Platforms’: (1) Budget Credibility, (2) Financial Accountability,(3) Budget Policy Linkages and (4) Performance Accountability.Work on Platform 1 was launched in 2005 as part of Stage 1 of the PFMRP implementation plan thatwas completed by the end of 2009. Implementation of Platform 1 is considered as a success that
went well beyond initial expectations. The Single Treasury Account has been fully implemented and asystem of cash management has been put in place. As a result, cash rationing and payments inarrears have completely disappeared. Budget execution has now become reliable and predictableand budget credibility is well established.Preparatory work on Platform 2 started as early as 2005 with the creation of an IT Department inMEF and the recruitment of an IT team that started thinking about a FMIS implementation strategy.FMIS implementation is part of the Phase 2 PFMRP which started at the end of 2010. MEF has startedto identify direct and indirect budget users, revising its Chart of Accounts and its budgetclassification, defining coding structure of General Ledger accounts, and is starting to develop newaccounting standards. The FMIS procurement process is nearly completed. MEF has selected avendor and is waiting for the World Bank no-objection to start contract preparation. Completion ofthat process will take another few months. Based on preliminary studies MEF and other line-ministries are conducting a business process reengineering exercise that will facilitate theimplementation and bring gradually budget execution procedures in line with the systemfunctionalities. 2. Success of the PFM reform strategyThe platform approach of PFM reform is considered to be highly successful and has attractedattention world-wide through a number of articles and reviews published in a number of PFMmagazines and newsletters. The success of that strategy is based on several factors: The commitment of the RGC towards the reform agenda and support gained from the highest level of the state; Engagement of all major stakeholders facilitated by a long consultative process and a strong communication strategy; Clear and sound project management structure and dedicated leadership; A change management strategy put in place at an early stage of the project; Advance efforts in capacity building with adequate incentive and motivation elements Excellent sequencing of PFM reform; A long term vision of PFM reform with time flexibility for implementation based on a ‘no- rush’ policy.The elements that have made the success of Platform 1 are all present in the launch of Phase 2 andPlatform 2 and will certainly contribute to the success of the programme’s second phase. However,fundamental differences exist between the two phases. If Platform 2 has the wide objective ofestablishing accountability in the PFM system, emphasis in the forthcoming years will have to focuson FMIS implementation which rests as the most fundamental objective. MEF’s Treasury is operatinga manual system with no computerization of the data processing. The only existing IT system is asystem that monitors document processing and that cannot be used as a base for any new or interimsystem. As a consequence, computerization of treasury operations is seen as high priority as almostno other PFM reform can proceed without a sound accounting and reporting system in place. The
lack of timely information is acutely felt and implies that MOF has little control over budgetexecution in terms of sector policy implementation and is incapable of reporting on how line-ministries execute their budgets. The absence of a legacy system will make FMIS implementationchallenging and fraught with risks.Three main risks appear to be linked with the current strategy. The first risk is the risk that revenue mobilization will be too slow on the uptake to support not only the PFMRP but also the Administrative Reform (PAR) and the Deconcentration and Decentralization Reform (D&D) all of which require additional fiscal space. The second major risk is the risk that FMIS implementation might absorb all resources and attention and that other ongoing PFM reforms might be neglected. Achievement of Platform 1 still needs some consolidation and fiscal space needs to be broadened for the overall success of the reforms engaged by the RGC. Preparation for Platform 3 must be accelerated. The third risk is that the connection between PFM reforms and other reforms such the Deconcentration and Decentralization Reform (D&D Reform), and the Public Administration Reform (PAR) will not be fully understood. MEF and MOI have expressed respectively through the Public Finance System Law and the Organic Law on Decentralization widely diverging views of what deconcentration and decentralization should be in terms of public finance and fiscal policy. Harmonizing these two diverging visions should be one of the most pressing issues in the forthcoming year and should be given high priority. 3. Progress in PFM reform programmeProgress in PFM performance is essentially the result of the progress made with Platform 1 andbudget credibility. The PEFA conducted in 2009 was the first PEFA in Cambodia since the introductionof the PEFA Framework in 2005. Prior to this, the Country Financial Accountability Assessment (CFAA)was part of the IFAPER conducted in 2003. The 2009 PEFA delineates substantial progress since theCFAA of 2003, particularly in regard to budget formulation, expenditure control, treasury operations,and cash management. As most improvements in PFM performances are linked to theimplementation of Platform 1, we will witness more in-depth treatment of this subject in the nextsection.Our assessment confirms progress made on Platform 1: The Single Treasury Account can be considered as completed. Transfers to provinces are made using the Central Bank’s payment system and bank accounts opened in commercial banks. Use of the banking system is increasing steadily. A cash management system has been established in the treasury with a time horizon from one year to one month and is now in full use for cash planning, prioritization of payments and budget execution. Slow but steady progress has been made on revenue collection and tax compliance.
A Medium Term Fiscal Framework has been implemented and is used to prepare sector multi-year fiscal envelope based on line-ministries’ three year budget plans. Budget credibility is restored with elimination of cash rationing and payments in arrears. However, budget credibility remains fragile and need to be consolidated. Much work remains to be done on platform 1. The revenue policy strategy is just at the beginning of its implementation only to have been delayed several times. As long as fiscal space has not been broadened, the country will remain vulnerable to external and internal shocks which could easily bring cash rationing and payments in arrears to re-emerge. Value of tax exemptions, while on the decline, is still very high at 4.5 percent of GDP. Although the cash management system is operational there are some concerns about the quality of data, especially on the revenue side. Revenue forecasting is still weak with different revenue units using different methodologies and different economic assumptions. It has been understood that forecast consolidation should not be the responsibility of the Treasury and the task has been taken over by the Fiscal Policy Department which will need several years to improve its methodology. The system is not linked to debt management and to any commitment systems. All commitments are still managed manually. Work on debt management remains to be completed. Although the system is technically operational, the inventory of the stock of debt with the data associated to every loan shows some inconsistencies.The continuous broadening of fiscal space will be a critical success factor of all other reforms of theGovernment of Cambodia, especially the Public Administration Reform and the Deconcentrationand Decentralization Reform.Work on Platform 2 is moving slowly but so far successfully and is expected to focus for theforthcoming years on the FMIS implementation. Preparation for the system implementation is welladvanced. Reform of the Chart of Account has made significant progress; Budget Classification has been revised; Chart of Accounts and Budget classification can be linked by a code structure; Process to establish accounting standards has been established; A Workflow Chart as well as a Function Hierarchy Chart have been prepared to be used not only for the PFMIS data base design and the development of the system functions, but also for business process reengineering;
The FMIS procurement procedure has reached the stage of the vendor selection and MEF is awaiting World Bank’s no-objection; An implementation strategy has been prepared. A change management strategy has been put in place.The conclusion is that preparation of FMIS implementation has been scrupulously following systemimplementation methodology and that MEF has reached a very satisfactory level of preparedness.The last effort to be made is to make the project management structure fully operational.