Module: Managing Public Money

1.Assessment of existing Public Expenditure Management systems in Moldova

1.1 Budget Formulation and Execution
The Parliament and its Committee for Economic Policy, Budget and Finance scrutinise and approve the proposals of Line Ministries (LMs).Under the ‘Law on National Public Budget’, the State budget, State Social Insurance Budget (SSIB), Donor funding and Autonomous Treasury Unit budgets are passed simultaneously (World Bank, 2006b). These are available on the Ministry of Finance (MoF) website. The MTEFs (Medium Term Planning Frameworks) are a part of the budget calendar, the cabinet after approving the MTEF document submits it to Parliament for information (IMF, 2004b). The formulation of the Budget is based on forecasts and ministerial ceilings laid down in the MTEF document. Budget is comprehensive, transparent and has reliable revenue forecasting. However, ‘MoF controls the Budget execution by allocating overall budgetary spending limits to the LMs, based on forecasts received from LMs’ (World Bank, 2006a). The spending limits although flexible, offer little operational flexibility to the managers due to cumbersome procedures.

1.2 Financial Accounting and Reporting
Moldova has a cash-based accounting for the treasury and modified cash based accounting for the budget institutions. A ‘National Treasury System’ has been developed for ‘comprehensive treasury coverage’ (World Bank, 2003).The treasury monitors cash on daily basis but the SSIB accounts are tallied on monthly basis. There is regular auditing and scrutiny of the accounts. Tax transactions are computerized and reconciled regularly between treasury, banks and tax collection units. There are also about 10% EBEs (extra budgetary expenditures) which are presented to the parliament for post facto approvals. The treasury controls the cash management except for the SSIB and donor receipts.

The payrolls, which are decentralized, are not effectively supervised. Procurement contracts are also not closely monitored by LMs. This results in inadequate controls and bureaucratic corruption. The accounting mechanisms even though in place, are insufficient in certain areas.

‘Budget Execution Reports’ (World Bank, 2003) are regularly received by the MoF from LMs. However, as consolidated financial statements are not prepared, MoF does not have complete information. This results in inadequate communication of the cash availability information to the spending units and creates unfunded commitments and arrear generation. Reporting thus lacks an integrated Financial Management Information system.

1.3 Monitoring by Internal and External Audit
Small internal audit units exist in MoF, State Tax Service, Customs and National Social Insurance House. The Control and Revision Service (CRS) under the MoF performs ‘ex-post verification of budget execution’ (World Bank, 2006a). The internal auditing function is not well developed in Moldova.

The Court of Accounts (CoA) performs the function of External audit. It carries out a ‘transaction level auditing’ (World Bank 2006a). To check widespread bureaucratic corruption, CoA often ‘digresses from its main role of audit and performs the role of control, enforcement and prosecution’ (IMF 2004b). However, in the CoA, the government nominates the top management members. This severely compromises the independence of CoA and makes it susceptible to political interference. Moldova lacks modern auditing standards and practices.

1.4 Legislative control
Parliament exercises control over budget through its Economic and Finance committee. The budget is presented before the Parliament who passes it after three readings. ‘Annual Budget Execution reports’ are presented to the Parliament is at in a ‘disaggregated manner’ (World Bank, 2006b). The country also has the institution of an Ombudsman who receives and investigates the financial complaints and submits a report to the Parliament. The audit reports are normally not examined or are examined late by the Parliament. The Parliament does not carry out an in-depth analysis of the final report of audit. It does not give any directions or instructions on these reports. Thus there is not enough Parliamentary participation.

2. Ways to reform the existing Public Expenditure Management systems

2.1 Strong MoF with Operational Flexibility
A strong and effective MoF is the required for planned formulation and implementation of the budget (Schick, 1996). The MoF may therefore ensure strict adherence to the budgetary cycle. The MTEFs can also be re-aligned. They may have ‘year-to-year roll over linkage’ in various programs (IMF, 2004b).The may also specify the reasons for changes in previous estimates. This would increase control over the budget by long-term planning and resource allocation.

However, the entire focus of budgetary control in Moldova is on compliance to procedures with no attention on delivery. As Schick (1996) points out that ‘while the strict control of allocations is justified….to have greater control over the use of budget resources. A certain degree of Managerial delegation is needed which can be gradually increased based on performance.’ Thus, flexibility at the operational level can be provided to the managers combined with simplified procedures. This is would provide incentive to managers to improve outputs and outcomes.

2.2 Strengthen Cash Management Systems
Cash Management is the starting point of any control mechanism because, ‘If you can’t count the money, you can’t allocate it, and if you can’t allocate it you can’t manage it’ (World Bank, 1998). In Moldova, the ‘cash accounting’ and ‘modified cash accounting’ systems are fairly well established. These however do not offer comprehensive financial control. A major reform can be, to upgrade the existing system by a ‘comprehensive accrual system of accounting’ (IMF, 2004a). The accounting changeover however has to be backed by an effective FMIS as, ‘FMIS will reduce the opportunities for diversion of funds away from the priorities reflected in the budget, both at a strategic level and at an operational level’(DFID, 2000). The payrolls and procurement contacts can also be monitored through FMIS. This will also help to check bureaucratic corruption.

There can be an extension of the role of the treasury to bring the EBEs (Extra budgetary expenditures), SSIB funds, and the Donor contributions under its control.

2.3 Ensure Consolidated and Concise Financial Reporting
As stated in the World Bank, PEM handbook (1998) ‘It is essential not only that information be provided, but that it be relevant and in understandable form’ (World Bank, 1998). The present fragmented reporting system is fragmented. It offers ineffective controls. A consolidated computerized FMIS can be developed (as discussed above). This can generate regular and consolidated ‘Budget execution reports.’ These will provide timely and accurate information on the spending by the LMs and would improve control of MoF on budget formulation and fund releases.

2.4 Develop Internal Audit and Strengthen External Audit
As stated in the UNPAN (1999), ‘Internal audit …is part of the management process.’ In-house monitoring and controls can be developed in combination with an internal audit organization, ‘incorporating the international best practices’ (IMF,2004a).These controls will reduce ‘top-down compliance and enforcement from the MoF’ (IMF,2004a). These would also make the financial managers accountable and reduce corruption in the financial management systems.

External Audit helps to oversee in, ‘a regular and effective manner how public money is raised and spent’ (World Bank 2003). Enactment of a new Audit law and creation of a Certification body can standardize the Audit code and procedures. To ensure competence and independence, the CoA can train its staff in modern audit concepts and procedures. To avoid political interference COA may move away from the role of ‘control, enforcement and prosecution agency’ (World Bank, 2003) and focus more on strengthening the accountability controls. These accountability controls can be ‘ex ante’ (automatic prevention of LMs from exceeding budgetary allocations) or ‘ex post’ (Verification of reliability of financial data and public spend by the auditors) (Leruth & Paul, 2006).

2.5 Ensure a dynamic Parliamentary Oversight
Legislature has the important function of ‘exercising ultimate control’ (World Bank, 2005).But the Parliament has to be active and supervisory. The select committees of Parliament may examine in detail a certain percentage of the audit reports and all reports pointing out serious reports. Corrective actions may be suggested which address the system failures or policy deficiencies.

To promote transparency, fight corruption and encourage debate, Media and Civil society can scrutinize the audit reports after discussion in the Parliament.

Conclusion
Over last few years, Moldova has incorporated several public expenditure management controls. Implementation of these measures has resulted in improved budgetary formulation and execution. Budgetary processes are now well defined, transparent and timely. Adoption of MTEFs indicates control over the budget by way of long-term planning and resource allocation. However, it would be unwise to assume that once these initial controls are in place the budget process will deliver the desired outcomes. A strong and effective MoF is an important starting point for further reforms. A cash management system, based on accrual accounting is desirable. Efficient and accurate financial accounting and reporting systems are the backbone of any vibrant control mechanism and they can be developed further. These measures may be supported with strong internal controls and an independent external scrutiny to entire budget cycle. These would ensure accountability and transparency. Strong public expenditure management controls combined with operation flexibility will help Moldova progress and develop in future.

References
Department for International Development (2001) Understanding and reforming public expenditure management Guidelines for DFID (London: DFID) http://www.dfid.gov.uk/pubs/files/pfma-pem.pdf 25 November 2006

International Monetary Fund (2004a) Report on the Observance of Standards and Codes, Moldova, Accounting and Auditing (Washington: IMF)
http://www.imf.md/press/Moldova%20ROSC%20AA%20final%20Sept%202004.pdf
26 November 2006

International Monetary Fund (2004b) Republic of Moldova: Report on the Observance of Standards and Codes—Fiscal Transparency Module (Washington: IMF)http://www.imf.md/press/rosc-cr04412.pdf 27 November 2006

Leruth, Luc and Paul, Elisabeth (2006) A Principal-Agent Theory Approach to Public Expenditure Management Systems in Developing Countries (Washington: IMF) http://ssrn.com/abstract=934463 27 November 2006

Schick, Allen (1998) A Contemporary Approach to Public Expenditure Management (Washington: World Bank)
http://www1.worldbank.org/publicsector/pe/handbooks.htm 25 November 2006

UNPAN (1999) Integrated Financial Management in Least developed Countries (New York: UNPAN)
http://www.unpan.org/case_study.asp 25 November 2006

World Bank (1998) Public Expenditure Management Handbook (Washington: World Bank)
http://www1.worldbank.org/publicsector/pe/handbooks.htm 25 November 2006

World Bank (2002) Medium Term Expenditure Frameworks: From Concept to Practice, Preliminary Lessons from Africa (Washington: World Bank)
http://www.worldbank.org/afr/wps/wp28.pdf 25 November 2006

World Bank (2003) Moldova Country Financial Accountability Assessment (Washington: World Bank)
http://siteresources.worldbank.org/INTMOLDOVA/Resources/Moldova_CFAA_Dec1.pdf 25 November 2006

World Bank (2005) Public Financial Management: Performance Measurement Framework (Washington: World Bank)
http://www1.worldbank.org/publicsector/pe/handbooks.htm 25 November 2006

World Bank (2006a) Program document for proposed Poverty Reduction Support Credit for Republic of Moldova (Washington: World Bank)
http://siteresources.worldbank.org/INTMOLDOVA/Resources/PRSC_eng.pdf
25 November 2006

World Bank (2006b) Republic of Moldova Public Expenditure and Financial Accountability Assessment Final Report (Moldova: Ministry of Finance)
http://www.minfin.md/common/raportinfo/Raport_PMFP-EN.pdf 25 November 2006