1 Module F: Financial Management and Creditworthiness Module F Financial Management and...

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Module F: Financial Management and Creditworthiness 1 Module F Financial Management and Creditworthiness

Transcript of 1 Module F: Financial Management and Creditworthiness Module F Financial Management and...

Page 1: 1 Module F: Financial Management and Creditworthiness Module F Financial Management and Creditworthiness.

Module F: Financial Management and Creditworthiness 1

Module FFinancial Management and

Creditworthiness

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Module F: Financial Management and Creditworthiness 2

1. Introduction to the Module1.1 Objectives of the Module• To increase the understanding of the principles of sound

SNG financial management• To analyze and assess opportunities for strengthening

intergovernmental financial relationships• To assess the fundamentals of SNG financial management • To apply tools to assess current financial management

trends in SNGs • To identify existing problems and constraints to sound

financial management processes /systems in SNG• To introduce strategies and tools for improving and

strengthening financial management in SNGs

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1. Introduction (cont)

1.2 Structure of the day

• Financial management and creditworthiness: framework and issues (2)

• Fiscal controls procedures and discipline (3)• Borrowing, access to capital markets and

creditworthiness (4)• Local government performance in financial

management (5)

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Session 1 Financial management &

creditworthinessSummary of topics:

2.1 Introduction

2.2 Aim of modernizing financial management practices

2.3 Problem areas in financial management

2.4 Key components of financial management

2.5 Maintaining a broader view of financial management

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2.1 Introduction• Financial management in a decentralized

system• SNG have potential to be more transparent and

accessible • Citizens are closer to operations of their

government• SNGs with real autonomy, strong capacities

can respond more effectively• How can local government autonomy be

expressed?

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2.2 Aim of modernizing financial

management practices • Increased efficiency• Improved resource management• Creditworthiness, financial strength and

debt management• Better control on future budgets • Enhanced quality, timeliness and

transparency of financial information base

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2.3 Key problem areas in financial management

• Lack of accountability

• Understanding budget development as a policy setting process

• Adoption of more informative budget documents (responsive to citizen)

• No integrated system of budgeting, accounting and financial reporting

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2.4 Key components of municipal

financial management • Planning – perspective and medium term• Budgeting (recurrent, development and

revenue)• Fund release and liquidity management• Accounting and auditing• Internal and External Audit• Systems of information feedback and reporting• Systems of rules, procedures and financial

delegation of powers which link the subsystems together

Source: UN 1999

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2.4 Financial planning

– A process in which coordinated comprehensive strategies are developed and implemented to achieve local governments financial goals and policies

– These policies are developed in response to projections of a picture of the future over various timeframes

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2.4 Financial forecasting

A process for local government to produce projections of future years revenues and expenditures based upon a set of specific policy and economic assumptions.

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2.4 Budgeting (preparation, control and implementation)

Process by which SNG plans for:– its future expenditures, revenues,

borrowings– fund release / liquidity management

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2.4 Accounting and monitoring systems

Set of records / procedures used to record /

report financial information and to

monitor financial situation of SNGs

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2.4 Auditing

- Internal

– Legal / financial compliance– Satisfy requirement of management

- External– Meet statutory obligations

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2.4 Financial reporting

– Financial reporting presents the financial position of a sub national body for a specific period of time

– Reports should present revenue expenditure information as well as deviations from the budget

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2.4 Debt management

• Process of directing and controlling the acquisition and retirement of debt

• Managing the public sector debt portfolio efficiently to minimize cost to the government

• National safeguards against over-borrowing by SNG

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2.5 Maintaining a broader view on financial management

• Avoid isolation of financial management• Broaden overall process of financial management• Focus on management of results and management of

organizational capacity• Improve financial management systems:

– Review of existing systems (legislative and processes)

– Identify weak areas as regards systems and procedures

– Involve key stakeholders– Implement concrete projects

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2.6 Benefits of integrated financial management systems (IFMS)

• Enhanced revenue mobilization• Improved fiscal management and expenditure

control• More optimal resource allocation • Effective liquidity management of inflows and

outflows • Improved technical efficiency in managing

and utilizing resources (improved information flows)

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2.6 Benefits of integrated financial management systems (cont)

• Enhanced transparency and accountability

• Good management of public funds (reduction of levels of corruption and leakages)

• Financial consequences of decisions become more apparent.

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Exercise 1 Financial Management systems

• Identifying Constraints and Opportunities for the improvement of financial management systems in SNGs (30min)

• “What are the major constraints and opportunities for improving financial management systems in SNGs?”

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Session-2Fiscal Procedures, Controlsand Discipline (FPCD)

Summary of topics:3.1 Introduction

3.2 Regulations and approval requirements

3.3 Key components of FPCD

3.4 Other systems of financial control

3.5 Financial management information systems (FMIS)

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3.1 Introduction

• Degree of control exercised by central government over SNGs

• How effective are the controls?

• Accountability of SNGs

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3.2 Regulations and approval requirements

• Regulatory frameworks– Regulations and requirements as

prescribed by law;For example: Urban Government Act Swaziland (15 requirements regarding approval of budgets, by-laws, borrowing, investments, land management)

• Procedures– Discretionary powers of Ministries

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3.3 Key components of FPCD

• Budgeting

• Accounting

• Financial reporting

• Auditing

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3.3.1 Budgeting

Budgeting:– The process by which the government or a

governmental organization, plans for its future expenditures, revenues and, borrowing (access to capital markets) and other financial activities;

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3.3.1 Budgeting

Why is it important?– Control, management– Results in a comprehensive and coherent

allocation of resources– Allows for inputs from potential consumers

of services (link to module B and C – participatory budgeting)

– Defines the financial constraints under which the SNG will operate

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3.3.1 Budgeting

Different types of budgeting:• Incremental line item budgeting• Program budgeting• Zero-based budgeting• Responsibility budgeting (many progressive

variations)– Performance– Revenue– Value

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3.3.1 Budgeting Types of Operating Budgets

Budget type Characteristics Criteria

Line-item Expenditures and revenues are related to commodities

Control

Performance Expenditures and revenues are related to workload

Management and efficiency

Program Expenditures and revenues are related to public goals

Planning and impact

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3.3.1 BudgetingHow to improve budgeting practices (Steps)

1. Identify the sources, amounts and timing of actual receipt of all revenue under SNG control .

2. Identify the source, amount and timing of all inter-governmental transfers

3. Provide a forum for citizens to voice their concerns about and priorities for how the budget will be spent

4. Link non-financial data to the budget formulation process

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3.3.1 Problems related to central control of local budgets

• Procedures for approval unclear, cumbersome, and not always observed;

• Lack of clear conditions /criteria for approving/rejecting budgetary proposals and lack of transparency in the approval process

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3.3.2 Accounting

A set of records and procedures that are used to record, classify and report information on the financial status and operation of the sub national government.

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3.3.2 Accounting

• Why is it important?– Ensures that SNG resources are being

properly, legally used– Provide necessary information to evaluate

SNG performance and;– Plan for future action– Irrelevant if information is not timely

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3.3.2 Accounting

Types of accounting:• Accrual accounting:will record revenues

and expenses when they are legally due or incurred

• Cash accounting: will wait for the money to be received or spent before writing it down in the city books

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3.3.2 Accounting

Key problem areas:– Budgeting and spending of SNG do not

always match – SNG resources not always properly /legally

used– Financial information to evaluate SNG

performance not timely available, and– Lack of planning for future action

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3.3.2 AccountingHow to improve accounting practices (Steps)1. Centralize all accounting functions under a

single administrative official2. Prepare monthly financial reports which

identify both: expenditures and purchase commitments

3. Maintain accounting records on a consistent year to year basis

4. Perform audits on a regular basis at least once a year

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3.3.3 Financial reporting

Financial reporting:– Financial reporting presents the financial

position of a sub national body for a specific period of time;

– Reports should present revenue / expenditure information as well as deviations from the budgeted expenditures;

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3.3.3 Financial reporting

• Why is it important?– Offers the opportunity to monitor and

evaluate operations and management

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3.3.3 Financial reportingHow to improve financial reporting

practices?1. Periodic reports (quarterly; monthly) should

be required explaining key economic and fiscal developments and significant deviations from the budget

2. Financial data provided should be interpreted and explained (at least quarterly)

3. The output should be a narrative report (three to five pages)

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3.3.4 Auditing

Auditing can be defined as:

an expert examination of legal and financial compliance or performance

– Carried out to satisfy the requirements of management (internal)

– Or an external audit entity or any other independent auditor, to meet statutory obligations (external audit)

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3.3.4 Auditing

Financial audit:– Attestation of financial accountability– Audit of financial systems and transactions

including evaluation of compliance with applicable statues and regulations

– Audit of internal control and internal audit functions– Audit of the probity and propriety of administrative

decisions taken within the audited entity

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3.3.4 Auditing

Performance audit ( value for money audit):

– Audit of the economy of administrative activities in accordance with administrative principles, practices

– Audit of efficiency of utilization of human, financial and other resources

– Audit of effectiveness of performance in relation to the achievement of objectives

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3.4 Other systems for operational efficiency and financial control

• Cash management

• Borrowing and debt management systems

• Capital budget and investment planning

• Asset management

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3.5 Financial management information systems (FMIS)

Reasons for introducing FMIS:• The need for transparency

• Integration of all the components of the system

• Building capacity at SNG level

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(25 minutes)

• Questions to address- Can the present and future problems be solved by

introducing new techniques or by more effective functioning of existing controls (strength and weaknesses of the existing system)

1. Should FPCD measures be centralized or decentralized?

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Exercise 2 Identifying issues and options as

regards FPCD• Should control mechanism be strengthen or should the

size of government be reduced? (The nature of the control should be included in the debate

• Can the present and future problems be solved by introducing new techniques or by more effective functioning of existing controls (strength and weaknesses of the existing system)

• Should FPCD measures be centralized or decentralized?

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Session 3Borrowing, Creditworthiness and

Access to Capital Markets• Introduction• Context of borrowing and creditworthiness in SSA• Lack of creditworthiness and borrowing; When is a

municipality creditworthy?• Factors influencing creditworthiness of SNG• Why is access to financial markets important?• Issues and channels of municipal borrowing • Design of a regulatory framework for SNG borrowing• Credit risk and how to measure it?• Assessing municipal creditworthiness

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4.1 Introduction & Context

Key points to mention:• Decentralization and new responsibilities for local

government• Functions of SNG borrowing (e.g. infrastructure and

service provision=ISP) • Significance of SNG borrowing in Africa• Need for building healthy and credible financial

reputation by SNG• Possible sources SNG can borrow from

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4.2 Significance of Sub national Borrowing

• Access to capital markets through:

– Direct borrowing by central government that is onlent to sub national tiers

– A public finance intermediary

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4.2 Significance of Sub national Borrowing

– Direct borrowing• South Africa – more than 200 LGs borrowing

from national market• Limited borrowing also in Swaziland,

Zimbabwe.

– Market decentralization of public services

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4.3 Creditworthiness and borrowing

in SSA (selected countries)• No country has significant SNG

borrowing• Limited borrowing (Zimbabwe and

Swaziland)• SNGs borrowing in no case exceeds

5% of CG borrowing• Bank overdraft arrangement exist

( short-term borrowing)

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4.4 Factors influencing creditworthiness & borrowing by

SNGMajor underlying factors:• Lack of financial autonomy• Lack of stable financial resources &

management• Lack of sources/institutions to borrow from• Lack of co-operation between central and

SNG (negotiating power and credit guarantees)

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4.5 Importance of access to financial markets by SNG

• Financing capital expenditure

• Matching expenditure and tax flows

• Fostering political accountability

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4.6 Borrowing by SNG: What windows are available?

• Direct borrowing by central government and on lending to sub national tiers

• Through a public intermediary such as a financial parastatal (pension funds)

• Direct borrowing from capital markets • Through market decentralization of public

services (involving the private sector in the financing and delivery of government services)

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4.7 Access to capital markets and regulatory framework

• Do not provide inappropriate incentives• System should protect against “moral

hazard”• Transparency is important. ( through

better information systems and accounting procedures)

• Procedures for bankruptcy should be clear

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4.8 Access to capital markets and regulatory framework (cont)

• Ensure SNGs have sufficient access to own resources (funds and assets) as collateral

• Regulatory framework between central and SNG should be clear with regard to issues such property rights, land use, sale/lease of SNG property etc.

• Clear delineation of fiscal and financial relations in the design of intergovernmental systems.

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4.9 When is a SNG Creditworthy?

–The general eligibility of the SNG to borrow money–When borrowing meets the risk standards of the lender

(Credit Risk: is the risk that a borrower will not make full and timely payment of debt service)

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4.10 Measuring Credit Risk

Risk can be based on factors such as:• Stability revenue base• Decision making system• Management skills• Local politicians prepared to make decisions

Note: it is usually measured on a comparative scale by look at legal economic and political conditions at the national level.

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4.11 Assessing creditworthiness

• Quantitative aspects– Ability to pay– Debt servicing indicator– Degree of indebtedness– Proportion of central funds in the income– Net operating income proportion

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4.11 Assessing creditworthiness

• Qualitative indicators aspects– Does the SNG have a long term vision– Quality and trends in changes in assets

registered– Tax policy of SNG– General economic condition of SNG– Rating of SNG

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Exercise 3 Assessing Creditworthiness of SNGs

The key question to look at is:• Who makes the key decisions regarding access to and use of credit

by local governments? Sub questions include but are not limited to:• For what purposes may SNGs borrow?• Are there specific guidelines for long-term and short-term borrowing?• Does the access to borrowing include the ability to issue bonds?• Are there borrowing and debt service limits?• What are the permitted sources for collateral for loans?• Are there requirements to inform the State of Borrowing by local

governments?• Are Local governments required to obtain authorization from the State

for all proposed credit or for certain types of borrowing?

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Session 4Local government performance in

financial management

Summary of topics:

5.1 What is performance measurement?

5.2 Why is performance measurement

important?

5.3 Performance indicators for financial management

5.4 Dimensions of performance

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5.1 What is performance

measurement It can be described as:

An objective and systematic process for collecting, analyzing and using information to determine how efficiently and effectively SNG services are being delivered and objectives are being achieved.

This will involve:• Assessment of the efficiency and effectiveness of

programs or activities of the SNG • By measuring the relevant inputs, processes, outputs

and outcomes• Using ‘Performance measures or indicators’ for this

purpose.

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5.2 Why is performance measurement necessary

“If you cannot measure it, you cannot control it, if you cannot control it you cannot manage or improve it”

• Initially to help reduce budget deficits• Shift from input-oriented to output-oriented

approach (value for money); outputs included in overall judgment

• “Service for the people approach” including the quantity and quality of the output and outcomes arising from this.

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5.3 Performance indicators for financial management

There are no standard performance indicators, but they relate to a written policy with regard to elements such as:

• Building / developing a budget• Financial investment planning • Building reserves• Purchasing and procurement • Debts and debt servicingRequirements for an effective system:

– Validity– Legitimacy

• Continuity

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5.3 Requirements for successful performance

measurement

There are three main requirements:

• Validity

• Legitimacy

• Continuity

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5.4 Dimensions of performance

Performance measures can be grouped under the following headings:

• Efficiency measures• Effectiveness measures• Economy measures• Compliance measures• Service quality measures

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Summary of main pointsand

wrap up of module.• Key Components of financial management;

problem areas; breading the view on financial management

• Issues and options regarding fiscal procedures, control and discipline

• SNG borrowing in SSA: status and issues• Assess SNG creditworthiness• Importance of performance measurements