Analysis of Gov't Use Of Unexpected Expenditure QM April 2012 Eng CV (2) KS

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By Chea Kim SongDevelopment Issues Programme Manager

The NGO Forum on CambodiaE-mail: [email protected]

Websites: www.ngoforum.org.khwww.cambodianbudget.org

Analysis on Government Use ofUnexpected Expenditure

2005-2010

NGOF Quarterly meeting, 25 April 2012
mailto:[email protected]://www.ngoforum.org.kh/http://www.cambodianbudget.org/http://www.cambodianbudget.org/http://www.ngoforum.org.kh/mailto:[email protected]


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CONTENTn Introduction

n Allocation and Disbursement of Unexpected

Expenditure 2005-2010

n Allocation by Ministries 2005-2010, 2011n Comparison of Overspent Recurrent Budget

Amount and Allocated Unexpected Expenditure

by Ministries

n Conclusion and Recommendations


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Introduction

n Unexpected expenditure/ Contingency funds or reserves:

A separate fund or a budget provision set aside to meetunforeseen and unavoidable requirements that may ariseduring the budget year(IMF, 2001).

n Good practice guideline:Contingency reserve may be approved by parliament to

be around 13% of total expenditure, which the

executive would spend on genuine unforeseenemergencies.

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IntroductionAnalysis of budget laws 2005-2010 showed that non-priority ministrieshave overspent their recurrent budget repeatedly totaled at USD 541.3

Million. Most of overspent amount came from the use of unexpectedexpenditure and supplementary budget. Unexpected expenditure aspercentage of total budget has increased from around 4% in 2005 to 10%in 2008 and decreased to 3.5% in 2011 and 4.2% in 2012.

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Actual Recurrent Expenditure in % ofAllocated Budget by Priority Ministry 2005 2006 2007 2008 2009

2010

Ministry of Economy and Finance 154.4% 185.5% 171.6% 201.0% 191.6%123.5%

Office of the Council of Ministers 159.1% 173.7% 189.6% 286.2% 211.1%150.7%Ministry of Interior-General Administration

& Public Security 101.8% 117.3% 133.0% 149.7% 137.3% 105.4%Ministry of National Defense 99.6% 105.6% 115.5% 149.6% 172.8% 106.2%

Ministry of Industry, Mines and Energy 91.8% 339.9% 345.2% 1,226.3% 94.2% 96.0%

National Election Committee 230.0% 113.2% 1,066.4% 502.6% 163.6% 95.9%


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Introductionn Article 25 of the Law on Public Finance System states that

Recurrent expenditure category 2 on Financial Obligations andcategory 6 on Unexpected Expenditure shall not be allocated toministries, institutions or public entities. These credits are kept for

payment of interests on loans and other obligations including asreserves for unexpected expenditures. Reserved credit shall beallowed to cover any expense whose allocation cannot be

accurately specified when credit is approved. The allocation ofthese reserved credits by ministries, institutions and similar publicentities shall be made by sub-decree pursuing to the requestmade by the Minister of Economy and Finance.

n Article 58 of the Law on Public Finance System states that A sub-

decree following request by MEF can allocate budget recordedunder unexpected expenditure in the form of additional creditbeneficial to various (budget) chapters of ministries, institutions orsimilar public entities.

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Introductionn Article 84 of the law emphasize the commitment toward

improving transparency in public finance system that allaccounting and financial reports must be transparent andpublicly disclosed.

n Article 61 of the law on Public Finance System says that Incase of natural disasters or any emergent necessity beneficial

to the nation, based on a report of the Minister of Economy andFinance, the Royal Government may issue a sub-decree toincrease credit for utilization (or provide supplementary budgetto line ministries/agencies). This credit shall be adopted by theannual amended law on the Law on Annual Finance and thegovernment shall seek immediate approval from the NationalAssembly and Senate when these special circumstances end;otherwise, these credit are subject to regularization in the Lawon Finance in the following year.

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Introductionn There is also other legal and regulatory guarantee to ensure that the

official gazettes are to be made publicly and widely disclosed andavailable to the general public by the Royal Government. Thoseinclude:

q New article 93 in the constitution

q Article 13 of law on formulation and functioning of the council ofministers (1994), sub-decree on formulating structure and

functioning of general department of official gazette and computerservice (26 August 2004), and

q RGC Circular No. 12 S.R.N.N dated 23 November 2004 onObligation for Preparation of Official Gazette.

n Article 93 of the constitution and 13 of the law on formulation and

functioning of the council of ministers (1994) mandated the RoyalGovernment to publish all legal and regulatory documents to the publicvia the official gazette, especially those that are generally applicableand for implementation throughout the Kingdom of Cambodia.

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Introduction

This analysis will seek to answer the following key questions:

n Are unexpected expenditures allocated to theministries/agencies are genuinely unexpected orunpredictable? Is the information provided in the sub-decrees sufficient for the public to trace or monitor the

spending of this budget? Which expenditure items hasthe allocated budget been spent on? And do thosepurposes and expenditure items conform to the definitiongiven in the Law on Public Finance System?

n Which ministries/agencies are the main beneficiaries ofthis budget?

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Introduction

This analysis will seek to answer the following key questions:

n Is there universal or international good practice on the use ofthis budget? Does the governments use of unexpectedexpenditure comply with the universal/international goodpractice? What is the difference between the definition

stated in the Law on Public Finance System and theinternational good practice?

n Does the government have reports on the use of thisbudget? Does the legislative body such as the NA have theauthority to scrutinize and investigate the governments useof this expenditure line, based on the Law on Public FinanceSystem?

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Allocation and Disbursement of Unexpected

Expenditure 2005-2010 (USD Million)

1010Source: Budget Laws 2005-2010, A collection of Sub-decrees on Transfer of Budget Credit 2005-2010.

0

2

4

6

8

10

12


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Allocation of unexpected expenditure byMinistries 2005-2010 (above US$5 Millions)

1111

0

2

4

6

8

10

12


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- During these years, a total of USD 578.79 Million of

unexpected expenditure was spent by line ministries, which is98% of total allocated unexpected expenditure (USD 589.8Million) in the budget laws 2005-2010.

- Of the actual unexpected expenditure (USD 578.79 Million),about USD 530.8 Million (91.7%) was spent by non-priorityministries while only 8.3% (USD 48 Million) was absorbed bypriority ministries (including MoWRM).

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Allocation of unexpected expenditure byMinistries 2005-2010 (above US$5 Millions)


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- 6 non-priority ministries (excluding MoH) benefited the mostfrom the use of unexpected expenditure in the last six years,absorbing a total of 85.8% on average of the annual actualunexpected expenditure.

- MEF and CoM are the largest recipients of this expenditureline, together having received 65% of the total unexpectedexpenditure allocated for all ministries.

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Allocation of unexpected expenditure byMinistries 2005-2010 (above US$5 Million)


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Allocation of unexpected expenditure byMinistries in 2010 (in Million USD)

1414

0

2

4

6

8

10

12


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Allocation of unexpected expenditure byMinistries in 2011 (in Million USD)

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0

2

4

6

8

10

12


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Discrepancy between overspending recurrentbudget and unexpected expenditure 2005-2010

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No.

Disbursement by 6 Non-PriorityMinistries

(in Million USD)

OverspentAmount ofRecurrent

BudgetExpenditure

Amount ofUnexpectedExpendituretransferred Difference

1 Ministry of Economy and Finance 54.9 287.7 -232.8

2 Office of the Council of Ministers 156.0 88.8 67.1

3Ministry of Interior (GeneralAdministration & Public Security) 95.8 43.7 52.1

4 Ministry of National Defense 167.8 34.0 133.9

5 Ministry of Industry, Mines and Energy 48.5 26.3 22.2

6 National Election Committee 18.2 21.6 -3.4

Total 541.3 502.1 39.1


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- There is significant inconsistency between both amountsspent by each ministry, but in terms of total amount of all

ministries, the inconsistency is minimal. This raises doubt overthe differences which should be explained by Ministry ofEconomy and Finance.- There were also transfers of supplementary budget by thegovernment as written in Article 61 of the Law on Public

Finance System (2008) which increase budget to some keyline ministries during this period in addition to the use ofunexpected expenditure above.- During 2005-2011, 8 ministries received a totalsupplementary budget of USD 191 Million; and 2005-2010, 7ministries received a total supplementary budget of USD 132.5Million.

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Discrepancy between overspending recurrentbudget and unexpected expenditure 2005-2010


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Supplementary Budget Allocated to Key Non-PriorityMinistries & Institutions 2005-2010&2011 (in Million USD)

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No. Ministries/InstitutionsAmount in2005-2011

Amount in2005-2010

1 Office of the Council of Ministers 99.77 41.23

2 Ministry of National Defense 44.19 44.19

3 Ministry of Industry, Mines and Energy 23.66 23.66

4 Ministry of Economy and Finance 14.48 14.48

5 Ministry of Interior-Public Security 5.63 5.63

6

Ministry of Social Affairs, Veterans and YouthRehabilitation 1.48 1.48

7

Ministry of Foreign Affairs and InternationalCooperation 1.56 1.56

8 National Assembly 0.57 0.28

Total 191.35 132.52


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- There were 8 out of 14 supplementary budget transfers(USD61.7 Million or 46.6%) in 2005-2010used for expenditureconsiderably not related to emergency or natural disasters orurgency necessity for national benefit (eg. operating expenses,payroll, meeting arrangement, settlement of advance and debt,and subsidies).- Others are expenditures (USD70.8 Million or 53.4%) that were

immediately appropriate for consideration as necessaryexpenditure (eg. the expenditure on flood, sovereignty andintegrity defense).- It is broad and flexible to interpret the meaning of urgentnecessity for national benefit since there is no further

explanation in Article 61 of the Law on Public Financial System.

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Supplementary Budget Allocated to Key Non-PriorityMinistries & Institutions 2005-2011 (in Million USD)


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Discrepancy between overspending recurrentbudget and unexpected expenditure plussupplementary budget 2005-2010

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No.Disbursement by Line Ministries (in

Million USD)

OverspentAmount ofRecurrent

BudgetExpenditure

Unexpectedand

AdditionalCredit Difference

1 Ministry of Economy and Finance 54.9 302.2 -247.3

2 Office of the Council of Ministers 156.0 130.1 25.9

3Ministry of Interior (GeneralAdministration+Public Security) 95.8 49.3 46.5

4 Ministry of National Defense 167.8 78.2 89.7

5 Ministry of Industry, Mines and Energy 48.5 50.0 -1.4

6 National Election Committee 18.2 21.6 -3.4

Total 541.3 631.3 -90.1


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- The difference between the total amount of the twoexpenditures is even larger for MEF (USD 247.3 Million).- Chapter 03 of Budget Laws 2006-2012 provides that Laws on

Budget Execution 2005-2011 shall adopt an actual amount ofbudget for implemented supplementary budget, which meansthat actual expenditure figures are to be recorded in eachbudget year in the actual budget expenditure of the ministriesthat received this supplementary budget, and this plus

unexpected expenditure amount should be found through theoverspent amount of recurrent budget by line ministriesrecorded in the annual budget implementation report and Lawon Budget Execution. Both amounts should not be significantlydifferent.

21Budg21

Discrepancy between overspending recurrent budgetand unexpected expenditure plus supplementary credit2005-2010


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Sub-decree of Budget Transfer immediatelyclassified as Unexpected Expenditure

n 28 out of 209 sub-decrees or 13.4% could beimmediately classified as unexpectedexpenditure. In real terms, it is USD 61.4 Millionor 10.61% of total unexpected expenditure (USD578.79 Million).

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Conclusion

n the Royal Government of Cambodia has taken concrete step in

showing transparency to the public by publishing all sub-decrees in the official gazettes and some sub-decrees in thewebsite of the Ministry of Economy and Finance. Moreover,RGC has also made legal binding and commitments towardensuring transparency and public participation.

n MEF has been committing to minimize the use of unexpectedexpenditure.

n It allows more effective oversight by legislators and civil societywith its positive influence to help ensure the appropriate use ofthe expenses and its efficiency toward contributing to povertyreduction in Cambodia. However, there are some challengesthat needs further efforts of RGC to address and advancethe transparency level in management of this budget

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Conclusionn The amount of information presented in the sub-decrees has been

minimal and difficult to identify the real purposes of thosespending.

n The trend of unexpected expenditure has been uneven in realterms although it seems to go up. In percentage term, it isgenerally going down.

n

Priority ministries benefited the most from the allocatedunexpected expenditure in the annual budget laws. Almost allallocated unexpected expenditure amount has been spent.

n Analysis of the expenditure items made by each ministry showsthat overall around 50% of the expenditure allocated through the

sub-decrees on the transfer of budget was spent on administrativeand operating expenses, which is not in line with the internationalgood practices definition mentioned by Ian Lienert of IMF.

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Conclusion

n The definition, purpose and conditions for the governments

use of this expenditure line are defined broadly in the Lawon Public Finance System (2008) and it allows lots offlexibility for the Royal Government in using this fund.

n In addition to the above summary, it is observed that theNational Audit Authority has not published its audit reportsin a timely manner; but rather its timing has been gettingworse i.e. only 2006 and 2007 audit reports on budgetimplementation were published accordingly in September2009 and October 2011. This late timing does not enable

the public to judge timely whether the Royal Governmenthas managed its public fund appropriately and transparentlyor not especially the use of unexpected expenditure budgetline item.

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Recommendationsn More comprehensive description of the payments purpose should

be included in the sub-decrees to avoid misinterpretation of their

meaning as suspect expenditure or slush fund by those who arenot familiar with those terms.

n The RGC via MEF and the NA should elaborate further on thedefinition and purpose of using unexpected expenditure inArticle 25 and Article 58 of the Law on Public Finance System,link the use of this expenditure to priority sectors (i.e. health,education, agriculture, rural development, water resources andsocial safety net programmes), and provide clarification on thetypes of expenditure that shall be used under the unexpectedexpenditure and other expenditure lines.

n The sub-decree should feature only one recipient line ministry/government agency or sub-national administration withappropriate details.

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Recommendationsn All versions of future sub-decrees should also be published in

the website of the Ministry of Economy and Finance andshould be put in one concentrated place.

n The National Assembly should legislate certain thresholdsand require RGC to publish regular report on use of thisbudget.

n The Royal Government of Cambodia via Ministry of Economyand Finance and the National Assembly should elaboratefurther the definition and purpose of the UnexpectedExpenditure in article 25 and 58 of the Law on PublicFinance System.

n The expenditures that are predictable and not listed in table 1of analysis should be in included in the normal budget.

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- For Ministry of Economy and Finance (MEF), 94.7% (USD272.4 million) of the total unexpected expenditure (USD 287.7million ) was allocated for its own operating and administrativeexpenses, while other 5.3% or USD15.35 million was spent on

work related to other sectors such as military demobilizationand support for disabled veterans.- If expenses on road repair and maintenance and otherinfrastructure projects (USD 53.05 million) are included,expenditure for other sectors will increase to about USD 68.4

million or 23.77% of the total unexpected expenditure by MEF.- If the total allocated budget for external services (USD109.3million) also included road maintenance and repairinfrastructure, expenditure for other sectors by MEF willincrease to USD 177.71 million (61.76% of the totalunexpected expenditure by MEF).

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Annex: Analysis of Spending by Key Ministries 2005-2010


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Unexpected expenditure of MEF can be grouped into 5main categories:- 58.9% (USD 169.51 Million) for external services, road

maintenance and repair of other infrastructure projects.- 16.9% (USD 48.66 Million) for administrative andoperation expenses and tax and excise, especially refundof excise for enterprises, organizations and embassies.- 13.1% (USD 37.56 Million) for subsidy and social

assistance, economic intervention and other expenditure,and charity support through the Cambodian Red Cross.- 5.8% (USD 16.65 Million) for interest payment and loan(principal) settlement in 2007 and 2008- The rest 5.3% (USD15.35 M) for supporting disabled

veterans and military demobilization of the MoND

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Council of Ministers (CoM) used unexpected expenditure for similarpurposes and they can be grouped into 5 main categories as well:- 56.7% (USD 50.39 Million) for settlement of advanced financing.

- 25.55% (USD 22.69 Million) for special work of the government.- About 11.9% (USD 10.61 Million) for administrative work andongoing operation of the Authorities and Committees under thesupervision of CoM- 5.2% (USD 4.63 Million) for urgent and necessary work of the

APSARA Authority, especially for repair and construction of 3 roadsin Siem Reap affected by Ketsana storm in 2010.- 0.6% (USD0.52 Million) was spent in 2007 for paying electricitybill overdue since 2003-2005.

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unexpec e expen ure use s u ge or s m ar purposes,


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unexpec e expen ure use s u ge or s m ar purposes,most of which were for old debt settlement (domestic debts)and administrative and operating expense.

1- Ministry of Interior: total unexpected expenditure was USD

43.71 Million, in which 60% (USD 26.21 Million) was spent onthe settlement of old debts and 40% (USD 17.5 Million) onoperation and administration work, mostly during the period2005-2009.2- Ministry of National Defense: total unexpected expenditurewas USD 33.97 Million, of which 38.01% (USD12.91 M) wasfor old debt settlement, 50.84% (USD17.27 Million) foroperating expenses and administrative work, and 11.15%(USD 3.79 Million) for national defense and security.

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33.2% (USD 8.75 Million) was allocated for operating expensesand administrative work, mostly of EDC.4- Ministry of Health: total unexpected expenditure was USD26.35 Million, of which 95.5% (USD 25.17 Million) was for the

purchase of additional medicine and medical equipment in 2007,2009 and 2010. Other 4.5% (USD 1.19 Million) was spent onadministrative and operation expenses.5- National Election Committee: total unexpected expenditure(USD 21.59 Million) was to cover operating expenses for the

preparation of elections (4) from 2006 to 2009.

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purc ase, opera on o e a ona un or or erm


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purc ase, opera on o e a ona un or or ermVocational Training for unemployed youths and workers, andSmall Business Creation Fund in 2009, purchasing mud to fillin the campus of Takeo Poly Techniques Institute in 2010, andOperation of National Social Safety Net Fund.7- Ministry of Education, Youth and Sport: total unexpectedexpenditure was USD 7.51 Million for publication of literacybooks, purchase of 2-student chairs, construction of schoolbuildings, and installment of a clean water and electricity

system in Mean Chey and Battambang Universities.

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.Million for publishing new official and diplomatic electronic


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.Million for publishing new official and diplomatic electronicpassport in 2008; the ministrys ongoing operation to the endof 2008; Expenses on renovation of the wall of theambassadors residence in Paris, France; spending on a

number of new tasks such as the opening of a consulate inNa Ning, a military ally in Australia and Indonesia, a trade allyin China and Korea, repair and purchase of equipment in NewYork and for ongoing operation to the end of 2007; andarranging official meetings and summits.

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