Where Does the Public Sector End and the Private Sector Begin?

Where Does the Public Sector End and the Private Sector Begin?;

Summary: The boundary between the public and private sectors can be defined on the basis of ownership of institutional units. Nonmarket government-owned entities and corporations that are owned or controlled by government units belong to the public sector. “Economic ownership” is more important than majority ownership. Joint ventures, public-private partnerships, and social insurance funds (including for public employees) can be unambiguously allocated to the public or private sector on the basis of international public sector accounting standards. Boundary problems within the public sector are just as acute as those between the public and private sectors, mainly because of ambiguities in distinguishing “market” from “nonmarket” activities.

Assorted Fiscal

Fiscal Reforms That Work

Public Investment and Public-Private Partnerships

Guidelines for Fiscal Adjustment

Fiscal Adjustment for Stability and Growth

Unproductive Public Expenditures: A Pragmatic Approach to Policy Analysis

El Salvador letter of intent

To mitigate these risks, we have designed a program aimed at preserving macroeconomic stability during 2009 and boosting the economy’s resilience to external shocks. The program aims to: (i) bolster confidence by maintaining sound macroeconomic policies; (ii) upgrade the regulatory and supervisory framework of the banking system; and (iii) increase the liquidity buffers of the financial system.

Within this context, the program will focus on preventive and contingency measures, in particular, in the financial system. The measures will be anchored on strict adherence to El Salvador’s monetary regime of official dollarization and a prudent fiscal policy, while expanding social programs to mitigate the impact of the global growth slowdown. Financial system policies will concentrate on enhancing readiness to detect and respond resolutely to signs of stress in the banking system...

The nonfinancial public sector (NFPS) comprises the central government, the rest of the general government (Instituto Salvadoreño del Seguro Social (ISSS), the municipal governments, public hospitals, the national university, and other decentralized agencies), and the nonfinancial public sector enterprises (Comisión Ejecutiva Hidroeléctrica del Río Lempa (CEL), Comisión Ejecutiva Portuaria Autónoma (CEPA), Administración Nacional de Acueductos y Alcantarillados (ANDA), and Lotería Nacional de Beneficiencia (LNB)).

3. The overall balance of the NFPS is measured on a cash basis from below the line, defined as (a) net domestic financing of the NFPS; plus (b) net external financing of the NFPS; plus (c) proceeds from exceptional revenues such as, but not limited to, proceeds from privatization or licenses and concessions, as defined in the attached Table A1. The components of the NFPS financing will be defined and measured as follows:

(a) The net domestic financing of the NFPS is defined as the sum of: (i) the increase in net claims of the domestic financial system on the NFPS, excluding government bonds initially sold abroad; (ii) the net increase in the amount of public sector bills (Letes) and bonds held outside the domestic financial system and the NFPS, excluding bonds initially sold to nonresidents; and (iii) floating debt of the NFPS due to expenditure operations and tax refund payments.

(b) The net external financing of the NFPS comprises (i) disbursements of external loans; plus (ii) receipts from the issuance of government bonds abroad and Letes held by nonresidents; minus (iii) cash payments of principal (current maturities of both loans, bonds and Letes); minus (iv) cash payments of arrears (principal and interest); minus (vi) debt buybacks or other prepayments of debt (at market value); minus (vii) debt-equity swaps accounted at the market value of these papers; and minus/plus (viii) the net increase/decrease in other foreign assets of the nonfinancial public sector.

(c) proceeds from exceptional revenue such as, but not limited to, proceeds from privatization, the sale of licenses, and the granting of concessions. These would be defined as (i) the cash payments received by the Treasury from the sale of state-owned assets; plus (ii) debt equity swaps, accounted at market values. Also included are up-front payments

-El Salvador: Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding

The state of GFS in Malawi

The accuracy and reliability of the data are affected by inadequate source data. A key shortcoming in this area is inadequate system of recording source data. In addition, there are serious quality problems, including data inconsistencies, that complicate program monitoring:

• While tax revenue data are received in a timely fashion, it is not always possible to reconcile them with deposits in the Malawi Government (MG) Account.

• Nontax revenue, including capital revenues collected by line ministries are not properly accounted for in the fiscal reports prepared by the Ministry of Finance.

• Data on recurrent expenditure suffer from serious shortcomings partly related to insufficient bank reconciliation between expenses records prepared by line ministries and financing information prepared by the Ministry of Finance. Line ministries submit spending reports to the Ministry of Finance based on recorded expenses, while the Ministry of Finances estimates expenses based on funding data (from the Credit Ceiling Authority). At times, there are sizable discrepancies between these two sources of data for both wages and other recurrent transactions—to some extent reflecting the widespread practice of reallocation across budget lines.

• Domestically financed development expenditure estimates are based on funding released to line ministries, and estimates on externally funded expenditure are based on reported project grants and loans. Owing to differences in timing and financing modalities (e.g., some donors require prefinancing of expenditure before reimbursement), there are substantial differences between the flow of expenses and corresponding financing data. Thus, there are substantial errors in the reporting of capital spending. In addition, many donor projects are still not incorporated in the budget, and hence the corresponding expenditure is not captured in government finance statistics. Some externally funded development expenditures are likely recurrent and reported capital expenditure therefore overstated.

• Data on expenditure arrears are likely incomplete, as reporting from the Commitment Control System appears to be only partial, and ministry level data are not consistent from report to report.

• The budget classification and chart of accounts may be adequate for some administrative, economic, functional and program classifications. An output-oriented activities-based budget classification (ABB) is used for the presentation of the budget. However, pro-poor expenditures that have been protected in line with the PRSP are only identified in the ABB classification. As no bridge table exists to map the ABB classification into the program classification used for expenditure reporting and accounting, pro-poor expenditures cannot be monitored.

• Financing estimates are based on monetary and debt data, rather than on government records of financing. Reporting on treasury bills directly issued to the RBM at times has been slow.

8. The authorities have received significant technical assistance from the Fund and other donors to strengthen expenditure monitoring and reporting, accounting, and statistical reporting, but results have lagged. The government has pledged to strengthen public financial management and fiscal reporting, and renewed efforts are being made to establish a work plan, including utilizing donor technical assistance more effectively.

9. Government finance data are not reported for publication in the Government Finance Statistics Yearbook (GFSY) or the International Financial Statistics (IFS). An August 2005 and August 2007 STA mission that visited Lilongwe reiterated the importance of continued efforts to implement the Integrated Financial Management Information System (IFMIS), and encouraged the authorities to improve the coverage and sectorization of government financial operations and to correctly classify transactions according to international guidelines. The mission proposed, and discussed with the authorities, a migration plan and timetable to adopt the GFSM 2001 methodology.

-Malawi: Request for a One-Year Exogenous Shocks Facility Arrangement - Staf Report

Related;
Malawi Ministry of Finance
Report on MTEF process

SOEs in GFS

To this end, the government is making the commitment to a new PSI benchmark of compiling the official statistics of Other Economic Flows for the general public sector arising from the holding gains with our five largest state-owned enterprises to allow for prompt detection of balance-sheet vulnerabilities and adoption of corrective actions.

-Cape Verde: Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding

Related;
The Basics of Macroeconomic Accounts

SOEs Performance in Indonesia

-Indonesia: State-Owned Enterprise Governance and Privatization Program

Assorted on National Accounts

Latin America: Highlights from the Implementation of the System of National Accounts 1993 (1993 SNA)

Understanding National Accounts

GFS data quality in Dominica

Statistical capacity problems affect the timely production of quality government finance statistics. In particular, the data are subject to frequent revisions stemming in part from omissions and misclassifications. Data on central government operations are incomplete and must be supplemented with additional information from external sources. For instance, some operations are undertaken outside the consolidated fund. These include certain investment spending, loan and grant receipts, and on-lending and transfers to public enterprises. As a result, capital expenditure data, recorded by the Treasury, must be supplemented with additional donor financing information, particularly because the public sector investment program (PSIP) data are not timely. Delays in the reporting of the PSIP data reportedly stem from reporting delays from the line ministries.

Several ongoing initiatives to strengthen expenditure management, should help minimize the extent of this problem. There is an ongoing effort to automate the expenditure execution process. A new automation technology installed in all line ministries in 2005 should allow all local purchase orders (LPOs) to be electronically generated and tracked. Commitments are charged against a specific budget allocation once the LPOs are generated. All ministries and suppliers of goods and services are compelled to use the new system. Only limited financing data are available. Although progress has been made in improving the measurement of the government's debt, there are concerns that there is still some under-recording of government commitments.

The authorities do not provide consolidated nonfinancial public sector data. Data for the rest of the public sector—Dominica Social Security and the public enterprises—must be obtained directly from each entity during Fund Article IV consultation missions.

No government finance data are reported to STA for publication in the International Financial Statistics (IFS) or the Government Finance Statistics (GFS) Yearbook.

via Dominica: 2008 Article IV Consultation - Staff Report

Indonesia: Progress in Fiscal Institution Building

Recommended reading- Indonesia: Selected Issues, chapter IV;

Progress has been made in strengthening technical capacity at the central government level. Within the Ministry of Finance (MoF), the Fiscal Policy Office (FPO) is now fully operational with a mandate for macro-fiscal projections and analysis, including assessments of fiscal risks. The FPO now prepares fiscal risk statements that are included in the annual budget documents—making Indonesia one of the pioneers in fiscal risk analysis among emerging market economies. Operational management of debt-related risks is undertaken by the Directorate General (DG) for Debt Management, which is responsible for both domestic and external debt management.

Despite some progress, parliament’s technical capacity for fiscal policy analysis is still limited. Parliament’s (DPR) budget committee plays an important role in the budget approval processes, though with excessive emphasis on details which are usually seen as being within the province of the executive (such as close scrutiny of macroeconomic assumptions and detailed review of expenditure items—as opposed to scrutiny at a more aggregated level found in other countries). In contrast with this wide ranging mandate, the DPR had limited qualified technical staff and few with specializations. Some improvement in these areas has been achieved through: (1) increasing the number of technical staff; and (2) greater specialization of staff through the establishment of specific parliament commissions (e.g., the economic commission). These commissions are now able to provide some analytical and technical support to members of parliament, though the DPR’s effectiveness in budget scrutiny and oversight is still inadequate. Intense involvement of the DPR at the pre-budget presentation stages remains (6–7 months before the new fiscal year), but there is only limited focus on medium-term budget issues and on the results of policies embedded in the annual budget. The 2003 State Finances Act calls for an unusually early date for approval by parliament of the annual budget law (2 months before the new fiscal year); nonetheless, DPR committees continue to be involved in budget approval after the annual budget law has been adopted in plenary session. The DPR’s follow-up on the external audits of the Supreme Audit Institution (BKP) remains weak.

Progress has been made in improving the quality of government accounts, but is still incomplete. The adoption of government cash management regulations in July 2007 was an important step in improving the transparency of government banking arrangements. The regulations strengthen the Minister of Finance’s powers to consolidate government bank accounts. On this basis, the MoF conducted a census of government bank accounts operated by ministries and budget users outside treasury control. The ensuing ministry-by-ministry analysis of accounts revealed that over 20,000 government accounts existed. Some of these off-budget bank accounts have either been closed or integrated with the treasury. This was a sizeable step towards establishing an operational treasury single account (TSA). However, there are still a few impediments to the establishment of a TSA. In particular, government deposits held at Bank Indonesia (BI) are poorly remunerated, which impedes the development of active cash management (since the opportunity cost of idle government deposits is small). Transparency also improved following the incorporation of the regional development and investment accounts into financial reports and budget documents. Progress in integrating the operation of other extrabudgetary funds in the budget has been limited

The disclosure of fiscal information to the public has improved significantly.
Several recent amendments to ministerial decrees should help improve fiscal data quality and transparency. In particular, the chart of accounts now requires that the budget, in-year fiscal reports, and annual financial statements use the same terminology, which should simplify budget monitoring. The publication of a comprehensive fiscal risk statement accompanying the annual budget document significantly improves the transparency of fiscal policies and associated risks. In this context, improved reporting of information by SOEs should enable the FPO’s risk management unit to better assess risks for selected key SOEs. The reporting of information on central government debt is now comprehensive and timely, and key contingent liabilities are also disclosed in the annual fiscal risk statement (including those related to public-private partnerships). However, little progress has been made on reporting general government debt (though local government debt remains negligible), and debt accumulated by public enterprises.

Early progress has been achieved in strengthening internal and external audit bodies and in fighting corruption among public officials. The BPK mandate has been strengthened by the adoption of a 2006 law (and associated decrees in 2007). BPK staff headcount has been significantly increased (currently 6,000 staff covering 28 provinces) and training has been improved in both the IG and BPK, though needs remain significant. However, both the MoF’s IG and BPK are experiencing difficulties in accessing taxpayers data needed to investigate potential misconduct of tax officials owing to taxpayers privacy concerns, even though the law provides both institutions such access. Memorandum of understandings between the MoF and the internal and external auditors to address this issue are under discussion. Finally, the role of the Financial and Development Supervisory Agency (BPKP) as an internal audit body has not been reviewed—BPKP is part of the president’s office and has jurisdiction on central government finances. However, it shares internal audit responsibilities related to ministries with the IG, with an unclear distinction between their mandates.

Quality of Fiscal Data in Libya

The fiscal information system remains fragmented and inconsistent with international standards, since it was designed for administrative reporting under the government finance law, rather than for purposes of providing timely statistical information for economic planning and analysis. However, there has been significant improvement in this area. Monthly and quarterly data for key components of revenue and expenditure are being reported to staff on a regular basis.

To improve the fiscal data, the 2005 STA mission recommended: (i) adopting centralized management of all budgetary central government accounts at the ministry of finance; (ii) expanding coverage of central government accounts by including extrabudgetary and local government operations; (iii) developing GFS metadata on concepts, scope, classifications, basis of recording, data sources, and statistical techniques for posting on the GDDS website; (iv) adopting the Fund’s 2001 Government Finance Statistics Manual (GFSM) as a coherent methodological framework for the production and dissemination of monthly, quarterly, and annual fiscal data. This would promote the recording of all assets and liabilities on accrual basis and at market values. To this end, STA has trained two CBL staff, one in 2007 and one in 2008.

Source: Socialist People's Libyan Arab Jamahiriya: 2008 Article IV Consultation-Staff Report

New Zealand the model

Willem Buiter talks about the New Zealand model of public financial management;

It is a near-universal rule of time management that the urgent but not necessarily terribly important takes precedence over the important but not terribly urgent. Economic policy making is no exception to this rule. I was therefore pleasantly surprised to read in the papers that Peter Orszag, Director of the Congressional Budget Office (CBO) said on September 9 that “It is the CBO view that Fannie Mae and Freddie Mac should be directly incorporated into the federal budget”. The CBO is the (non-partisan) federal agency within the legislative branch of the US government that acts as a congressional budget watchdog and among whose responsibilities is the projection of the budgetary consequences of proposed legislation.

Why does it matter that the revenues, outlays, assets and liabilities of Fannie and Freddie be put into/onto the budget and balance sheet of the US Treasury? It won’t help or hinder the resolution of the current financial crisis. What is does, is strike a blow for accountability for the use of public funds. It enhances the quality of the information available to the Congress and to the public at large about the federal government’s financial exposure (including its contingent exposures) and about future expected or planned sources and uses of funds. Without high-quality information and without transparency, there can be no accountability for the use of tax payers’ money. Peter Orszag therefore struck a blow for good governance, for better government and for checks and balances....

The only government in the world that gets close to providing all the relevant information to have a go at constructing its comprehensive balance sheet is the government of New Zealand. Since 1989, the Public Finance Act 1989 (PFA) requires the New Zealand government to pursue its policy objectives in accordance with the following principles of responsible fiscal management:

* Maintaining debt at a prudent level by ensuring that, on average, over a reasonable period of time, total operating expenses do not exceed total operating revenue.
* Achieving and maintaining net worth at levels which provide a buffer against factors which may adversely impact on net worth in the future.
* Managing prudently the fiscal risks facing the Government, and;
* Pursuing policies which are consistent with a reasonable degree of predictability about the level and stability of taxes for future years.

That’s rather waffly, but the implementation of these principles is anything but. The PFA requires the government to present, in each financial year, two reports outlining Government’s fiscal policy: the Budget Policy Statement (BPS) and the Fiscal Strategy Report (FSR). The BPS has a short run focus setting out policy goals that will guide the Government’s Budget decisions and priorities. The FSR is presented with the Budget and must state the Government’s long term objectives for fiscal policy over a period of at least 10 years and the Government’s short term intentions for fiscal policy over a period of three years. The FSR must also provide projections of fiscal variables to show progress towards meeting the long term objectives (Progress Outlooks).

In addition, the Treasury is required to publish, at least every four years, a Statement of the Long Term Fiscal Position. This has a horizon of at least 40 years and identifies how demographic and other changes may impact the fiscal position.

Added to this are serious attempts to value such contingent liabilities as guarantees, and to calculate the fair value of such contingent political commitments as social security retirement benefits.

Nothing new for Argentina

Argentina’s overdue loans from the Paris Club nations, principally Japan and Germany, have represented a serious obstacle to its medium-term growth potential. While the country was in arrears, the export-promotion agencies of many foreign governments were banned from providing subsidised credit for sales or investments in Argentina. Now, it will be eligible for such loans, substantially lowering financing and insurance costs for infrastructure projects and imports of capital goods. In particular, the move should expedite the construction of a high-speed rail line linking the country’s three largest cities, a costly project of questionable necessity strongly backed by Ms Fernández. “We haven’t been getting big investments of hundreds of millions of dollars because they need international financing,” says Beatriz Nofal, the president of the government’s investment-promotion agency. “Now they’ll start coming.”

But the mechanism Ms Fernández has chosen for repaying the debts is reinforcing widely held concerns about Argentina’s economic management. Just as her husband did when repaying the government’s debt with the IMF in 2005, Ms Fernández has rustled up the cash by helping herself to 15% of the central bank’s foreign-currency reserves. In addition to highlighting the bank’s tenuous independence, this decision implies a steep opportunity cost: Argentina could easily have paid the debt in instalments rather than in one lump sum. Doing so might have spared the country the need to borrow ever-greater sums from the Venezuelan government, which now charges a daunting 15% interest rate.

But according to the Paris Club’s rules, securing any such restructuring with the group would require the blessing of the IMF, which has long been the Kirchners’ favourite political scapegoat. And in turn, to obtain the Fund’s approval, Argentina would probably have had to reveal how it calculates its official inflation figure, which is manipulated so that it hovers at around a third of the true rate. Ms Fernández remains unwilling to reveal precisely how her officials doctor Argentina’s economic statistics.

If Ms Fernández hoped that her decision would calm investors’ nerves, she appears to have been mistaken: the spread between the interest rates on Argentina’s bonds and US Treasury notes actually increased on the day she made the announcement. The markets remain jittery because Argentina’s unpaid obligations to the Paris Club were in fact among the least of its worries. The government still refuses to negotiate with the private holders of $20 billion of its bonds who held out against the country’s harsh debt restructuring in 2005, a decision that prevents it from borrowing on the international capital markets. It continues to impose strict price controls and hand out lavish energy and transport subsidies. And it suffers from a yawning credibility gap, due to lies about the inflation rate

-Satisfying the creditors

How Government Accountants almost killed one of the greatest innovations in Macroeconomics

Leontief believed that the economy could be broken down into sectors, like farming, steel manufacturing, retailing, and so forth. Each sector uses material and services from other sectors to produce material or a service, which it supplies to those other sectors. This interrelationship can be described in the form of a mathematical matrix. It is often called an “input-output analysis.” When he first began investigating this model at the end of World War II, Leontief went to the Bureau of Labor Statistics to help gather the data he needed. To assist him, the bureau assigned a young analyst who was working there at the time, Jerome Cornfield.

Leontief could break the economy down into a few broad sectors, such as putting all manufacturing in one sector, or he could subdivide the sectors into more specific ones. The mathematical theory of input-output analysis requires that the matrix that describes the economy have a unique inverse. That meant that the matrix, once assembled, had to be subjected to a mathematical procedure called “inverting the matrix.” At that time, before the widespread availability of computers, inverting a matrix was a difficult and tedious procedure on a calculator. When I was in graduate school, each of us had to invert a matrix- I suspect as a kind of rite of passage “for the good of our souls.” I remember trying to invert 5 x 5 matrix and taking several days, most of which I spent locating my mistakes and redoing what I had done wrong.

Leontief’s initial set of sectors led to a 12 x 12 matrix, and Jerry Cornfield proceeded to invert that 12 x 12 matrix to see if there was a unique solution. It took him about a week, and the end result was the conclusion that the number of sectors had to be expanded. So, with trepidation, Cornfield and Leontief began subdividing the sectors until they ended with the simplest matrix they thought would be feasible, a 24 x 24 matrix. They both knew this was beyond capacity of a single human being. Cornfield estimated that it would take him several hundred years of seven-day work weeks to invert a 24 x 24 matrix.

During World War II, Harvard University had developed one of the first, very primitive computers. It used mechanical relay switches and would often jam. There was no longer any war work for it, and Harvard was looking for applications for its monstrous machine. Cornfield and Leontief decided to send their 24 x 24 matrix to Harvard where its Mark I computer would go through the tedious calculations and compute the inverse. When they sought to pay for this project, the process was stopped by the accounting office of the Bureau of Labor Statistics. The government had a policy at the time; it would pay for goods but not for services. The theory was that the government had all kinds of experts working for it. If something had to be done, there should be someone in government who could do it.

They explained to the government accountant that, while this was theoretically something that a person could do, no one would be able to live long enough to do it. The accountant was sympathetic, but he could not see a way around the regulation. Cornfield then made a suggestion. As a result, the bureau issues a purchase order for capital goods. What capital goods? The invoice called for the bureau from Harvard “one matrix, inverted.”

Source: The Lady Tasting Tea: How Statistics Revolutionized Science In The Twentieth Century, By David Salsburg, pp.177-78

Mauritius Government Finance Statistics- Data Quality

ROSC- Data Module for Mauritius was recently posted by the IMF. The recommendations on government finance statistics are well worth a look;

• Legally/officially assign the responsibility to compile GFS for the general government to the CSO.
• Strengthen and increase staff resources for work on GFS
• Inform the users of the internal approval processes of the data
• Prepare a detailed migration path and obtain official approval for implementing GFSM 2001.
• Continue work on improving the timeliness of source data by obtaining an agreement on the timely provision of data from all major source data providers.
• Improve the timeliness of the general government operations data.
• Regularly check for consistency between GFS and monetary data and prepare a reconciliation table.
• Explain the revision policy in the GFS publication
• Prepare and disseminate advance release calendars for central government operations and outstanding central government debt.

On the capacity side;

The CSO has four staff positions dedicated to the compilation of annual GFS for the general government sector and in cooperation with the MOFED the functional classification of budgetary central government expenditure on a quarterly basis. These staff also are assigned to compile quarterly general government statistics for the national accounts. Resources are limited; in particular staff resources are constrained taking into account the current migration from the methodology described in the GFSM 1986 to the methodology described in the Government Finance Statistics Manual, 2001 (GFSM 2001). While computer resources seem adequate at the moment, any additional demands could over-extend these resources.

On-the-job and external training have been available to the MOFED and CSO staff. Formal internal training has not been provided. Some staff have attended external training on the GFSM 1986 and on the GFSM 2001.

Significant progress to automate government finance compilation procedures has been achieved recently through the implementation of the Treasury Accounting System (TAS) used by the Accountant-General to follow the cash flows of the budgetary central government. However, this process needs to be extended to other areas of the general government. Data for non-budgetary central government and local governments are input manually. A new chart of accounts, based on the GFSM2001, is currently being prepared and is expected to be implemented as from the financial year 2008/09.