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Module F Financial Management and Creditworthiness

Module F Financial Management and Creditworthiness. 1. Introduction to the Module. 1.1 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

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Module F Financial Management and Creditworthiness

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

  2. 1. Introduction to the Module 1.1 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 Module F: Financial Management and Creditworthiness

  3. 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) Module F: Financial Management and Creditworthiness

  4. Session 1Financial management & creditworthiness Summary 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 Module F: Financial Management and Creditworthiness

  5. 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? Module F: Financial Management and Creditworthiness

  6. 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 Module F: Financial Management and Creditworthiness

  7. 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 Module F: Financial Management and Creditworthiness

  8. 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 Module F: Financial Management and Creditworthiness

  9. 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 Module F: Financial Management and Creditworthiness

  10. 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. Module F: Financial Management and Creditworthiness

  11. 2.4 Budgeting (preparation, control and implementation) Process by which SNG plans for: • its future expenditures, revenues, borrowings • fund release / liquidity management Module F: Financial Management and Creditworthiness

  12. 2.4 Accounting and monitoring systems Set of records / procedures used to record / report financial information and to monitor financial situation of SNGs Module F: Financial Management and Creditworthiness

  13. 2.4 Auditing - Internal • Legal / financial compliance • Satisfy requirement of management - External • Meet statutory obligations Module F: Financial Management and Creditworthiness

  14. 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 Module F: Financial Management and Creditworthiness

  15. 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 Module F: Financial Management and Creditworthiness

  16. 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 Module F: Financial Management and Creditworthiness

  17. 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) Module F: Financial Management and Creditworthiness

  18. 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. Module F: Financial Management and Creditworthiness

  19. 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?” Module F: Financial Management and Creditworthiness

  20. 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) Module F: Financial Management and Creditworthiness

  21. 3.1 Introduction • Degree of control exercised by central government over SNGs • How effective are the controls? • Accountability of SNGs Module F: Financial Management and Creditworthiness

  22. 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 Module F: Financial Management and Creditworthiness

  23. 3.3 Key components of FPCD • Budgeting • Accounting • Financial reporting • Auditing Module F: Financial Management and Creditworthiness

  24. 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; Module F: Financial Management and Creditworthiness

  25. 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 Module F: Financial Management and Creditworthiness

  26. 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 Module F: Financial Management and Creditworthiness

  27. 3.3.1 Budgeting Types of Operating Budgets Module F: Financial Management and Creditworthiness

  28. 3.3.1 Budgeting How to improve budgeting practices (Steps) • Identify the sources, amounts and timing of actual receipt of all revenue under SNG control . • Identify the source, amount and timing of all inter-governmental transfers • Provide a forum for citizens to voice their concerns about and priorities for how the budget will be spent • Link non-financial data to the budget formulation process Module F: Financial Management and Creditworthiness

  29. 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 Module F: Financial Management and Creditworthiness

  30. 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. Module F: Financial Management and Creditworthiness

  31. 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 Module F: Financial Management and Creditworthiness

  32. 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 Module F: Financial Management and Creditworthiness

  33. 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 Module F: Financial Management and Creditworthiness

  34. 3.3.2 Accounting How to improve accounting practices (Steps) • Centralize all accounting functions under a single administrative official • Prepare monthly financial reports which identify both: expenditures and purchase commitments • Maintain accounting records on a consistent year to year basis • Perform audits on a regular basis at least once a year Module F: Financial Management and Creditworthiness

  35. 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; Module F: Financial Management and Creditworthiness

  36. 3.3.3 Financial reporting • Why is it important? • Offers the opportunity to monitor and evaluate operations and management Module F: Financial Management and Creditworthiness

  37. 3.3.3 Financial reporting How to improve financial reporting practices? • Periodic reports (quarterly; monthly) should be required explaining key economic and fiscal developments and significant deviations from the budget • Financial data provided should be interpreted and explained (at least quarterly) • The output should be a narrative report (three to five pages) Module F: Financial Management and Creditworthiness

  38. 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) Module F: Financial Management and Creditworthiness

  39. 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 Module F: Financial Management and Creditworthiness

  40. 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 Module F: Financial Management and Creditworthiness

  41. 3.4 Other systems for operational efficiency and financial control • Cash management • Borrowing and debt management systems • Capital budget and investment planning • Asset management Module F: Financial Management and Creditworthiness

  42. 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 Module F: Financial Management and Creditworthiness

  43. (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) • Should FPCD measures be centralized or decentralized? Module F: Financial Management and Creditworthiness

  44. 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? Module F: Financial Management and Creditworthiness

  45. 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 Module F: Financial Management and Creditworthiness

  46. 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 Module F: Financial Management and Creditworthiness

  47. 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 Module F: Financial Management and Creditworthiness

  48. 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 Module F: Financial Management and Creditworthiness

  49. 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) Module F: Financial Management and Creditworthiness

  50. 4.4 Factors influencing creditworthiness & borrowing by SNG Major 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) Module F: Financial Management and Creditworthiness

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