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Module F Financial Management and Creditworthiness

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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