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Oil Revenue Management Workshop. By Francisco Carneiro, The World Bank Luanda, 16-19 de Maio de 2006. Quasi-Fiscal Expenditures and Compensation Mechanisms. Objectives of the Presentation. Brief description of the public finance management system in Angola.

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oil revenue management workshop

Oil Revenue Management Workshop

By Francisco Carneiro, The World Bank

Luanda, 16-19 de Maio de 2006

Quasi-Fiscal Expenditures and Compensation Mechanisms

objectives of the presentation
Objectives of the Presentation

Brief description of the public finance management system in Angola.

Highlight what has been done and what remains to be done to strengthen it.

methodology based on the pemfar of 2004 05
MethodologyBased on the PEMFARof 2004-05
  • Assessment of the legal, institutional, and regulatory frameworks and comparison with actual practices.
  • Diagnosis and possible solutions based on existing discrepancies in the legal-institutional frameworks and in the practical implementation of the legislation, rules and procedures.
  • Prioritization of the role of the Government in the reforms already adopted (e.g., PMFP, EMTA).
main topics covered in the pemfar
Main Themes:

1. Fiscal Performance

2.  Public Expenditure Management

3.  Financial Accountability

4.  Relation between Planning, Policies, and Budget

5. Credibility and Transparency in the Management of Public Funds

Fiduciary Aspects:

1.  Legal and institutional frameworks

2.  Budget preparation

3.  Budget execution and monitoring

4.  Public Accounting

5.  Internal control

6.  External fiscal control

7. Legislative monitoring

Main Topics Covered in the PEMFAR
institutional weaknesses and fiscal position
Institutional Weaknesses and Fiscal Position

In 2002, quasi-fiscal deficit of 6% of GDP and extra-budgetary expenditures of 14,7% of GDP.

INSUFFICENT BUDGETARY FUNDING

FISCAL INDISCIPLINE

EXTRA-BUDGETARY EXPENDITURES; QUASI-FISCAL DEFICITS; DISCREPANCIES

dois sistemas de gastos p blicos

Two Systems of Public Spending

Dois Sistemas de Gastos Públicos

Non-Conventional System

Led by Sonangol.

Transactions outside of SIGFE

 Oil-backed debts

Other quasi-fiscal expenditures

Responsible for some 11% of total expenditures in 2002.

Conventional System

Led by DNT.

Transactions registered in the SIGFE.

Compensation Mechanisms

Tax Retentions, Profit Oil

Treasury Operations

slide7

Negative Implications

Informal mechanisms of compensation (MINFIN e Sonangol)

Blurs transparency and accountability channels

Weakens the budgetary process

Creates uncertainty about the actual fiscal stance

Impairs planning

a transitional strategy
A Transitional Strategy

Situation in 2004

·Co-existence of conventional and unconventional public spending system.

·Compensation mechanism between Sonangol and MINFIN.

· Growing fiduciary risk and weak supervision.

·BNA not acting as monetary authority in control of foreign exchange

·    Ongoing reforms in Sonangol, MINFIN, and BNA.

Transition Period

·Identify expedient mechanisms.

·Eliminate fuel price subsidies.

·Identify Sonangol’s quasi-fiscal activities and transfer them to appropriate institutions.

·Implement a debt management strategy, reduce the need for oil-backed loans.

·Capacity building in MINFIN, MINPET, BNA.

Arrival Point

·Respect fully the Lei Quadro do Orçamento.

·Respect fully the Lei Quadro do Banco Central.

·       Transfer Sonangol’s concessionaire functions to MINPET.

the pemfar recommendations to restore normality
Pilar I

Strengthen the conventional system

Expand and strengthen the credibility and the effectiveness of the budget

Respect the Lei Quadro do Orçamento

Pilar II

Gradual elimination of the non-conventional system

Reduce Sonangol’s treasury-like operations

Transfer these activities to MINFIN

Strengthen the monitoring role of the Tribunal of Accounts

The PEMFAR Recommendations to Restore “Normality”
slide10

A Gradual Strategy Towards Normality

Establish clear reporting mechanisms among Sonangol, MINFIN and BNA

Strengthen internal control mechanisms (MINFIN e Sonangol) to ensure that treasury-like operations respect fiscal policy objectives and acceptal public finance practices

Improve accounting procedures to allow DNC to receive the necessary information to prepare quarterly budget execution reports

government actions in the domain of

Government Actions in the Domain of:

Budget Preparation

Budget Execution

Public Accounting and Monitoring

government actions to strengthen the budget process
Government Actions to Strengthen the Budget Process

Budget Preparation

  • Improve capacity to make projections
  • Adoption of AUPEC’s financial model
  • Increased coordination between MINFIN-MAPESS to improve the capacity to estimate with more precision the government’s wage bill
government actions to strengthen the budget process13
Government Actions to Strengthen the Budget Process

Budget Execution

  • Guarantee the consolidation of the CUT (Treasury’s Single Account)
  • Follow the correct procedures to execute public expenditures (cabimentação, liquidação, pagamento)
  • Train staff to operate SIGFE
government actions to strengthen the budget process14
Government Actions to Strengthen the Budget Process

Public Accounting and Monitoring

  • Adoption of a double entries system (SIGFE)
  • Training staff of the budgetary units
  • Establish appropriate accounting mechanisms to administer the government’s non-financial assets
  • Adoption of an accounting manual and a new Plan of Accounts
slide16

Elimination of Quasi-Fiscal Expenditures

  • Careful assessment of the racionality for the different categories of such expenditures.
  • Eliminate those with weak justification.
  • Elaborate an action plan to transfer those which are justifiable to the appropriate organizations in the Government.
slide17

An Appropriate Fiscal Strategy

  • Fiscal Policy and Debt Strategy:
  • Adopt a sustainable and forward-looking fiscal policy (MTEF).
  • Design a clear debt management strategy in which the need for oil-backed loans should be gradually reduced in a realistic timeframe.
slide18

Improve Governance and Transparency

Deal with Conflicts of Interest

  • The effectivness of Sonangol could be strengthened if there was a clear separation of its roles as (a) regulator; (b) commercial enterprise; and (c) social contributor.
  • Define a clear strategy to ring-fence and separate these functions and transfer them to the appropriate agencies/ministries within a reasonable timeframe.
slide19

Phase Out Subsidies

  • (World Bank – UK Study)
  • Gradual, through periodic price adjustments.
  • Generate substantial fiscal savings.
  • Plan and implement parallel social safety net programs.
slide20
Sonangol Concessionaire

Regulatory functions

Conflicts of interest

Decisions about acquisitions (“Local Content”)

Ring-fencing? Transfer to Ministry of Petroleum?

Sonangol Commercial

Commercial orientation

Clarify functions as a state enterprise

Focus on core activities

Internal control and financial accountability

External audits

Complicating Factors

  • Issues to Address
  • Significant flows of public funds
  • It is essential that these be integrated in the formal expenditure and revenue circuits of the Government
  • Activities performed by Sonangol are clearly important, but it is necessary to increase the degree of oversight and control of the Government…