Analysis on Government Use of Unexpected Expenditure 2005-2010

NGOF edit Master subtitle style Click toQuarterly meeting, 25 April 2012
By Chea Kim Song Development Issues Programme Manager The NGO Forum on Cambodia E-mail: ngoforum@ngoforum.org.kh Websites: www.ngoforum.org.kh www.cambodianbudget.org

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CONTENT
n n

Introduction Allocation and Disbursement of Unexpected Expenditure 2005-2010 Allocation by Ministries 2005-2010, 2011 Comparison of Overspent Recurrent Budget Amount and Allocated Unexpected Expenditure by Ministries

n n

Conclusion and Recommendations

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Introduction
Unexpected expenditure/ Contingency funds or reserves: A separate fund or a budget provision set aside to meet unforeseen and unavoidable requirements that may arise during the budget year (IMF, 2001).
n

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

n

be around 13% of total expenditure, which the executive would spend on genuine unforeseen emergencies.

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Introduction
Analysis of budget laws 2005-2010 showed that non-priority ministries have overspent their recurrent budget repeatedly totaled at USD 541.3 Million. Most of overspent amount came from the use of unexpected expenditure and supplementary budget. Unexpected expenditure as percentage 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.

Actual Recurrent Expenditure in % of Allocated Budget by Priority Ministry Ministry of Economy and Finance

2005

2006

2007 171.6% 189.6% 133.0% 115.5%

2008

2009

2010

154.4% 185.5%

201.0% 191.6% 123.5% 286.2% 211.1% 150.7% 149.7% 137.3% 105.4% 149.6% 172.8% 106.2% 502.6% 163.6% 95.9%

Office of the Council of Ministers 159.1% 173.7% Ministry of Interior-General Administration & Public Security 101.8% 117.3% Ministry of National Defense Ministry of Industry, Mines and Energy National Election Committee 99.6% 105.6% 91.8% 339.9%

345.2% 1,226.3% 94.2% 96.0%

230.0% 113.2% 1,066.4%

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Introduction
n

Article 25 of the Law on Public Finance System states that Recurrent expenditure category 2 on Financial Obligations and category 6 on Unexpected Expenditure shall not be allocated to ministries, institutions or public entities. These credits are kept for payment of interests on loans and other obligations including as reserves for unexpected expenditures. Reserved credit shall be allowed to cover any expense whose allocation cannot be accurately specified when credit is approved. The allocation of these reserved credits by ministries, institutions and similar public entities shall be made by sub-decree pursuing to the request made by the Minister of Economy and Finance. Article 58 of the Law on Public Finance System states that A subdecree following request by MEF can allocate budget recorded under unexpected expenditure in the form of additional credit beneficial to various (budget) chapters of ministries, institutions or similar public entities.
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Introduction
n

Article 84 of the law emphasize the commitment toward improving transparency in public finance system that all accounting and financial reports must be transparent and publicly disclosed. Article 61 of the law on Public Finance System says that In case of natural disasters or any emergent necessity beneficial to the nation, based on a report of the Minister of Economy and Finance, the Royal Government may issue a sub-decree to increase credit for utilization (or provide supplementary budget to line ministries/agencies). This credit shall be adopted by the annual amended law on the Law on Annual Finance and the government shall seek immediate approval from the National Assembly and Senate when these special circumstances end; otherwise, these credit are subject to regularization in the Law on Finance in the following year.
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Introduction
n

There is also other legal and regulatory guarantee to ensure that the official gazettes are to be made publicly and widely disclosed and available to the general public by the Royal Government. Those include: q New article 93 in the constitution q Article 13 of law on formulation and functioning of the council of ministers (1994), sub-decree on formulating structure and functioning of general department of official gazette and computer service (26 August 2004), and q RGC Circular No. 12 S.R.N.N dated 23 November 2004 on Obligation for Preparation of Official Gazette. Article 93 of the constitution and 13 of the law on formulation and functioning of the council of ministers (1994) mandated the Royal Government to publish all legal and regulatory documents to the public via the official gazette, especially those that are generally applicable and 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 the ministries/agencies are genuinely unexpected or unpredictable? Is the information provided in the subdecrees sufficient for the public to trace or monitor the spending of this budget? Which expenditure items has the allocated budget been spent on? And do those purposes and expenditure items conform to the definition given in the Law on Public Finance System? n Which ministries/agencies are the main beneficiaries of this 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 of this budget? Does the governments use of unexpected expenditure comply with the universal/international good practice? What is the difference between the definition stated in the Law on Public Finance System and the international good practice? n Does the government have reports on the use of this budget? Does the legislative body such as the NA have the authority to scrutinize and investigate the governments use of this expenditure line, based on the Law on Public Finance System?

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Allocation and Disbursement of Unexpected Expenditure 2005-2010 (USD Million)

12 10 8 6 4 2 0

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

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

12

10

1111

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

- During these years, a total of USD 578.79 Million of unexpected expenditure was spent by line ministries, which is 98% of total allocated unexpected expenditure (USD 589.8 Million) 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-priority ministries while only 8.3% (USD 48 Million) was absorbed by priority ministries (including MoWRM).

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

- 6 non-priority ministries (excluding MoH) benefited the most from the use of unexpected expenditure in the last six years, absorbing a total of 85.8% on average of the annual actual unexpected expenditure. - MEF and CoM are the largest recipients of this expenditure line, together having received 65% of the total unexpected expenditure allocated for all ministries.

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Allocation of unexpected expenditure by Ministries in 2010 (in Million USD)

12 10 8 6 4 2 0 1414

Allocation of unexpected expenditure by Ministries in 2011 (in Million USD)

12

10

1515

Discrepancy between overspending recurrent budget and unexpected expenditure 2005-2010

Disbursement by 6 Non-Priority Ministries (in Million USD) Ministry of Economy and Finance Office of the Council of Ministers Ministry of Interior (General Administration & Public Security) Ministry of National Defense Ministry of Industry, Mines and Energy National Election Committee Total Overspent Amount of Amount of Recurrent Unexpected Budget Expenditure Expenditure transferred Difference 54.9 156.0 95.8 167.8 48.5 18.2 541.3 287.7 88.8 43.7 34.0 26.3 21.6 502.1 -232.8 67.1 52.1 133.9 22.2 -3.4 39.1

No. 1 2 3 4 5 6

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Discrepancy between overspending recurrent - There is and unexpected expenditure 2005-2010 budget significant inconsistency between both amounts

spent by each ministry, but in terms of total amount of all ministries, the inconsistency is minimal. This raises doubt over the differences which should be explained by Ministry of Economy and Finance. - There were also transfers of supplementary budget by the government as written in Article 61 of the Law on Public Finance System (2008) which increase budget to some key line ministries during this period in addition to the use of unexpected expenditure above. - During 2005-2011, 8 ministries received a total supplementary budget of USD 191 Million; and 2005-2010, 7 ministries received a total supplementary budget of USD 132.5 Million.

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Supplementary Budget Allocated to Key Non-Priority Ministries & Institutions 2005-2010&2011 (in Million USD)
Amount in Amount in 2005-2011 2005-2010 99.77 41.23 44.19 44.19 23.66 23.66 14.48 14.48 5.63 5.63 1.48 1.56 0.57 191.35 1818 1.48 1.56 0.28 132.52

No. 1 2 3 4 5

Ministries/Institutions Office of the Council of Ministers Ministry of National Defense Ministry of Industry, Mines and Energy Ministry of Economy and Finance Ministry of Interior-Public Security Ministry of Social Affairs, Veterans and Youth 6 Rehabilitation Ministry of Foreign Affairs and International 7 Cooperation 8 National Assembly Total

Supplementary Budget Allocated to Key Non-Priority - Ministries &8 out of 14 supplementary budget transfers There were Institutions 2005-2011 (in Million USD) (USD61.7 Million or 46.6%) in 2005-2010 used for expenditure considerably not related to emergency or natural disasters or urgency 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 necessary expenditure (eg. the expenditure on flood, sovereignty and integrity defense). - It is broad and flexible to interpret the meaning of urgent necessity for national benefit since there is no further explanation in Article 61 of the Law on Public Financial System.

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Discrepancy between overspending recurrent budget and unexpected expenditure plus supplementary budget 2005-2010
Overspent Amount of Unexpected Recurrent and Disbursement by Line Ministries (in Budget Additional No. Million USD) Expenditure Credit Difference 1 2 3 4 5 6 Ministry of Economy and Finance Office of the Council of Ministers Ministry of Interior (General Administration+Public Security) Ministry of National Defense Ministry of Industry, Mines and Energy National Election Committee Total 54.9 156.0 95.8 167.8 48.5 18.2 541.3 302.2 130.1 49.3 78.2 50.0 21.6 631.3 2020 -247.3 25.9 46.5 89.7 -1.4 -3.4 -90.1

Discrepancy between overspending recurrent budget - The difference between the total amount of the two and unexpected expenditure plus supplementary credit expenditures is even larger for MEF (USD 247.3 Million). 2005-2010 - Chapter 03 of Budget Laws 2006-2012 provides that Laws on Budget Execution 2005-2011 shall adopt an actual amount of budget for implemented supplementary budget, which means that actual expenditure figures are to be recorded in each budget year in the actual budget expenditure of the ministries that received this supplementary budget, and this plus unexpected expenditure amount should be found through the overspent amount of recurrent budget by line ministries recorded in the annual budget implementation report and Law on Budget Execution. Both amounts should not be significantly different.

21Budg21

Sub-decree of Budget Transfer immediately classified as Unexpected Expenditure

n

28 out of 209 sub-decrees or 13.4% could be immediately classified as unexpected expenditure. In real terms, it is USD 61.4 Million or 10.61% of total unexpected expenditure (USD 578.79 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 subdecrees in the official gazettes and some sub-decrees in the website of the Ministry of Economy and Finance. Moreover, RGC has also made legal binding and commitments toward ensuring transparency and public participation. MEF has been committing to minimize the use of unexpected expenditure. It allows more effective oversight by legislators and civil society with its positive influence to help ensure the appropriate use of the expenses and its efficiency toward contributing to poverty reduction in Cambodia. However, there are some challenges that needs further efforts of RGC to address and advance the transparency level in management of this budget
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Conclusion
n

The amount of information presented in the sub-decrees has been minimal and difficult to identify the real purposes of those spending. The trend of unexpected expenditure has been uneven in real terms although it seems to go up. In percentage term, it is generally going down. Priority ministries benefited the most from the allocated unexpected expenditure in the annual budget laws. Almost all allocated unexpected expenditure amount has been spent. Analysis of the expenditure items made by each ministry shows that overall around 50% of the expenditure allocated through the sub-decrees on the transfer of budget was spent on administrative and operating expenses, which is not in line with the international good 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 Law on Public Finance System (2008) and it allows lots of flexibility for the Royal Government in using this fund. In addition to the above summary, it is observed that the National Audit Authority has not published its audit reports in a timely manner; but rather its timing has been getting worse i.e. only 2006 and 2007 audit reports on budget implementation were published accordingly in September 2009 and October 2011. This late timing does not enable the public to judge timely whether the Royal Government has managed its public fund appropriately and transparently or not especially the use of unexpected expenditure budget line item.
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Recommendations
n

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 are not familiar with those terms. The RGC via MEF and the NA should elaborate further on the definition and purpose of using unexpected expenditure in Article 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 and social safety net programmes), and provide clarification on the types of expenditure that shall be used under the unexpected expenditure and other expenditure lines. The sub-decree should feature only one recipient line ministry/ government agency or sub-national administration with appropriate details.
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Recommendations
n

All versions of future sub-decrees should also be published in the website of the Ministry of Economy and Finance and should be put in one concentrated place. The National Assembly should legislate certain thresholds and require RGC to publish regular report on use of this budget. The Royal Government of Cambodia via Ministry of Economy and Finance and the National Assembly should elaborate further the definition and purpose of the Unexpected Expenditure in article 25 and 58 of the Law on Public Finance System. The expenditures that are predictable and not listed in table 1 of analysis should be in included in the normal budget.
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-Annex: Analysis of Spending by Key Ministries 2005-2010 For Ministry of Economy and Finance (MEF), 94.7% (USD 272.4 million) of the total unexpected expenditure (USD 287.7 million ) was allocated for its own operating and administrative expenses, while other 5.3% or USD15.35 million was spent on work related to other sectors such as military demobilization and support for disabled veterans. - If expenses on road repair and maintenance and other infrastructure 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 (USD109.3 million) also included road maintenance and repair infrastructure, expenditure for other sectors by MEF will increase to USD 177.71 million (61.76% of the total unexpected expenditure by MEF).

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Unexpected expenditure of MEF can be grouped into 5 Annex: Analysis of Spending by Key Ministries 2005-2010 main 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 and operation expenses and tax and excise, especially refund of 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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Annex: Analysis of Spending by Key Ministries 2005-2010

Council of Ministers (CoM) used unexpected expenditure for similar purposes 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 and ongoing operation of the Authorities and Committees under the supervision of CoM - 5.2% (USD 4.63 Million) for urgent and necessary work of the APSARA Authority, especially for repair and construction of 3 roads in Siem Reap affected by Ketsana storm in 2010. - 0.6% (USD0.52 Million) was spent in 2007 for paying electricity bill overdue since 2003-2005.

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unexpected expenditure used this budget for similar purposes, most of which were for old debt by Key Ministries 2005-2010 Annex: Analysis of Spending 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 on the settlement of old debts and 40% (USD 17.5 Million) on operation and administration work, mostly during the period 2005-2009. 2- Ministry of National Defense: total unexpected expenditure was USD 33.97 Million, of which 38.01% (USD12.91 M) was for old debt settlement, 50.84% (USD17.27 Million) for operating expenses and administrative work, and 11.15% (USD 3.79 Million) for national defense and security.

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payment of interest and loan principal amortization and the rest 33.2% (USD 8.75 Million) was allocated for operating expenses Annex: Analysis of Spending by Key Ministries 2005-2010 and administrative work, mostly of EDC. 4- Ministry of Health: total unexpected expenditure was USD 26.35 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 on administrative 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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purchase, operation of the National Fund for Short Term Vocational Training for unemployed youths and workers, and Annex: Analysis of Spending by Key Ministries 2005-2010 Small Business Creation Fund in 2009, purchasing mud to fill in the campus of Takeo Poly Techniques Institute in 2010, and Operation of National Social Safety Net Fund. 7- Ministry of Education, Youth and Sport: total unexpected expenditure was USD 7.51 Million for publication of literacy books, purchase of 2-student chairs, construction of school buildings, and installment of a clean water and electricity system in Mean Chey and Battambang Universities.

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Relationship: total unexpected expenditure was USD 6.33 Million for publishing new official and diplomatic electronic Annex: Analysis theSpending ongoing Ministriesto the end passport in 2008; of ministrys by Key operation 2005-2010 of 2008; Expenses on renovation of the wall of the ambassadors residence in Paris, France; spending on a number of new tasks such as the opening of a consulate in Na Ning, a military ally in Australia and Indonesia, a trade ally in China and Korea, repair and purchase of equipment in New York and for ongoing operation to the end of 2007; and arranging official meetings and summits.

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