FOR OFFICIAL USE INTERNATIONAL MONETARY FUND · FOR OFFICIAL USE INTERNATIONAL MONETARY FUND Fiscal Affairs Department MADAGASCAR HEAVILY INDEBTED POOR COUNTRIES ASSESSMENT AND ACTION

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FOR OFFICIAL USE

INTERNATIONAL MONETARY FUND

Fiscal Affairs Department

MADAGASCAR

HEAVILY INDEBTED POOR COUNTRIES ASSESSMENT AND ACTION PLAN

Michel Lazare, Jean-Luc Hélis, and Jean-Pierre Nguenang

June 2004


“The contents of this report constitute technical advice and recommendations given by the staff of the International Monetary Fund (IMF) to the authorities of a member country in response to their request for technical assistance. Subject to written authorization from the authorities of the beneficiary country, the report, in whole or in part or summaries thereof, may be disclosed to the IMF Executive Directors and their staff, technical assistance providers, and donors outside the IMF. Communication of this report, in whole or in part or summaries thereof, to parties outside the IMF, with the exception of technical assistance providers and donors, shall be subject to the written authorization of the authorities of the beneficiary country and the Fiscal Affairs Department of the IMF.”


Contents Page List of Abbreviations ................................................................................................................... Executive Summary ..................................................................................................................... I. Introduction...................................................................................................................... A. HIPC Assessment Process ................................................................................... B. Madagascar’s Poverty Reduction Strategy .......................................................... II. Assessment of the Capacity to Tract Poverty-Reducing Public Spending ...................... A. Assessment Coverage .......................................................................................... B. Budget Formulation ............................................................................................. C. Budget Executive ................................................................................................. D. Fiscal Reporting ................................................................................................... E. Public Procurement.............................................................................................. III. Action Plan to Strengthen Public Expenditure Management .......................................... A. Budget Formulation ............................................................................................. B. Budget Execution................................................................................................. C. Fiscal Reporting ................................................................................................... D. Public Procurement.............................................................................................. Appendices I. Recent, Current, and Planned Donor and Lender Activities............................................


LIST OF ABBREVIATIONS AAP Assessment and Action Plan ACCT Central Treasury Accounting Office AfDB African Development Bank BOA Bank of Africa CCM Central Procurement Contracting Committee CDE Control of Committed Expenditures CFAA Country Financial Accountability Assessment CMP Government Procurement Code CNMP National Government Procurement Contracting Committee COFOG Classification of the Functions of Government ENAM Malagasy National School of Administration ENMG National School for Judicial Authorities EPA Public Administrative Agency EPIC Public Industrial and Commercial Institution EU European Union GFS Government Finance Statistics GFSM Government Finance Statistics Manual GTO General Treasury Operations HIPC Heavily Indebted Poor Countries HIPC Heavily Indebted Poor Countries Initiative IGE State General Inspectorate IGF General Inspectorate for Finance IMF International Monetary Fund INSTAT National Statistics Institute JIRAMA Jiro Sy Rano Malagasy (Water and Electricity Company) MEFB Ministry of Economy, Finance, and Budget MGF Malagasy Franc PABU Emergency Budgetary Support Program PAIGEP Governance and Institutional Development Project PCOP Chart of Accounts for Government Operations PDP Public Expenditure Program PEM Public Expenditure Management PGDI Governance and Institutional Development Program PIP Three-year Public Investment Program PRMP Government Procurement Contracting Manager PRSP Poverty Reduction Strategy Paper PTA Three-year Action Plan RMF Road Maintenance Fund SIGFP Integrated Fiscal Management System STA Technical Secretariat for Adjustment TELMA Malagasy Telecom TOFE Government Flow of Funds Table

EXECUTIVE SUMMARY This report contains an assessment of Madagascar’s budget management system capacity to tracking poverty-reducing spending. It is based on a common framework comprising 16 indicators, that is applied to all beneficiary countries of IMF and World Bank Heavily Indebted Poor Country (HIPC) Initiative.1 The relevant assessment and action plan were examined with the Malagasy government and Madagascar’s main development partners, and will be published once they have been finalized. Regarding Madagascar, an assessment and action plan were completed in 2001 and an update was performed in 2003. This document relates to the comprehensive reassessment conducted in 2004. In the previous assessment under the HIPC Initiative in 2003, Madagascar met 4 of the 15 benchmarks. The present assessment revealed that Madagascar still meets four benchmarks (Table 1). This lack of change in the number of benchmarks that Madagascar meets is explained in part by the fact that implementation is in progress or has been initiated for relatively few of the measures included in the action plan for the 2003 assessment (Table 3). Reforms, however, have been initiated in connection with the priority action plan of the Ministry of Economy, Finance, and Budget (MEFB) with the support of a number of development partners, including the World Bank. In light of the overall reforms, we find that Madagascar is substantially closer to its goal that it was in 2003, in terms of the benchmarks that have yet to be met. Accordingly, the rating for 2004 is higher for five benchmarks than in 2003. On the whole, we observe modest progress in the results of the 2004 assessment as compared with the progress registered in 2003. The four benchmarks that were met indicate that: (1) the state’s activities are not financed significantly by improperly reported extrabudgetary sources; (2) budget expenditure is classified on a detailed administrative, economic, and functional basis in conformity with the Classifications of the Functions of Government (COFOG); (3) multiannual forecasts are integrated into the budget formulation process; and (4) tracking surveys are being carried out. Significant weaknesses, however, do exist, particularly in the areas of in-year budget tracking and execution.2 The main weaknesses are: (1) the substantial gap between budget outturn and the initial budget; (2) no clear identification of poverty-reducing spending in the budget law or in execution tracking (only HIPC Initiative expenditure is clearly identified); (3) domestic arrears remain substantial and are not fully reflected; (4) internal control procedures are still inefficient; (5) accounting and banking data are not reconciled; (6) fiscal reports are received with excessive 1 The previous assessment in 2003 was based on 15 benchmarks. A new indicator on public contracting was added in connection with the present mission, increasing the number of benchmarks to 16.

2 Only one of the four benchmarks has been met in the area of budget execution, although none of the benchmarks have been met with regard to in-year budget tracking. The situation is more satisfactory for budget preparation, in which three out of seven benchmarks have been met.

lags; (7) the complementary period is still overly long; and (8) the draft budget execution laws (lois de règlement) are not submitted to Parliament within 12 months after the end of the fiscal year. Some reforms now under way or envisaged under the MEFB 2004 priority action program may potentially help correct certain observed weaknesses, once they are in effect and fully applied. This is true, for example, for the draft public procurement code, and for the strengthening of internal control entities and procedures. All of the constraints identified above must be corrected in a timely manner, however, by expediting the pace of reforms and by ensuring in the medium term that the reforms go beyond those included in the 2004 priority action program of the MEFB. To that end, the report proposes an action plan to strengthen Madagascar’s budget management capacities. The general objective of this plan is to assist Madagascar to meet all 16 indicators in the medium term. In the mission’s opinion, this objective is quite ambitious but feasible. Some of the 12 benchmarks that have not been met may be achieved in the relatively near future. The action plan, in particular, includes measures that, when put into practice, may help the authorities meet four additional benchmarks in the near future.3

3 Benchmarks 6, 11, 13, and 16 on clear identification of poverty-reducing expenditure (in the budget as well as and in budget execution tracking), reconciliation of accounting and banking data, and the government procurement contracting system.

Formatted: Space After: 0 pt, Tabs: 1.91", Left

I. INTRODUCTION

A IMF mission which received support from the World Bank resident mission, visited Antananarivo during May 28–June 7, 20044 to assess the Malagasy government’s capacity to track poverty-reducing spending and to work with the authorities to prepare an action plan to make the necessary improvements in this field. The mission’s assessment and the proposed action plan are based on productive discussions with the various parties involved, to whom the mission is grateful for their input. In particular, the self-assessment prepared by the Malagasy authorities constituted a highly useful base for the mission’s work. The draft mission report was examined during meetings attended by the authorities and representatives from key development partners. Comments on the latter were reflected in the final report. During its visit, the mission met with the president of the Audit Office of the Supreme Court (Mr. Raveloarijaona), the Attorney General, Audit Office (Mr. Randrezason), Secretary General of the Ministry of Economy, Finance, and Budget (Mr. Razakariasa), Secretary General of the Technical Secretariat for Adjustment (M. Razafinony), Director General of the Treasury (Mr. Randriantoetra), Budget Director (Mr. Raoelijaona), Director of Public Investment (Mr. Rajaonarison), Director General of Public Expenditure (Mr. Randrianasolo), Director General of Control of Committed Expenditures (Mr. Ranaivo), Director of Public Accounting (Mr. Ratovo Andriambahiny), Research Director, Central Bank of Madagascar (M. Rakotomanga), Coordinator General and Director of the National Bureau of the Governance and Institutional Development Program (Mr. Rakotovao and Mr. Randrianarison), Secretary General of the Road Maintenance Fund (Mr. Razafintsalama), Director General of the Ministry of Education (Mr. Raserijaona), Administrative and Financial Director of the Ministry of Education (Mr. Rakotondrabe), Administrative and Financial Director and Director General of Family Health and Disease Prevention, Ministry of Health and Family Planning (Mr. Randrianandrasana and Dr. Rahantanirina), Administrative and Financial Director of the Antananarivo University Hospital Center—CHU/HJRA (Mr. Razafimandimby), President of the Central Procurement Committee (Mr. Raharimanana), Mayor of the Urban Municipality of Antananarivo (Mr. Ramiaramanana), Administrative and Financial Director, JIRAMA (M. Andriamampianina), Deputy General Manager for Finance, TELMA (Mr. Andriamahery), General Manager and Tracking and Assessment Expert, INSTAT (Mr. Razafindravonona and Mr. Randrianarisoa), as well as a number of staff and colleagues of the persons listed above.

A. HIPC Assessment Process

In 2001, staff of the IMF and World Bank jointly undertook an overall assessment of the Public Expenditure Management (PEM) system in Madagascar. This assessment was based on 15 4 The mission was comprised of Michel Lazare (mission head), Jean-Luc Hélis (both from the Fiscal Affairs Department, IMF) and Jean-Pierre Nguenang (member of the panel of fiscal experts, FAD). Benu Bidani, Luc Razafimandimby, Dieudonné Randriamanampisoa, Gervais Rakotoamimanana, and other members of the World Bank resident mission participated in discussions with the Malagasy authorities. Samir Jahjah (Resident Representative) and Noro Andriamihaja (Economist) also assisted the mission in its work.

benchmarks in the areas of budget formulation and execution, and budget reporting. The purpose of this exercises was to assess the capacity of the PEM system to track poverty-reducing spending in connection with the enhanced HIPC Initiative and to find ways for the international community to help strengthen existing systems. Following this assessment, in cooperation with the authorities, an action plan was adopted and technical assistance requirements identified. The results of the assessment (as well as those of 23 other countries benefiting from the HIPC Initiative) were presented to the Executive Boards of the World Bank and IMF in March 2002.5 Later, in March 2003, progress reports on action plan implementation were prepared for the two Executive Boards.6 An update of the assessment in Madagascar was carried out in March 2003 by the World Bank (in collaboration with the African Department, IMF) in connection with the World Bank’s preparation of the report on the Country Financial Accountability Assessment. This 2003 assessment confirmed that Madagascar’s PEM system needed upgrading. Four of the 15 benchmarks were met in 2003—three (of seven) benchmarks in budget formulation, one (of four) in budget execution, and none of the four benchmarks in budget reporting. The 2003 report indicated that performance in the area of budget formulation was relatively encouraging, although substantial improvements were required in information related to: (1) fiscal reporting according to the definition adopted in the IMF Government Finance Statistics Manual (GFSM); (2) grants, and particularly monitoring of investment projects financed with external grants; (3) reliability of budget forecasts; and (4) multiannual expenditure forecasts. The budget also included clearly identified items devoted to expenditure financed under the HIPC Initiative, although it was not possible to identify non-HIPC poverty-reducing expenditure. As indicated above, budget execution procedures did not generally meet the established benchmarks, except in the case of tracking surveys. Similarly, there were substantial gaps in the conformity to rules and regulations, reliability, and timely publication of budget and audit reports.

Only a few of the recommendations formulated in the short-term action plan adopted in 2003 have been implemented or are in the process of being implemented. In particular, a system for tracking the entire expenditure cycle has been designed for six ministries that hold special importance in the area of poverty reduction; efforts are in progress to establish semiannual activity reports on the education and health sectors at the central and decentralized levels; staffing has been increased in the Audit Office (Chambre des Comptes); and finally, the draft organic law on government finance now being examined by Parliament provides for the appropriations manager (gestionnaires de crédits)and subauthorizing officer (sous-ordonnateur) functions in the ministries to be combined. Further measures, which include defining the aggregates for the various expenditure categories to reflect their incidence on poverty, have yet to be effectively implemented. 5 Measures designed to strengthen tracking of public expenditure on poverty reduction in heavily indebted poor countries (SM/02/30, Revision 2 of March 21, 2002).

6 Recent information on implementation of action plans to strengthen the capacities of HIPCs to track public expenditure earmarked for poverty reduction (SM/03/90 of March 11, 2003).

In early 2004, the Finance Ministry adopted a 2004 priority action plan concerning budget management reforms. These reforms should make it possible to strengthen administrative capacities in preparation, execution, and tracking of public expenditure. Their implementation can be expected to promote the fulfillment of additional benchmarks. These reforms include adoption of a new organic law on government finance and implementation of program budgets, extension of the pilot experiment on the integrated fiscal management system, merger of the functions of appropriations manager and subauthorizing officer, implementation of the new government procurement contracting code and the relevant implementing legislation, establishment of the national public procurement contracting committee, implementation of the general finance inspectorate, transformation of the public treasury brigade as a specific Inspection Directorate, in addition to further capacity building for the Audit Office.

The Executive Boards of the IMF and World Bank asked staff to carry out a further comprehensive review of PEM systems in HIPCs and to submit the conclusions by end-2004. This assessment of PEM in Madagascar is part of this process. It is based on the same general framework as that of 2001–2003, although the assessment guidelines have been refined and clarified to facilitate comparison among countries. The 2004 assessments use a new 16th indicator on public procurement.

B. Madagascar’s Poverty Reduction Strategy

Madagascar completed preparation of its poverty reduction strategy in March 2003. This exercise was based on a broad-ranging participatory process. The resulting strategy should serve as a guide for the preparation of all medium-term policies and negotiations with all technical and financial partners in development. Poverty is widespread in Madagascar, to the extent that, in 2001, it affected 69.6 percent of the country’s population. Poverty is substantially a rural phenomenon (85 percent of the poor are situated in rural areas). The poverty reduction strategy as outlined in the July 2003 edition of the Poverty Reduction Strategy Paper (PRSP) is based on three self-reinforcing priorities: • “Restoring the rule of law and a well governed society.” This encompasses a program

of activities involving the renewal, improvement, modernization, strengthening, and development of an institutional framework for good governance. The objective is an environment conducive to rapid, sustainable development; implementing such an environment is a prerequisite for successful promotion of economic growth. This approach should enable the state to effectively and transparently carry out its role as economic facilitator and leader.

• “Fostering and promoting economic growth on a very broad basis.” This consists of judiciously distributing and intensifying production resources; defining, promoting, and implementing mechanisms for partnership and/or solidarity, designing and implementing systems for the transfer of technical and professional expertise and capacities in the area of research. The aim of the second approach is to accelerate growth through increased

effective investment and through a more outward-oriented approach to the world economy. The private sector should play a decisive role in this connection.

• “Fostering and promoting systems ensuring human and material security and broader social protection.” This consists in defining and implementing a nationwide management system for food security, health, education, housing, environment, etc. Municipalities will serve as cornerstones for all activities, as the key suppliers of grassroots services. In this case, the aim is to ensure that each Malagasy citizen can reap the benefits of growth.

The current efforts to strengthen fiscal management capacities promote implementation of the poverty reduction strategy in several ways. First, fiscal management reforms are clearly part of the essential objectives of the strategy, and in particular, reforms to improve governance. Next, they are vitally important for the government’s capacity to implement the other components of the strategy. Any initiative that aims, for example, to strengthen efforts in the area of primary health care and grassroots services will fail unless the government has a solid, transparent, and reliable system to channel resources to priority areas, monitor the use of these resources, and ensure that they are judiciously used. Finally, according to the HIPC assessment process, a sound budget management system is an essential ingredient for the partners, to assure them that their resources will be used judiciously and responsibly. This approach will make it possible to strengthen Madagascar’s capacity to attract external resources and move increasingly from project financing to general budget support.

II. ASSESSMENT OF THE CAPACITY TO TRACK POVERTY-REDUCING PUBLIC SPENDING

A. Assessment Coverage

This assessment substantially covers the structure of the central government, including the subnational or “deconcentrated” agencies [organismes déconcentrés] of the central government at the regional level. Madagascar is comprised of six provinces, 22 prefectures, 110 subprefectures, and 1,391 municipalities.7 General Directorates of Treasury and Control of committed expenditures, and the key ministries, particularly of education and health, are devolved or “deconcentrated” to the provinces, and from time to time, to the municipalities. The budget law presents resources allocated to each deconcentrated administration. The latter are closely integrated into the central government structure. They are governed by the same laws and regulations and use the same budget and accounting classifications and control mechanisms. Specific concerns on budget management at the deconcentrated level are examined in connection with the various indicators in this section.

7 A reform being examined by Parliament provides for the establishment of regions.

In addition to the deconcentrated agencies, there are decentralized administrations [administrations décentralisées]—municipalities—whose revenue is substantially comprised of own resources. The overall level of financial activities of the municipalities, however, is modest. Although they participate in poverty reduction efforts, in light of the limited role of the local authorities in expenditure execution and of serious data limitations, this report substantially leaves out their public expenditure management activities from its assessment.

B. Budget Formulation Indicator 1. Coverage of the budget or fiscal reporting entity. Benchmark 1: Fiscal reporting covers the Government Finance Statistics definition of the general government sector, (i.e., including central, regional, and local governments, and all government operations, whether funded through the budget or not). Assessment: The benchmark is not being met. General budget coverage is limited to central government as defined in the 2001 edition of the GFS Manual. Local government budgets and their execution are not consolidated with those of the central government. The general state budget is the budget of the central government. It covers ministerial departments and agencies (a total of 27 reflected in the 2004 budget law), public administrative agencies—EPA (55) and public industrial and commercial agencies—EPIC (74), as well as funds and special treasury accounts. Externally financed special accounts are included to the extent that information is available. Budgets of deconcentrated services in each province (6), prefecture (22), and subprefecture (110) are included. Although prepared separately, capital expenditure is associated with the functional unit (service) involved. Operations of EPAs, EPICs, and local governments are recorded only in the amount of transfers made by the state budget. Certain own resources of EPAs and the corresponding expenditure are not fully integrated or consolidated into the state budget or budget reports. They pertain primarily to services, import duty, and registration fees. Such revenue is generally deposited in commercial bank accounts (see Indicator 2). Furthermore, some institutions do not report their budgets, including their own, even if they are subsidized. Not all institutions participating in poverty reduction efforts (for example, territorial governments) identified in the PRSP and covered by the definition of the general government sector included in the GFS 2001 manual are included in the budget execution statements. Special funds are recorded in the budget according to the relevant regulations. Overruns of allocated appropriations and gaps in feedback were noted prior to 2003. Since 2004, only the Office of the President and the parliament may have access to special funds for which the appropriations are now capped and are subject to an audit and report by the Audit Office.

The budget data of local entities are not consolidated with those of the central government. The budgets of these entities are prepared and executed at the local level. Expenditure by these institutions are estimated to represent approximately 30 percent of the general state budget. However, data deficiencies and unavailability prevent the completion of a comprehensive assessment covering central and sub national spending and do not allow to gain appropriate assurance as to the quality of PEM systems relevant to poverty reducing spending. Indicator 2. Degree of spending being funded by inadequately reported extrabudgetary sources. Benchmark 2. Government activities are not funded through inadequately reported extrabudgetary sources to a significant degree (less than 3 percent of total expenditure). Assessment: The benchmark is being met. Extrabudgetary funds exist and information on execution is not consistently accurate or transparent. The overall amount, however, is considered insignificant in relation to total expenditure (less than 3 percent). Extrabudgetary operations represent all revenue, expenditure, financial transactions, and expenditure of government entities not included in the annual budget law (or equivalent document) and/or are inadequately declared in budget reports. Based on this definition, certain general government operations are still carried out on the basis of own resources, which are not adequately reported. The following, in particular, have been identified: • Extrabudgetary operations funded by the own resources of certain government

institutions. Current operating subsidies paid by the state for these institutions may prove insufficient, and it may be advisable for them to develop their own revenue. The corresponding revenue and expenditure, however, are not systematically subject to sufficient reporting in the budget documents. Some of this revenue is used to fight poverty. For each EPA, there is an accounting officer (a government accounting officer) and a financial controller. These officers do not have clearly established authority to control or execute the full budget of these institutions, in revenue and expenditure, or to access precise information on the amounts deposited in commercial bank accounts. Furthermore, the budget and financial documents that we have been able to study (budget execution statements, general balance sheets of the treasury accounts, table of government financial operations—TOFE) do not show sufficiently precise information on these extrabudgetary operations.

• Revenue allocated to special accounts (such as the road maintenance fund—FER).8

Not all of this revenue is reflected in the budget or budget execution reports. 8 Not including special accounts used for externally financed projects addressed in connection with Indicator 4.

No accurate estimate is available for these operations. Based on information collected from the authorities involved, however, these operations can represent approximately 5–10 percent of the budget of government institutions (not including wages) under the supervision of the ministry of education, and 50 percent of the budget for hospitals (not including wages). Even in relation to these bases, the total of these operations would not seem to be significant and remains below 3 percent of total expenditure. Indicator 3. Reliability of budget as a guide to future. Benchmark 3. Budget outturn data are quite close to the original budget. Assessment. The benchmark is not being met. The overall budget utilization rate is low, particularly where capital expenditure is concerned. For the past three years, the average percentage of overall budget execution has been low. Some degree of improvement was registered in 2003 at the level of commitments (albeit with some substantial overruns on the appropriations authorized), as well as with respect to payments. The authorities have not been able to provide us with precise information on payments made at the local level. The authorities indicate that these payments could amount in 2003 to approximately 15–20 percent of the state budget, which should substantially improve the budget execution rate, although without meeting the benchmark. We cannot consider 2002 to be a reference year, in light of the political crisis that limited the budget execution period to less than six months. If we compare the percentages of expenditure committed, authorized, and paid, as against the initial projections, we obtain the following consolidated results:

Table A 1/

Expenditure Committed (In percent)

Expenditure Paid (In percent)

2001 64.37 53.00 2002 52.40 n/a 2003 92.13 61.82 2/

Source: Malagasy authorities. 1/ With a few exceptions (see comment on Indicator 4), externally funded expenditures are included in the budget; in Table A, these expenditures are, therefore, included in the denominator. Reporting on actual payments of externally funded expenditures is, however, weak (amounts actually reported have been included in the numerator). 2/Does not include payments by institutions at the local level.

Table B

Positions and Percentage Execution of the State Budget for 2001 and 2003 by Ministerial Department and Institution

(In billions of Malagasy francs)

2001 2003 Amended

appropriations/ general budget

(1)

Commitments/ general budget

(2)

Execution

rate (2)/(1)

Payments/ PGT

Amended appropriations/ general budget

(1)

Commitments/ general budget

(2)

Execution

rate (2)/(1)

Payments/ PGT 1/

Office of the president 52.5 51.5 98.0 43.6 86.1 88.2 102.4 77.7 Senate 22.5 21.0 93.3 19.9 38.6 38.0 98.4 36.6 National assembly 42.2 38.8 91.9 39.5 47.4 43.7 92.2 39.4 Superior constitutional court 2.8 2.7 96.4 2.7 4.2 4.1 97.6 3.6 Office of the prime minister 431.5 230.9 53.5 263.5 189.2 85.8 45.3 66.3 Foreign affairs 143. 2 138.2 96.5 91.6 140.3 139.6 99.5 72.6 National defense 173.5 161.8 93.2 153.6 402.9 387.7 96.2 379.5 Gendarmerie 95.2 93.0 97.7 86.5 Interior 70.5 68.2 96.7 65.1 90.6 89.7 99.0 83.4 Public security 70.2 63.8 90.9 59.4 98.8 98.7 99.9 79.8 Justice 75.3 49.6 65.9 59.2 96.5 89.3 92.5 71.8 Economy, finance, and budget

744.6 219.1 29.4 501.0 1,378.7 1,313.1 95.2 983.5

Decentralization and provinces

669.9 491.3 73.3 503.7 240.9 233.0 96.7 226.0

Private sector 386.8 233.9 60.5 124.5 0.0 0.0 0.0 0.0 Trade 25.6 19.7 77.0 19.3 19.7 14.6 74.1 11.2 Export promotion 0.0 0.0 0.0 0.0 8.1 7.6 93.8 6.0 Privatization 0.0 0.0 0.0 0.0 42.9 30.6 71.3 27.4 Labor 0.0 0.0 0.0 0.0 1.6 1.5 93.7 1.5 Civil service 14.0 11.8 84.3 10.6 15.6 15.4 98.7 13.9 Communication 26.9 22.7 84.4 19.8 Industry and trade 13.0 7.6 58.5 6.6 19.6 8.6 43.9 7.2 Tourism 7.9 5.4 68.3 5.0 14.7 8.0 54.4 6.6 Agriculture 266.2 149.4 56.1 107.3 254.8 221.7 87.0 120.4 Ranching 57.6 22.5 39.0 23.1 0.0 0.0 0.0 0.0 Fisheries 23.0 31.6 137.4 46.7 26.4 10.8 40.9 8.6 Environment 149.5 73.9 49.4 70.4 131.0 53.2 40.6 44.7 Water and forestry 24.7 16.3 66.0 10.7 23.7 18.5 78.0 16.0 Energy and mining 231.6 57.7 24.9 45.9 161.3 59.7 37.0 48.5 Public works 844.7 591.8 70.0 316.2 718.8 905.4 126.0 384.1 MINATV [Ministry of regional and urban development]

183.7 74.2 40.4 71.4 202.8 189.6 93.5 166.6

Maison du tourisme (MTM) 100.2 75.4 75.2 23.4 62.9 101.6 161.5 39.2 Post and telecommunications 6.4 1.2 18.8 0.5 3.7 3.6 97.3 0.5 Health 510.7 351.8 68.9 198.4 506.4 377.0 74.4 191.3 Population 37.6 17.6 46.8 15.8 36.6 26.2 71.6 19.6 Secretariat of women’s affairs

0.0 0.0 0.0 0.0 7.3 2.9 39.7 1.6

Youth and sports 34.6 31.5 91.0 23.8 26.5 21.7 81.9 24.4 Secondary and basic Education

768.8 589.8 76.7 267.4 897.0 862.0 96.0 419.2

MINFTP 56.4 51.3 90.9 34.2 48.5 40.2 82.9 33.4 Higher education 116.4 103.8 89.2 100.7 124.2 117.3 94.4 95.9 Research 37.6 21.6 57.4 22.8 59.4 28.9 48.6 27.6 Information 35.6 31.2 87.6 25.5 16.6 16.5 99.4 21.9 Total 6,526.5 4,201.3 64.4 3,459.5 6,271.3 5,777.6 92.1 3,877.0* 53.0

percent 61.8

percent Source: Malagasy authorities. N.B.: Amended appropriations and payments include HIPC Initiative expenditure and interest on debt (included in Ministry of Finance, Economy, and Budget appropriations). 1/ Does not include payments made by local institutions.


There is substantial under-utilization by sector or by ministry for the three-year period, involving priority poverty reduction sectors (health, education, public works, etc.), in particular. The rate of capital expenditure execution is low, particularly for externally financed expenditure. One of the main problems mentioned is the information on externally financed operations. These operations are identified only belatedly or with difficulty when projects financed by external grants or loans not cosigned by the Malagasy authorities are involved. Accordingly, the capital budget execution statement cannot reflect all operations carried out. There are, however, other reasons related to the national government finance management system (late implementation of competitive bidding procedures for public procurement contracting, cumbersome budget control and execution procedures, cash flow problems, and problems in centralization and processing of information) of which the Malagasy authorities are aware and that they are trying to solve. For at least two of the three reference years, the overall budgetary gap is therefore higher than 15 percent of overall budget expenditure and the functional analysis shows that average variations exceed 20 percent. Indicator 4. Inclusion of donor funds. Benchmark 4. Budgets and/or fiscal reports at all levels of government include, without exception, grants projected to be provided by donors, and the capital and current expenditure of all multilateral and bilaterals on government activities. Assessment. The benchmark is not being met. Meeting this benchmark requires that all activities financed by donors and lenders be fully reported ex ante, and in a timely manner, on an ex post basis, which is not the case. It should be possible to track externally financed projects comprehensively. In 2003, total external aid forecast in the budget amounted to FMG 1,572 billion. At December 31, 2003, FMG 1,838 billion were effectively collected. In the 2004 budget law, external resources financed 62 percent of investments provided in the state budget. In the area of budget law preparation, there can be gaps between approval of financing by donors and lenders and preparation of budgets by the beneficiaries. In addition, some grants are not reflected in the budget, and particularly in the special capital budget, as the relevant operations are carried out directly between the donors and lenders and beneficiaries, through commercial bank accounts, and which are unknown to the finance ministry staff. According to the persons with whom we spoke, these operations are limited in comparison with the amounts of grants and loans recorded in the budget law.

More problems occur at the execution stage. As indicated above, it is apparently difficult for finance ministry staff to obtain information from donors and lenders, beneficiaries, and managers, on execution of current projects. Some donors and lenders require special procedures in the management of the activities and projects that they finance, and do not use national budget execution procedures. Regularization occurs at the time the budget review law is prepared on the basis of the non-accounting records maintained by the Investment Directorate, and such an arrangement is not satisfactory. Indicator 5. Classification. Benchmark 5. Budget expenditures are classified on an administrative, economic, and detailed functional and programmatic basis. Assessment. The benchmark is being met. The budget nomenclature meets international standards. It includes an administrative, economic, functional, and program classification. Budget operations are classified in accordance with international standards. The budget and accounting nomenclature of public operations established from 2000 (N2000) includes administrative, economic, functional, and program classifications for operations. The state chart of accounts in effect since 2000 (2000 Chart of Accounts for Public Operations [Plan Comptable des Opérations Publiques—PCOP 2000] is compatible with the budget nomenclature, which ensures that the budget nomenclature is unified with the accounting imputation accounts. The functional classification is compatible with the Classification of the Functions of Government (COFOG) approved by the United Nations and described in the IMF Government Finance Statistics Manual (GFSM). It includes, however, 15 functions (not including debt) rather than 10 in the COFOG. It is also detailed with two secondary levels of subfunctions (four-digit classification). The budget and accounting data on execution can be presented in accordance with this functional classification. The budget classification also includes an imputation in respect of the public expenditure program involved. In addition, a supplementary figure (code 9) denotes expenditure in connection with the HIPC Initiative. Indicator 6. Identification of poverty-reducing spending. Benchmark 6. Poverty-reducing expenditures are clearly identified. Assessment. The benchmark is not being met. With the exception of HIPC Initiative spending, other poverty-reducing expenditures are not clearly identified in the existing budget classification, and the PRSP priorities are not generally reflected in the budget law.

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Substantial efforts have been made to integrate the PRSP priorities into the process of preparing the 2004 budget law. Furthermore, a computer application can extract, by type of expenditure, projections and execution of expenditure under the HIPC Initiative identified in the budget nomenclature. By contrast, other poverty-reducing expenditures are not clearly identified in the budget law. Accordingly, the Budget Directorate has not identified, based on the functional classification, whether or not each expenditure is included in the poverty reduction effort, as defined in the PRSP. The authorities consider the overall budget to be a poverty reduction instrument. This presentation does not make it possible to identify priorities in this area so that the level of execution can be precisely tracked. Indicator 7. Integration of medium-term forecasts. Benchmark 7. Multiyear expenditure projections are integrated into the budget formulation process. Assessment. The benchmark is being met. Projected multiyear expenditure is integrated into the budget formulation process. Substantial efforts have been deployed and tools developed to integrate multiyear expenditure projections into the preparation of budget laws, to assess permanent costs of current policies and to forecast poverty-reducing expenditure. During the process of preparing the general state budget, the spending ministries and budget directorate rely on different documents that reflect medium-term forecasts. This entails, in particular, the PRSP, three-year investment program (PIP), and the medium-term public expenditure program (PEP). These documents are approved by the government and Parliament. Furthermore, the ministries prepare three-year business plans. These documents present the objectives pursued, expected results, actions to be taken to achieve the objectives, and the adopted performance indicators. These documents, which also serve as a basis for preparing the budget law, are the first drafts of the program budgets to be implemented beginning in 2005. The timetable for preparation of the 2005 budget law reflects these developments. Medium-term priorities are provided in the framework letter defining the maximum budget appropriations allocated to each ministerial department.

C. Budget Execution

Indicator 8. Evidence of budget execution problems—Arrears. Benchmark 8. Small stock of expenditure arrears, with little accumulation of arrears over the previous year. Assessment. The benchmark is not being met. Based on the information provided by the authorities, payment arrears (instances de paiement du Trésor) at end-December 2003 exceeding 30 days9 amounted to FMG 246 billion, that is, approximately 4 percent of total estimated expenditure (TOFE at end-December 2003). The main causes of arrears are reportedly: • Underestimation of budget appropriations. This primarily involves government

consumption debts with state and parastatal agencies: water, telephone, and electricity consumption, and duty travel (FMG 11 billion in arrears generated monthly by EPAs, EPICs, and territorial governments).

• Commitment of expenditure by appropriations managers outside of budget procedures.

• Accumulation of new arrears of the treasury attributable to the allotment of appropriations without taking due account of available financing, at a time when the state is facing recurrent cash flow problems.

By contrast, the available data do not reflect external and wage and salary arrears. Domestic arrears are monitored by the public treasury and budget directorate.

The Malagasy state is making substantial efforts to clear prior arrears, and particularly with the water and electricity supplier (JIRAMA) and the telephone company (TELMA). Reciprocal debt settlement arrangements are signed each year (for example, FMG 89 billion was included in the 2004 budget law for water and electricity: FMG 62 billion for current consumption and FMG 27 billion for arrears). In addition, the prepayment system for utilities consumption by the ministries, implemented in 2003 for telephone service and in 2004 for electricity, led to a commensurate reduction in the arrears generated in this connection at the level of the state (by contrast, this remains a problem for other public institutions).

9 Based on the definition provided in the Assessment Action Plan (AAP) methodology.

Expenditure arrears, however, remain significant and the budget has been repeatedly rectified, year after year, with amending budgets or liquidity rationing to address problems of cash flow or insufficient budgeting. Indicator 9. Effectiveness of the internal control system. Benchmark 9. Internal control is effective. Assessment: the benchmark is not being met. Internal control on the conformity of expenditure to laws and regulations is relatively satisfactory, but remains insufficient to improve the quality of budget and financial reporting, as well as the efficiency and effectiveness of expenditure. Internal control of conformity of expenditure to laws and regulations is relatively satisfactory. Commitment controls are carried out by the control of committed expenditures directorate (the CDE), and payment control is carried out by public treasury accountants. Under the Constitution, the CDE reports to the Office of the President but is now under the technical supervision of the Ministry of Finance. The CDE control at the level of authorizations is not systematic, in order to simplify and accelerate the expenditure system. It is carried out based on a selection of expenditures deemed to be high risk or requiring special scrutiny. This sampling is defined at the beginning of the year, during an assembly of all controllers, or by the controller him/herself when the commitments are being authorized. In this case, the controller of committed expenditures mentions on the authorization slip that the order, and therefore the service rendered, will be subject to his or her prior offsite or onsite approval (validation authorization). A selective expenditure approach at the level of ex ante control was therefore introduced. In addition, the deadline imposed on the controller of committed expenditures for authorization of commitments was changed to 48 hours, facilitated by the implementation of the one-stop shop for procedural verification of supporting documentation. Each ministry reports to a controller of committed expenditures. In addition, certain controllers are responsible for verifying operations of one of more EPAs. Expenditure of deconcentrated services is monitored by a controller of committed expenditures appointed in each province. For a short time, controllers have possessed a manual of internal procedures and can rely on a new nomenclature for supporting documentation (Decree of April 2004). Commitment basis accounting is maintained on a mutually controlling basis by the appropriations manager, authorizing officer, and the CDE. The CDE has specialized software for that purpose. The relevant accounting records are reconciled on a monthly basis. In practice, this control is subject, however, to certain limits. Stock accounting control bypasses the CDE when there is no validation authorization. Similarly, not all operations financed by donors and lenders that fail to follow the national system’s procedures are tracked by the CDE. The CDE obtains no information on payments made by the public

treasury on a commitment basis, or possibly on a payment order basis, which it has authorized, and this limits its knowledge of trends and problems in budget execution, while hampering its advisory and regulatory role in the area of expenditure. In the case of payment requisitions by managers (simplified procedures for payment of exceptional expenditure, subject to ex post regularization at the commitment level), the CDE is only informed if there is a request for regularization by the manager or systematic disclosure by the public treasury. These requisitions, however, which were numerous in 2002 owing to the crisis period, are now limited. Finally, the software used for accounting of commitments does not include a register of suppliers that can be used to identify any splitting of expenditures benefiting one particular supplier in an attempt to bypass the public procurement regulations. Quality control on budget and financial reports remains insufficient. Significant progress was registered as the first quarterly interim balance of the treasury accounts for many years was recently produced at the end of first quarter 2004. Substantial improvements, however, stand to be made to guarantee data reliability, and, in particular, to regularize the suspense accounts, some of which contain substantial amounts. Control of the efficiency and effectiveness of expenditure must be enhanced. This ex post internal control is carried out in part by the State General Inspectorate (IGE) and by internal audit and/or inspection units established at certain ministries or institutions. Although the IGE prepares an annual activity program, the agency carries out most of its missions based on ad hoc requests from the offices of the president and prime minister. It is often difficult in these conditions to execute the full audit and inspection program as envisaged. Furthermore, the IGE has insufficient physical, human, and financial resources (a total of 35 auditors and controllers distributed throughout the country). This situation limits the range and effectiveness of its actions. In addition, when they do exist, the ministries’ inspection and audit units also have insufficient human and financial resources to accomplish their mission, although in certain ministries (such as the ministry of health) these units manage to carry out a semiannual financial, accounting, and technical audit of all deconcentrated agencies. Implementation of the General Inspectorate (IGF) prior to end-2004, and for program budgets in 2005 might make it possible to strengthen internal control and promote performance supervision, provided that the distribution of authority among the various control agencies involved is precisely defined, and their cooperation enhanced. With regard to monitoring of program budget execution, expenditure control and efficiency indicators should be defined.

Indicator 10. Tracking surveys are in use. Benchmark 10. Tracking surveys are used, where necessary, to supplement internal control, but may not yet be a regular feature of the PEM system.

Assessment: This benchmark has been met. Tracking surveys are conducted to supplement internal controls. Tracking surveys are used to analyze the traceability of expenditure in the budget system and to assess satisfaction of beneficiaries of public services. Since 2001, INSTAT has conducted tracking surveys with the use of resources from interim assistance under the HIPC Initiative. Provisional results of these surveys indicate that the financial execution rates (authorization basis) and physical execution rates for this expenditure have been relatively high (an average of 90 percent and 98 percent, respectively, for 2002). One out of two beneficiaries reports being satisfied with the services delivered. Joint teams representing the Technical Secretariat for Adjustment and the ministries of education and health organize supplementary missions from time to time to gather more detailed information on overall budget execution and results and impact indicators. These actions supplement the internal controls. The following activities, however, are still required: • They must be expanded, for example, while determining the proportion of funds that

reach the beneficiaries.

• Their scope must be extended to all expenditure of the health and education sectors. Indicator 11. Quality of fiscal information. Benchmark 11. Satisfactory reconciliation of fiscal and banking records is undertaken routinely. Assessment. This criterion is not being met. Reconciliation statements are not being prepared. Written agreements [notes d’accord] between the central bank and the public treasury have been prepared. These documents, cosigned by the relevant accounting unit chiefs and their bankers with the central bank, reflect, for each 10-day period, the revenue and expenditure operations acknowledged and the corresponding end-of-period totals. Treasury officers have accounts open in 12 offices of the central bank in their locality, four of which are managed by Bank of Africa (BOA). The balances of these accounts are repaid daily to the current account of the treasury managed by the central accounting office of the treasury (ACCT).

Agreement documents are necessary—but not sufficient in and of themselves—to ensure enhanced reliability of the government financial position, and must be supplemented with accounting and banking records’ reconciliation statements. Reconciliation statements should be produced regularly and provided along with general balance sheets in connection with the treasury accounts. Their aim is to indicate any areas of agreement or discrepancy, at the end of a period, between the data recorded in the banking documents and in the budget statements. This involves the current account of the treasury, in particular. In this case, any discrepancies that may exist between the two statements can be explained either by accounting and budget recording lags, errors in processing accounting entries, or the transactions of accounting units still awaiting inclusion into the overall statement for reasons related to distance, but that have already affected treasury cash. In addition, provisional balances for 200210 and for the first quarter of 2004 provided to the mission have not been reconciled with the data from the Central Bank of Madagascar.

D. Fiscal Reporting Indicator 12. Regularity of timely internal fiscal reporting. Benchmark 12. Internal budget reports are received within four weeks of the end of the relevant period.

Assessment. This benchmark is not being met. Internal fiscal reports are filed with lags exceeding four weeks. Reports on execution of state financial operations (S1), prepared by 22 senior accounting units,11 [postes comptables supérieurs] are provided to the Central Accounting Office of the Treasury (ACCT) on a monthly basis, with a lag exceeding four weeks. These delays in transmission of monthly statements can be attributed to communication problems, and cash operations are processed manually in many treasuries. S1 statements are accounting balance sheets prepared for operations during the month in question, without reflecting opening balances (copy requested but not received). Based on monthly statements supplemented with information from the central bank and directorates of the ministry responsible for finance, the ACCT produces a provisional monthly statement of general treasury operations (OGT), which is transmitted to donors and lenders after lags of two months. A definitive OGT is prepared with a lag of three months. 10 The interim balance of accounts for 2003 was not provided to the mission.

11 In addition to their operations, senior accounting units must include secondary reporting accounting units [postes comptables secondaires de rattachement] (200, including 17 external accounting units for which the operations are centralized with a central accounting agency established for that purpose.)

Budget execution reports for the first quarter of 2004 were produced with a lag of eight weeks for the six priority ministries identified in connection with requirements for reaching the completion point. These ministries represent only 30 percent in number and 62 percent in terms of funding volume. Coverage of these reports remains insufficient and should accordingly be extended to at least 90 percent of the number of ministries and 90 percent of the total state budget. The quality of current budget execution reports is insufficient, and in most cases, they are not comprehensive. They do not provide information on authorizations (reflecting service rendered) and payments by disbursing ministry, nor are they written to reflect the existing functional classification. Reports or supporting documentation for imprest account applications are not regularly submitted, or are received with a delay, although the relevant regulations provide for reporting on a monthly basis or quarterly at the most. Expenditure that has transited through imprest accounts, however, is substantial (approximately 5.8 percent of total ministry budgets not including sovereign institutions in 2003). Reports from other public agencies, such as municipalities, which received just under 3 percent of total ministry allocations, not including sovereign institutions, are not consistently available. Indicator 13. Periodic fiscal reports track poverty-reducing spending. Benchmark 13. Good quality classification of poverty-reducing spending is reflected in the in-year budget reports.

Assessment. This benchmark is not being met. Poverty-reducing spending cannot be tracked as it is not identified. Tracking of HIPC Initiative expenditure is clearly identified in the budget, however, it gives only a partial view of the monitoring of poverty-reducing spending. While quarterly reports exist for certain priority spending ministries in the area of poverty reduction, these reports provide no functional analysis of poverty-reducing expenditure, although the functional classification has existed since 2000. No code is in fact provided in the budget and accounting nomenclature to specify poverty-reducing expenditure by budget line. The authorities can use their PRSP to identify and code their poverty-reducing expenditure lines (see Indicator 6). This exercise is useful in determining in general whether or not expenditure program execution was generally conducive to poverty reduction, and with a view to producing a progress report on PRSP implementation.

Indicator 14. Transactions are recorded in the accounts in a timely fashion. Benchmark 14. Routine transactions are entered into the main accounting system(s) within two months after the end of the fiscal year.

Assessment. This criterion is not being met. The supplementary fiscal period exceeds the two-month lag provided by law, although it is in fact less than six months. The supplementary fiscal period is three months long to make full use of approved appropriations. The lag authorized by law is two months following the end of the fiscal year (December 31), including the suspension of expenditure commitments at November 30 and closeout of expenditure authorizations at December 31. Memorandum items [opérations d’ordre] and imprest operations are recorded for a period that often exceeds three months, at the local and central levels. Delays are accumulating owing to centralization problems related to the isolation and remoteness of certain accounting units. Indicator 15. Timeliness of audited financial information. Benchmark 15. An audited record of the financial outturn should be presented to the legislature within twelve months from the end of the fiscal year. Assessment. This benchmark is not being met. The latest budget review law passed by Parliament dates back to 1996. This benchmark is not being met as the most recent budget review law passed dates back to 1996, although the regulations require that the draft budget review law for the prior year be submitted to Parliament no later than November 15 of each year. It has not been possible to meet these deadlines owing to human, physical, and organizational resource constraints. Draft budget review laws12 for 1997–2001 have been finalized and submitted for examination to the Audit Chamber for verification before submission to Parliament. Examination of draft budget review laws for 1997 and 1998 has been completed. By contrast, auditing of draft budget review laws for 1999 and 2001 has been delayed by the absence of

12 Parliament adopted a law waiving presentation of account balances and budget review laws for the period until 1992. To settle the problem of the opening balance for 1993, an instruction was issued on production and submission of budget review laws in terms of flows, which made it possible to begin to process the backlog in production of accounts.

certain supporting documentation (problems in filing and destruction by cyclones), and insufficient human resources at the Audit Chamber. To update the verification of accounts to some extent, a reverse historical accounting system [système à rebours] was implemented in the establishment and presentation of financial accounts to the audit authority. All centralizing accounting officers were asked to produce and communicate their management accounts for 2002 with a view to their consolidation and transmittal to the Audit Chamber by end-September 2004. The accounts for 2001 and 2003 will be examined in 2005. Last, the financial accounts for 2004 will be examined by the Audit Chamber in 2005. Previous account audits have shown that appropriation transfers have been made by simple decision rather than by decree. Recommendations and comments suggested by the Audit Chamber following the examination of budget review laws and other controls of special funds are useful in enforcing fiscal discipline. Correcting the observed delays would enhance the relevance of accounts. The current regulations unfortunately do not set a deadline for the Audit Chamber to issue its decision on the accounts. Staff reinforcement undertaken for the Audit Chamber during the past three years, in particular, with the recruitment of new specialized judges trained at the ENMG, should be continued.

E. Public Procurement

Indicator 16. Efficiency and effectiveness of the public procurement process.

Benchmark 16. The procurement system promotes efficiency and effectiveness in the expenditure of public funds through clear and enforceable rules that promote competition, transparency, and value for money. Assessment. This benchmark is not being met. The centerpiece of the procurement system is the central public procurement committee (CCM), managed administratively by the Office of the President and financially by the Ministry of Finance. CCM is a nonpermanent representation structure under the leadership of a chair, and its members represent the ministries of public works and finance, the state inspectorate general, chamber of commerce, and public treasury. It issues opinions on the work of the technical committee on assessment of bids prior to the award of contracts by the minister. CCM has no offices, and the nonpermanent members do not always possess appropriate training.

The main weaknesses in the current public contracting procedures and practices entail the following: • Lack of transparency in the process of public procurement, owing to the complexity

of the procurement code and the accumulation of texts and additional circulars. • Cumbersome existing procedures. • Absence of rapid, effective recourse mechanisms prior to contract notification and

during contract performance. The government implemented a steering committee on reform of the procurement system. The activities of this committee are guided by the action plan on reform agreed with the development partners, the elements of which are based on the four essential pillars of an effective procurement system: • The legislative framework, with preparation of a public contracting code to reflect a

new, clearer legal and regulatory framework based on international practices and on the government’s preliminary draft and recommendations from the development partners.

• The institutional framework, that must be revised to reflect the principle of

delegation and accountability of the contracting authorities, with elimination of excessive ex ante controls, and establishment of a system of technical support for the contracting authorities, and audits of contracts issued.

• Institutional capacities to be strengthened through training and development of

professional personnel within the administration and through the provision of instruments and methods to ensure best practices in contracting and procurement.

• Implementation of recourse mechanisms to strengthen transparency and protect the

rights of private operators, and strengthening of the mechanism to audit contracts issued and fight corruption, including mechanisms for imposition of penalties for violations observed, and in particular, in connection with audits.

Pending implementation of the various components of the reform, a number of provisional steps were taken in July 2003, to clarify and simplify responsibilities and streamline the control system. This effort involves increasing the limits on procurement and review by CCM, returning to the latter the ex post review function (audit of contracting activities), designating each minister as a contracting authority without recourse to a superior organizational level, with his or her authority to be delegated to a public procurement manager (PRMP); and finally, the requirement for each ministry to prepare a procurement contracting timetable.

All of these improvements will be incorporated into the new draft Public Procurement Code (CMP), which was the subject of a validation seminar on May 6–7, 2004. The text, amended to reflect the comments of the participants, including development partners, and primarily the World Bank, was validated by the Council of Government during June 2004 and should be submitted to Parliament in the near future. The new public procurement code, however, is a law that outlines the major principles involved, and requires the drafting and application of implementing texts (drafting is scheduled to be initiated in the second half of 2004). As long as the components of the reform are not fully implemented, the system will fail to promote efficiency and effectiveness in the expenditure of public funds through clear rules and an effective institutional organization to promote competition, transparency, and value for money.

III. ACTION PLAN TO STRENGTHEN PUBLIC EXPENDITURE MANAGEMENT

To improve the current public expenditure management capacity in Madagascar, and in particular, poverty-reducing expenditure tracking, the following action plan and recommendations for the short and medium term are: • limited to the scope of the 16 indicators; and • consistent with the MEFB’s priority action plan for 2004, approved by all donors and

lenders. This action plan has been prepared in order to increase the number of benchmarks met.

A. Budget Formulation

Indicators 1 and 2 A consolidated presentation of revenue and expenditure projected in the budgets for EPAs, EPICs, and deconcentrated administrations, including own resources, should be integrated on an informational basis as an annex to the budget law (this option is, however, not provided for in the new organic law now under review by Parliament). This revenue and expenditure should also be specifically tracked and presented in the budget reports.

Indicator 3 To improve the state budget execution rate, and although there are regulation procedures at the commitment level, the following arrangements, in particular, are required:

• More reasonable forecasting and more powerful collection of revenue, relying on a realistic macroeconomic framework.

• A closer match between projected and available resources during the year. • A merger of subauthorizing officer and appropriations manager activities to simplify

and accelerate the expenditure system. Indicators 3 and 4 A strategy should be developed in coordination with the donors and lenders to have the capacity to integrate external financing, and particularly financing allocated to poverty reduction, and to improve investment utilization rates. Possible solutions include: • A commitment from project managers and donors and lenders to comprehensively

provide the finance ministry with full information on planned financing and its execution.

• When possible, a discussion of this financing at the state budget formulation phase. Indicator 5 The existing budget classification must be adapted in the context of program budget implementation. Indicators 5 and 6 All expenditure related to poverty reduction, in addition to HIPC Initiative spending alone, should be clearly identified in the budget law. This approach requires: • Cooperation with all partners involved, coordinated by the Ministry of Finance,

to define, on a line-by-line basis, whether or not each expenditure is included in the context of poverty reduction priorities set in the PRSP.

• Specific coding for poverty-reducing spending to supplement the system used for

HIPC spending, although using a different numbering scheme; as a supplement, a definition of aggregates for the various expenditure categories should be used to reflect their incidence on poverty (high incidence, moderate incidence, or low incidence on poverty reduction).

Indicator 7 Preparation of the 2005 budget law must strictly observe the new budget formulation timetable, including, in particular, preliminary conferences and conferences on budget with the General Directorate of Budget Programming.

The draft organic law on government finance, now being examined by Parliament, provides for implementation of program budgets from 2005. An orderly and efficient introduction of program budgeting would require that sufficient time is devoted to the preparation and implementation of some technical prerequisites. In particular, it would require the following: • Program budgets must be based on coherent sector strategies prepared in accordance

with a participatory approach. • Overall expenditure must reflect recurrent charges in connection with investment

projects; costs of activities and programs must be quantified (both current and capital).

• The 2005 budget must reflect the first year of program budgets. • The latter must be regularly updated to reflect the apportionment of maximum

appropriation ceilings in the annual budget law. Implementation of program budgets may require an internal reorganization of the General Budget Programming Directorate. Specific, realistic performance indicators should be defined for all public administrations and programs.

B. Budget Execution

Indicator 8 It would be advisable to conduct a comprehensive survey of existing arrears. Such a survey should include arrears generated by uncommitted expenditure (water) and by operations of services of the state, EPAs, and EPICs. Furthermore, monitoring of expenditure committed and not authorized would be useful. To avoid new arrears, the following mechanisms might be required: • Realistic budget allocations. • Strict compliance with expenditure procedures and elimination of exceptional

procedures. • Establishment of a realistic cash plan that would make it possible to adjust the rate of

funding utilization at the commitment level to reflect actual cash on hand at the treasury.

• Regularization of advances granted and pending regularization.

• Extension of the prepayment system for water, electricity, and telephone to all government agencies.

Indicator 9 Enhanced effectiveness of internal control would require a number of activities at the institutional and procedural levels. At the institutional level: • The CDE should obtain information on payments from the public treasury to

reconcile commitments, and, if applicable, the authorizations that it has approved, and analyze areas where the system is not functioning properly. It should also have capacity to obtain information on operations financed by donors and lenders that do not follow national procedures.

• Complementarity should be sought between activities of the IGE and the IGF.

One possible approach would be to make the State Inspectorate General into a superior internal audit institution responsible for conducting audit missions on behalf of the government, as well as for promoting and coordinating internal audit activities of the ministries throughout the country, and in particular, with a view to implementing program budgets and audits for performance and efficiency.

• The merger of subauthorizing officer and appropriations manager functions

should be carried out to simplify and streamline the expenditure control and management system.

At the procedural level: • A register of suppliers might be established in the software used for accounting of

commitments, to identify any splitting of expenditure in favor of the same supplier in an attempt to bypass public procurement regulations.

• Quarterly general balances of the treasury accounts should be systematically

verified by the directorate established specifically for that purpose within the ACCT (and, in particular, suspense accounts and those registering abnormal balances).

• The nomenclature of supporting documentation of expenditure for ex ante

control and new procedural manuals for execution and control of public expenditure (manual for the CDE, public accounting manual, inspection manual for the new Treasury Inspection Directorate, etc.) must be disseminated and rigorously applied.

• A code of ethics could be prepared and adopted for internal auditors and controllers.

Indicator 10 To improve the quality and coverage of tracking surveys, the authorities must: • Ensure that they indicate the proportion of public funds that reach their final

destination. • Track all expenditure of the ministries of health and education.13 For this to occur, INSTAT’s capacities must be strengthened forthwith. Indicator 11 To ensure that state financial information is reliable, each main treasury office must prepare a reconciliation statement for accounting and banking data, to be appended to its monthly S1 statement (prepared based on flow management accounting) before transmission to the ACCT, which centralizes the information to prepare the complete financial statement of the state and a consolidated reconciliation statement with its own operations. Each reconciliation statement must include revenue and expenditure accounts and explain any discrepancies between accounting sources for the cash and bank accounts maintained with the central bank and commercial banks. To that end, ACCT should produce a standard reconciliation statement for main treasury offices that would also facilitate preparation of the monthly cash table.

C. Fiscal Reporting

Indicator 12 Quarterly fiscal reports must be produced by all disbursing ministries in a more timely manner (a maximum of four weeks following the reference period). To that end: • Services that control committed expenditure and cash services processing large

volumes of operations at the central and local levels must be appropriately computerized.

• Analytical capacities of the Budget and Investment Directorates, the Technical

Secretariat for Adjustment, and ministries must be strengthened.

13 Such a survey is scheduled to be undertaken by INSTAT within the context of an EU-financed project.

• Clear, comprehensive information must be obtained on the use of own resources of units of government, at the central and local levels, as well as in imprest account operations.

This approach also requires: • Implementation of appropriate computer hardware. • Secure and mutually compatible computer applications, so that information can be

exchanged. • Staff training. The computer system used in the Tamatave committed expenditure and treasury services (pilot phase, component A) could serve as a base. The system, however, should first be assessed and developed (interim phase or component B). It (or another more appropriate information system) should subsequently be extended to the entire country to become a true integrated fiscal management system (SIGFP) in the medium term. Indicator 13 Poverty-reducing expenditure tracking units must be established at the local level. These units should permit participatory PRSP tracking at the local level, and help improve coverage of information on poverty-reducing expenditure. Actions recommended in connection with Indicator 6 should permit quantitative tracking of public expenditure on poverty reduction. This approach also requires a functional classification of such expenditure. Indicator 14 The legal lag for the supplementary period (two months) should be strictly observed. Implementation of customized computerization, and of the integrated fiscal reporting system (SIGFP) in the medium term, can be expected to facilitate compliance with the supplementary fiscal period by accelerating data recording and centralization. Indicator 15 The budget review law and management accounts for the 2004 fiscal year should be produced according to the relevant regulations. The historical audit system, adopted to process the backlog in examination of management accounts and draft budget review laws as of 2005, must be observed.

The number of imprest accounts must be reduced and supporting documentation for their applications should be provided within the one-month or three-month deadlines as required. The nomenclature of supporting documentation for treasury accounts should be finalized and adopted. A filing system for supporting documentation of expenditure in the treasury services would make it possible to reduce the lags required for examination of treasury accounts by the audit authority. Human and physical resources of the Audit Chamber must be strengthened, and, in the medium term, the Audit Office must be established. Finally, the chart of accounts for public operations (PCOP) should be adapted to reflect the rules of accrual basis accounting as well as the new general chart of accounts (PCG) planned for 2005.

D. Public Procurement

Indicator 16 The new procurement contracting code outlines the major principles for management of public procurement contracting, and the implementing texts must be drafted, adopted, and implemented in a timely manner. Furthermore, the possibility of conducting audits should be mentioned clearly in the implementing texts. The National Government Procurement Contracting Committee (CNMP) should be implemented and its permanent members should be recruited and trained as appropriate.

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Recent, Current, and Planned Donor and Lender Activities Donors and lenders present in Madagascar meet from time to time to coordinate their support, particularly in the area of public expenditure management. The aim is to achieve effective public expenditure management through coordinated, complementary support to reduce any potential contradictions and overlapping. Support from donors and lenders, as described briefly below, is: (1) compatible with the priority action plan of the Malagasy authorities (PTA) of 2004; and (2) consistent with the recommendations of donors and lenders resulting from the joint diagnostic studies prepared under various reports (Country Financial Accountability Assessment—CFAA, HIPC-AAP, European Union Audit, etc.). World Bank The World Bank is mainly involved through the Governance and Institutional Development Program (PGDI), which supports the implementation of Madagascar’s Poverty Reduction Strategy. Comprehensive public finance reforms is a major component of the PGDI; elements include (1) the integrated financial management system; (2) strengthening of internal/external controls; (3) public procurement; (4) strengthening public finance capacity of the Government; and (5) strengthening operational efficiency of Ministry of Finance.

A second program supported by a three-year poverty reduction support credit (PRSC) from the World Bank is being implemented with the first PRSC to be approved in July 2004. It includes strengthening activities in the areas of budget formulation and execution and fiscal reporting. International Monetary Fund (IMF) The IMF assists the government in implementation of its economic and financial program ending in November 2004. This program contains a set of reforms in the following areas, inter alia: • Procedures to prevent accumulation of arrears. • Production of monthly treasury balance sheets. • Production of draft budget review laws and their submission to the Audit Chamber. African Development Bank (AfDB) Through the fourth structural adjustment loan to Madagascar, the AfDB supports the government’s efforts to control public expenditure. It envisages strengthening its physical and technical support, particularly for the treasury and Audit Chamber, in connection with a new institutional support project that is now being studied.

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European Union (EU) Since 2003, the European Union has accompanied the authorities in the budget area with the emergency budgetary support program (PABU). Activities conducted in this connection include the following, in particular: • Institutional support for the General Treasury Directorate. • Support for control entities. • Support to improve computerization of the MEFB. • Support for INSTAT. A second program of budgetary support covering the period 2004–2006 was approved during June 2004 as an extension of the previous program. Germany (GTZ) GTZ recently approved a project to support the process of government finance system reforms for a period of two years. It aims to improve the fiscal system and governance. A technical assistant in the fiscal area who will work with the Secretariat General of the MEFB has been recruited and is expected to start work in December 2004. France The French technical assistance authorities, and particularly through the Cooperation and Cultural Action Service (SCAC), are contributing to Madagascar’s economic recovery with two projects: the Structural Adjustment Subsidy (SAS) and the Project to Support the Reforms of Financial Administrations (PARAF). Support in the context of PARAF involves, inter alia, an overhaul of government expenditure (procedures, centralization of accounting operations, and reinforcement of control staff) and strengthening of technical and management capacities of treasury inspectors. France would also propose providing resources required to establish two of the three financial courts envisaged by the authorities in 2004. Table 2 provides a summary of major recent projects in progress or envisaged in the future by donors and lenders to improve the Malagasy government’s public expenditure management capacities.

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FOR OFFICIAL USE INTERNATIONAL MONETARY FUND · FOR OFFICIAL USE INTERNATIONAL MONETARY FUND Fiscal Affairs Department MADAGASCAR HEAVILY INDEBTED POOR COUNTRIES ASSESSMENT AND ACTION