Manual on Fiscal Transparency (2007)


I Clarity of Roles and Responsibilities

Dawn Rehm, and Taryn Parry
Published Date:
October 2007
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32. This chapter discusses fiscal transparency principles and practices that concern the scope of government and the framework for fiscal management. They are crucial as a basis for assigning accountability for the design and implementation of fiscal policy. Identification of all those entities that provide a public good or service provides the public with an understanding of the true scope of government. A legal and administrative framework that clearly assigns the roles and responsibilities of government in the collection and use of public resources promotes accountability and good governance.

The Scope of Government


The government sector should be distinguished from the rest of the public sector and from the rest of the economy, and policy and management roles within the public sector should be clear and be publicly disclosed.

33. The Code includes good practices relating to (1) structure and functions of government; (2) roles of the executive, legislative, and judicial branches of government; (3) responsibilities of levels of government; (4) relationships between government and public corporations; and (5) government involvement in the private sector.

34. Basic requirements under this principle are to ensure that

  • a published institutional table clearly shows the structure of the public sector, identifying all government entities by level of government, as well as public corporations;

  • the extent and purpose of all quasi-fiscal activities is explained; and

  • revenues and responsibilities are clearly assigned between different levels of government.

The structure and functions of government


The structure and functions of government should be clear.

35. The public sector consists of the general government sector and public corporations.14 The two main types of public corporations are nonfinancial public corporations and financial public corporations, which include the monetary authority (central bank) and nonmonetary financial corporations.15 Separation of government functions from commercial and monetary activities helps to establish clear accountability for the conduct of these very different activities and facilitates assessment of the macroeconomic impact of fiscal activities. To help achieve clarity in the description of the structure of government, the publication of an institutional table16 showing the structure of government and the rest of the public sector is a requirement of fiscal transparency. The institutional table should include entities that make up the subsectors of the public sector shown in Figure 1.

Figure 1.Public Sector

36. A fundamental first step in developing fiscal transparency is to identify all those entities that carry out government functions. Government functions are defined as activities related to the implementation of public policies through the provision of nonmarket17 services and the redistribution of income and wealth, financed primarily by taxes and other compulsory levies on nongovernment sectors. However, defining the boundaries of government and of the public sector is a complex task, and one that is particularly challenging for countries undergoing rapid change.

37. The Code uses the term “government” to describe the general government sector as defined in the United Nations (UN) System of National Accounts, 1993 (SNA) and the 2001 IMF Government Finance Statistics Manual 2001 (GFSM 2001).18 The general government sector consists of all government units and all nonmarket nonprofit institutions (NPIs) that are controlled and mainly financed by government. Government units encompass all national and subnational institutional units that perform functions of government as their primary activity. This would include any entities that receive the majority of their funds through transfers, earmarked revenues, or other government sources to carry out government functions, as well as any spending of public money for fiscal purposes even if not covered by institutional arrangements.19 Revenue and expenditure that are not included in the annual budget appropriations are referred to as “extrabudgetary” and may be associated with two types of institutions that can be found at all levels of government and should be included in the institutional table: “extrabudgetary funds” (see Box 13 in Chapter II for further details) and nonmarket nonprofit institutions. Nonmarket NPIs perform activities on a noncommercial basis and are financed mainly by government transfers or earmarked revenues, but may also have other sources of revenue. Extrabudgetary funds and nonmarket NPIs are both quite common, but the latter are more problematic for defining government, as explained in Box 2 (see also the GFSM 2001 for further details on nonmarket NPIs). As such, the general government sector can be defined as all the public institutional units that are nonmarket producers. Government-controlled units that are market producers are not part of general government; they comprise the rest of the public sector.

Box 2.Nonmarket Nonprofit Institutions

Identification of government entities is sometimes difficult. For example, entities may have a separate legal identity; substantial autonomy from the executive, including discretion over composition of their expenditures; and a direct source of revenue through a transfer or earmarked revenue. However, if they engage in nonmarket activities, are financed primarily by taxes (or other compulsory transfers), and/or are directed by a government entity, these entities are in fact government entities and should be included in the formal definition of government operations. These entities are nonmarket nonprofit institutions (NPIs) and should be included in general government operations.

Governments may choose to use nonmarket NPIs rather than government agencies to carry out certain activities because they may be seen as detached, more objective, and less subject to political pressure. Examples include institutions for research and development, and for the setting and maintenance of health, safety, education, or environmental standards. Sometimes nonmarket NPIs may be created for efficiency reasons, including where legal requirements that apply to government would otherwise impede their operations. Determining whether a government exercises control over the operations of an entity is a judgment call that is based on whether it has the ability to determine general policy, either by having the right to appoint the officers managing the NPI or through financial means. According to the GFSM 2001, an NPI is financed mainly by government when most of its operating funds are provided by a government unit or earmarked tax revenue.

Fiscal transparency requires that all nonmarket NPIs (also sometimes referred to as autonomous entities) be fully included in budget documentation and reports on general government activities. Evidence from fiscal ROSCs indicates that many countries currently fall short of this requirement. In some of these countries these types of entities undertake a substantial amount of fiscal activity, and their omission from general government statistics greatly skews the understanding of the size and scope of government and may lead to understating government involvement in key sectors, such as health and education. Furthermore, the existence of nonmarket NPIs and autonomous entities that carry out a mixed bag of activities, some market and some nonmarket, often leads to different official definitions of general government by different government agencies. This can make it particularly difficult to interpret and reconcile different statistical reports.

38. Good practice for fiscal transparency requires that all of these types of activities be included when referring to government, not only conceptually by including them in an institutional table of government, but in budget documentation and fiscal reports.20 Furthermore, the definition of general government and institutional table should be uniformly applied by all agencies reporting on government activities. An example of good practice in defining the boundaries of government is the application of the European System of Accounts, 1995 (ESA) to economic statistics in European Union countries.21

Roles of the executive, legislative, and judicial branches


The fiscal powers of the executive, legislative, and judicial branches of government should be well defined.

39. The Code requires that the roles of different branches of government in fiscal management be clearly defined but does not advocate a particular structure of government on the basis of fiscal management concerns. Relationships between different branches of government vary greatly across countries, and are often subject to change as political and administrative systems develop. A number of recent studies illustrate the important influence of budget institutions on fiscal outcomes.22 The authority of different branches of government at different stages of the budget process should be clearly defined in a budget system law or the constitution. For example, the executive may be given power to conduct fiscal policy when the budget for the fiscal year has not been adopted by the legislature before the start of the fiscal year to which it relates.

40. The powers and limits of each branch with respect to changes in the budget during the fiscal year should be clearly specified in the legal framework. In presidential (as opposed to parliamentary) systems it is more common for the legislature to introduce changes to the draft budget. Where this occurs, the draft budget submitted by the executive to the legislature as well as the final budget approved by the legislature should be publicly available to allow the public to hold each branch accountable for its part in the budget process.

41. The legislative and judicial branches should play an active role in ensuring the availability and integrity of fiscal information.23 This would include having an active committee of the legislature to oversee the conduct of fiscal policy and to facilitate civil society input into budget deliberations (e.g., through receiving public submissions). With respect to the judicial branch, taxpayers as well as recipients of specific public services, public pensions, or other social insurance should be able to challenge the legality of a ruling by appeal to the courts. In some cases decisions by the courts can have significant fiscal impact.

Responsibilities of different levels of government


The responsibilities of different levels of government, and the relationships between them, should be clearly specified.

42. A clear demarcation of roles within government is essential for transparency. At the broadest level, it is necessary to clearly define the allocation of tax powers, powers to borrow or incur debt, and expenditure responsibilities between different levels of government. The intergovernmental structure varies widely among countries, ranging from federations in which individual states or provinces have considerable powers to unitary forms of government. At the local level the inclusion of many informal as well as formal government structures may further complicate the picture. Even within governmental structures that look similar, the precise allocation of revenue and financing powers and expenditure responsibilities varies widely. It may also vary substantially over time. Fiscal transparency requires that the allocation of powers and responsibilities be based on clear principles, stated within the law or constitution. The powers and responsibilities at each level of government should also be exercised in an open and consistent way.

43. Where they exist, shared revenues and intergovernmental transfers should be clearly specified, preferably based on stable criteria or formulas rather than discretionary criteria or negotiations. Unfortunately it is common for transfers to be negotiated annually, which is neither stable nor transparent. A formula with well-defined parameters provides the most transparent option for distributing intergovernmental fiscal transfers. Distribution based on “need” where “need” is not well defined opens the process to subjectivity and reduces transparency. Project grants are also more subjective in nature, but transparency can be enhanced if the criteria and basis for decisions are made public.

44. Fiscal transparency of subnational levels of government and in relationships between levels of government is especially important where countries are devolving fiscal responsibilities. Decentralization has become a popular strategy based on the premise that lower levels of government can better respond to local demands and needs at lower cost. Many countries have recent legislation that assigns or reassigns the responsibilities of the different levels of government.24 Under these circumstances, the opportunities for duplication of responsibilities and unclear assignment of revenue or expenditures are many. Furthermore, because of inequality across regions, most countries that pursue decentralization have introduced new legislation regarding tax sharing and intergovernmental transfers to address such inequalities. Finally, the effectiveness of this strategy critically depends on the ability of citizens to hold local government officials accountable. Numerous factors may impact local government accountability, but one critical factor is the quality and public availability of fiscal data at the local level. The more decentralized the revenue and spending decisions, the more important it becomes to ensure that lower levels of government also follow good practices on fiscal transparency.

45. For countries with significant resource revenues, the distribution of resources between levels of government has an added dimension. Arrangements to assign or share revenues from these resources between central and lower levels of government should be well defined and any modification of the system should be subject to clear rules and procedures.25 There are a number of arguments that favor placing control of resources at the national level, such as the ability to control spending and save windfall revenues and to facilitate policy coherence for achieving macroeconomic objectives. But in many instances resource revenues are either under the control of subnational governments or are used to finance their activities. In countries where subnational levels of government enjoy a high degree of independence, it can be challenging to design a transparent revenue-sharing system that meets all objectives.

46. Central governments need adequate information on fiscal activities of lower levels of government in order to have a full picture of general government activities. This is particularly important where subnational governments have access to borrowing, including from international lenders. In many countries central governments carry an implicit contingent liability on subnational government debt, and in these cases monitoring of subnational governments is particularly important. This can be very challenging because many subnational governments do not provide good fiscal data in a timely manner. Furthermore, subnational governments may have hidden liabilities such as unmonitored arrears, or contingent liabilities for local public corporations. In some countries fiscal responsibility legislation includes reporting and other requirements for subnational governments.26 In cases where subnational governments have become overindebted and central government bailouts have been required, the bailouts usually come with certain agreements with the subnational government to ensure that it improves its fiscal position and eventually repays the central government. When such agreements are made, their terms should be publicly available.

Relationships between the government and public corporations


Relationships between the government and public corporations should be based on clear arrangements.

47. Fiscal transparency requires that the financial relationships between the government and public corporations be clearly stated. In particular, because public corporations are owned in whole or in part by the government, there should be clear expectations of how profit transfers or dividend payments to the government will be determined. The annual report of the public corporation should provide details on total profit, retained earnings, any other uses of profit, and the amount transferred to the budget, and this information should also be included in the annual budget documentation. In some countries profits may be transferred to extrabudgetary funds, used directly to finance or purchase a public good, or even paid in kind for government use. For purposes of fiscal transparency, all payments by public corporations, including taxes, royalties, dividends, or profits, should be reported in the annual report of the corporation as well as in budget documentation. Any in-kind payments should be valued at their market value in the budget. Conversely, if the government makes transfers to the public corporation, they should be included in the annual budget. Again, both the budget and the annual reports of the corporation should identify transfers from the government to the corporation.

48. Some functions, referred to as quasi-fiscal activities (QFAs), are carried out on behalf of the government by public corporations or, more rarely, private entities. QFAs can have significant implications for public policy and the general government financial position, but these fiscal effects are not usually reflected in fiscal reports for the general government. For instance, financial or commercial institutions may be asked to undertake lending at subsidized rates, the subsidy component representing a loss to the institution. However, if the government had directly subsidized the activity, it would have appeared as a subsidy in the government’s budget and the policy cost would have been transparent. Hence, QFAs are a nontransparent means of implementing a fiscal policy that introduces significant fiscal risk. The costs of QFAs will be borne by the budget either through smaller profit transfers or, eventually, through a need to subsidize or recapitalize the public corporation. A central feature of fiscal transparency, therefore, is the open conduct of all fiscal activity, no matter where and how it takes place.

49. Fiscal responsibilities should generally be carried out by government entities, but because public corporations may also undertake noncommercial activities on behalf of government, fiscal transparency requires that the annual reports of public corporations identify these activities. These QFAs could be eliminated by including their cost in the budget through either a well-defined budget transfer to the public corporation or direct budget subsidy for the activity.27 The cost and associated transfer from the government should also be explicit in the financial statements and annual reports of the public corporation. These clear arrangements reduce the risk that the nongovernment public sector, particularly financial corporations, will require unexpected financial support as a result of being asked to carry out fiscal policy objectives.

50. The converse of this situation can also be found, where government agencies provide commercial services, and hence have income from commercial charges. This was particularly common in transition economies where central planning had previously blurred the distinction between public and private sector activities. If a government agency carries out either banking or commercial functions, fiscal transparency requires that they be identified along with the fiscal policy objectives of these activities. The agency’s budget should state both income from and costs for providing commercial activities. In many cases the agency is assigned regulatory oversight of the commercial activities it performs. To avoid this type of conflict of interest, and to clearly establish the fiscal responsibilities of government, commercial activities of government entities should be privatized or assigned to a public corporation that does not have regulatory functions.

General government and the central bank28,29

51. The primary responsibility of the central bank is to conduct the government’s monetary policy. Increasingly, central bank responsibilities are being defined to give the bank as much autonomy as possible within a framework that ensures appropriate accountability.30 In many countries, central bank laws emphasize the operational independence of the central bank and prohibit or restrict its direct financing of the fiscal deficit.31 In such countries, any activities carried out for the government are conducted on a commercial or at least cost-recovery basis.

52. In some countries, however, a number of activities carried out by central banks are quasi-fiscal in nature. Quasi-fiscal activities may involve operations related to the management of the financial system (e.g., subsidized lending and directed credit) or the exchange system (e.g., multiple exchange rates and import deposits). These operations may be used by governments as a substitute for direct fiscal action and will have similar economic effects. They will affect the operating balance of the central bank and hence should be taken into account in explaining and projecting the overall fiscal position. Fiscal transparency requires a clear definition of the institutional relationships between monetary and fiscal operations and a clear definition of the agency roles performed by the central bank on behalf of the government. See the Code of Good Practices on Transparency in Monetary and Financial Policies for more details.32

General government and public financial corporations

53. Public financial corporations have often been set up to provide assistance of a quasi-fiscal nature, such as a development bank providing loans to specific sectors at below-market rates. Governments also use public financial corporations on a more ad hoc basis to provide quasi-fiscal assistance, for example, through policy-directed lending. Although an increasing number of state-owned banks have been privatized in recent years, they still account for a dominant share of the banking sector in many developing economies and may carry out QFAs.33

General government and nonfinancial public corporations

54. Nonfinancial public corporations in many countries provide noncommercial services, usually by being required to charge less than costrecovery prices (e.g., pricing electricity below cost to rural consumers). In a number of countries, nonfinancial public corporations have also been required to provide social services. These noncommercial activities may be financed by cross-subsidization between different groups of consumers and/or by incurring losses that are financed from the budget or by borrowing. In some instances, certain nonfinancial public corporations may charge excessive prices and transfer the supernormal profits to other corporations or to the budget. This practice confuses the fiscal responsibilities of government and the commercial role of nonfinancial public corporations, makes relationships between government and nonfinancial public corporations nontransparent, and creates difficulties in holding managers of nonfinancial public corporations accountable for their performance. Best practice for fiscal transparency, in these cases, would be the inclusion of a direct budgetary transfer to public corporations that covers the costs of QFAs. In a few countries, the government is contracting with a nonfinancial public corporation to provide a noncommercial service in return for an explicit budgetary transfer that reflects the price the government is willing to pay for the service. Similar contracts could also be agreed upon with public financial corporations.

Box 3.OECD Principles of Corporate Governance: Principle V on Disclosure and Transparency

The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.

  • Disclosure should include, but not be limited to, material information on

    • the financial and operating results of the company;

    • company objectives;

    • major share ownership and voting rights;

    • remuneration policy for members of the board and key executives, and information about board members, including their qualifications, the selection process, other company directorships, and whether they are regarded as independent by the board;

    • foreseeable risk factors;

    • issues regarding employees and other stakeholders; and

    • governance structures and policies, in particular the content of any corporate governance code or policy and the process by which it is implemented.

  • Information should be prepared and disclosed in accordance with high-quality standards of accounting financial and nonfinancial disclosure.

  • An annual audit should be conducted by an independent, competent, and qualified auditor in order to provide an external and objective assurance on the way that the financial statements have been prepared and presented.

  • Channels for disseminating information should provide for equal, timely, and cost-efficient access to relevant information by users.

55. Although the Code was not written for public corporations, many of its practices can and should be applied to them. In particular, they should operate in an open manner and their audited financial reports should be presented by the executive to the legislature and be published. Public corporations should apply internationally recognized accounting standards34 so that their accounts can be properly audited by international accounting firms. Best practice is that public corporations should observe the relevant disclosure and transparency requirements of Principle V of the OECD Principles of Corporate Governance (OECD, 2004b). Box 3 spells out these requirements.35

Box 4.Characteristics of Transparent Regulations: OECD Policy Recommendations

  • Regulations should have clearly identified policy goals; should be expressed in clear, simple terms; and should have a sound legal basis.

  • Public consultation on new regulations will often be desirable.

  • Procedures for applying regulations should be open and nondiscriminatory. They should apply equally to the public and private sectors, and should contain an appeals process.

  • Overlapping responsibilities among regulatory authorities should be minimized.

  • Regulations and their impact should be reviewed periodically in published reports.

National resource companies

56. National resource companies (NRCs) are often responsible for both commercial operations and noncommercial activities, such as the provision of social or other services normally provided by the government; specific requirements for employment; and the provision of products for domestic consumption at less than cost recovery or below-market prices. Clarity of fiscal policy requires that the ministry of finance oversee such noncommercial activities. In addition, the cost of these activities in terms of lowering dividends and tax payments should be quantified and reported to the public. Clarity is also needed in defining the policy and regulatory role of the NRC vis-à-vis the sector ministry and ministry of finance. Good practice would be to clearly separate the commercial and noncommercial roles of the NRCs and leave oversight and policy decisions related to noncommercial activities to government ministries.

57. It is important to hold NRCs to the same corporate governance standards as other enterprises (see Box 4), including making audited accounting statements available to the public. Best practice statements would clearly identify all payments to the budget in the form of taxes, royalties, dividends, or any other form, such as in-kind payments.36 Any transfers from the government to the NRC should also be disclosed. For instance, in some countries, the government has to make contributions to the production costs of joint ventures with private companies (cash calls) through the NRCs. The latter should be held accountable for the use of these government contributions.

Government involvement in the private sector


Government relationships with the private sector should be conducted in an open manner, following clear rules and procedures.

58. The government regulates the private sector in a variety of ways, and transparency in government operations may be of limited benefit if there is not clarity in all kinds of regulatory interaction with the private sector.

Regulation of the nonbank private sector

59. Governments have become increasingly aware of the need for transparency in regulatory practices. This aspect of regulation is explicitly recognized in the OECD Policy Recommendations on Regulatory Reform, which also address the efficiency of regulation.37 Best practice is that these recommendations be fully implemented.

60. There are other activities that the private sector carries out under the direction of or in conjunction with government that should share the characteristics of transparent regulations. These include the imposition of compliance costs of collecting taxes on private businesses and individuals; compulsory contributions to private providers of old age pensions, health, and insurance; and privately financed infrastructure projects. If policy or regulatory changes impose significant compliance costs on citizens or taxpayers, they should be given appropriate time to comply with the new laws or rules. To this end, explanatory material for the application of new laws or regulations should be publicly available and mechanisms should be in place whereby citizens can have their queries answered (e.g., by setting up a dedicated office to do so). A recent development in some advanced countries is a requirement to accompany the publication of new or amended tax legislation with a statement of the compliance cost of proposed measures.38

Government involvement in the banking sector

61. Government regulation of the banking sector—and the financial sector more generally—should also be based on clear policy goals. An appropriate framework for bank regulation, most notably that provided by the Basel Core Principles for Effective Banking Supervision,39 and greater transparency in reporting government involvement in the banking system, including a rationale for each type of intervention, are essential components of a framework that promotes financial sector stability. The IMF Code of Good Practices on Transparency in Monetary and Financial Policies contains detailed good practices for government financial agencies responsible for regulation, supervision, and oversight of the financial and payment systems.

Direct equity investment

62. Governments also intervene by directly acquiring private equity in companies or commercial banks. All government equity holdings should be identified in the budget documentation. See practice 1.2.5 for a discussion of transparent asset management, and practice 3.1.5 for a discussion of reporting requirements for financial assets, including equity investment in private companies. The acquisition or sale of equity should be clearly explained in the budget documentation (see also practice 4.2.4), and the policy objectives served by government equity holdings should be explained.

63. Direct equity participation in projects to develop natural resources is common, but often not very transparent. As noted in the Guide, equity can be acquired under commercial terms or through concessionary purchases, including tax swapped for equity or other, often complicated, deals. As a general rule, favorable terms for government participation are usually offset elsewhere in terms of a lower share of profits or tax revenue. In these cases fiscal transparency requires not only disclosure of equity but an attempt to fully cost any offsetting concessions.

Framework for Fiscal Management


There should be a clear and open legal, regulatory, and administrative framework for fiscal management.

64. The Code includes good practices relating to (1) comprehensive laws, regulations, and administrative procedures; (2) revenue collection; (3) public comment on legislative or regulatory changes; (4) contractual arrangements; and (5) liability and asset management.

65. Basic requirements under this principle are to ensure that

  • no public funds can be spent without publicly available evidence of appropriation by the legislature; and

  • revenue collection is governed by clear and easily accessible laws and regulations.

Comprehensive laws, regulations, and administrative procedures


The collection, commitment, and use of public funds should be governed by comprehensive budget, tax, and other public finance laws, regulations, and administrative procedures.

66. One of the fundamentals of fiscal transparency is the need to have firm footing for the implementation of fiscal policies. This can be achieved by having clarity of purpose and a comprehensive framework for fiscal management, including legislation, regulations, and administration. Fiscal transparency requires that the legal framework for fiscal activity avoid excessive complexity and opportunities for official discretion. As noted in part 3.1.3, the framework should also require disclosure of fiscal activities and any quasi-fiscal arrangements. Although clear laws and regulations are critical for fiscal transparency, it is just as important for them to be followed in practice. Experience with fiscal ROSCs indicates that the key weakness is often in the effective implementation of the laws and regulations rather than in the laws themselves.

Explicit legal basis for revenue collection

67. The constitutional framework of almost all countries embodies the principle that no tax may be levied unless it has a clear legal basis (although there are some differences in the application of this principle).40 It is fundamental to fiscal transparency that taxation be under the authority of law and that the administrative application of tax laws be subject to procedural safeguards, such as taxpayer rights and tax dispute procedures.41 Tax laws should clearly establish the powers and limitations of the tax administration to search the premises of taxpayers, demand information from taxpayers and third parties (including banks), apply indirect methods to determine income and sales, and enforce the collection of tax arrears. Taxpayers should have the right to challenge property or wealth assessments or any other tax ruling. As with budget laws, however, the legal framework for taxation needs to be developed in a way that reflects administrative capacity.

68. The practice of countries differs greatly in terms of where the administrative provisions of the tax laws are located. In some countries, each substantive tax law (e.g., for income tax or value-added tax) contains all the provisions necessary for its administration. In countries that organize all of their tax laws into one code, the tax administration provisions can be one or more titles of this code. Other countries have what may be called a tax administration law or a general law on taxation. Under this arrangement, the general law on tax administration contains those administrative provisions common to all tax laws, whereas each substantive tax law contains the administrative rules that are particular to that tax.

69. Tax laws should be well organized and include all elements needed to determine tax liabilities and to establish procedures for tax collection. To limit the size and complexity of tax laws, it is generally preferable that the explanation of a tax administration’s powers be detailed in published administrative guidelines, policy statements, or rulings, rather than being embodied in detail in the tax laws (see practice 1.2.3 for further discussion).

70. Tax laws should provide taxpayers with the following rights or safeguards: (i) confidentiality—the right to have personal information accorded the greatest possible confidentiality with the tax authorities; (ii) notice—the right to be notified of an assessment, a decision on adjudication, or any collection action against the taxpayer’s assets; (iii) explanation—the right to an explanation of why a tax is being assessed in the way it is and to an explanation of the reasons for a decision by adjudication; (iv) appeal—the right to an independent administrative appeal and a final judgment appeal; and (v) representation—the right to be represented by a qualified professional (attorney, accountant, etc.) in any dealings with the tax authority. These rights should be established in law and can also be incorporated in a taxpayers’ charter or equivalent that is used to communicate taxpayer rights and to hold agencies accountable for their performance, including administrative discretion.

71. Collection of customs and non-tax revenues, such as duties, fees, and charges, should also have a legal basis. These laws should also specify the rights of citizens, dispute procedures, and the powers and limitation of the agencies involved in the collection of these revenues. These revenue measures should be easily accessible to the public and stable over time so that their existence and purpose are known to the public.

Fiscal regime for resource sectors

72. Governments raise revenue from resource companies by various means, including corporate income tax, as well as royalties, signature bonus payments, and/or profit oil in the case of production-sharing agreements. The combination of instruments for raising revenue is referred to as the fiscal regime. At one end of the spectrum of fiscal regimes, resource companies are subject to the same regime as other industries, with the addition of royalty charges or their equivalent. Inclusion of corporate tax provisions for petroleum in the general tax law offers a high degree of fiscal transparency. At the other extreme, various instruments and rates are applied on a case-by-case basis. According to the Guide on Resource Revenue Transparency, fiscal transparency requires that the government’s policy framework and legal basis for taxation or production-sharing agreements with resource companies be clearly and comprehensively presented to the public. The more complex and discretionary the system, the more difficult it is to achieve fiscal transparency.

73. Investors often seek to protect themselves from unfavorable changes in the fiscal regime, and therefore agreements with private companies often include fiscal stability clauses that “freeze” the tax system at the time of the agreement or guarantee some sort of compensation if there is a change in taxes. While reducing risk for investors and perhaps increasing the flow of investment, such clauses limit the flexibility of tax policy, and may have an impact on the overall design of the tax system. The existence of such clauses and their potential implications should be disclosed to the public.

Use of public funds and resources

74. The effectiveness of the budget depends on its being well grounded in law, with supporting regulations and administrative practices. Many countries have a budget system law that provides the legal framework for budget formulation, approval, and execution. In some countries, this is an organic law, which has higher status than ordinary laws. The relative importance of codified budget laws, regulations, and administrative practices varies considerably among countries.42 Despite these differences, certain important elements should be embedded in all legal/administrative frameworks. All spending should be approved by the legislature through an appropriation; the budget should be comprehensive, covering all central government transactions (albeit possibly through different funds); budget transactions should be shown in gross terms; a minister or other responsible authority for government finance should be given effective power of budget management; individual agencies should be held accountable for funds they collect and/or use; contingency or reserve provisions should specify clear and stringent conditions for use of such funds; and independently audited reports showing clearly how public funds have been used should be prepared for the legislature and the public.

75. It is common for basic principles of budget management to be embodied in a budget system law (which may have constitutional or near-constitutional status). Often, such laws are supported by specific laws governing treasury operations or the management of public debt. Where a comprehensive legal framework is not in place, its development should proceed at a pace that is consistent with policy and administrative capacity.43 Weaknesses in institutional and administrative capacity often impede the enforcement of laws and regulations. Also, economies in transition are in various stages of developing a legislative basis for their budget processes, but many have difficulties implementing realistic fiscal policies and controlling budget execution in practice. The work of establishing a sound legal framework in these countries needs to be supported by development of the capacity to reflect that framework in realistic budgets.

76. Legal title to the nation’s natural resources should also be included in the basic legal framework. Such rights are often established in the constitution but can also be covered in national or even subnational government laws. In most countries, resources in the ground are the property of the sovereign state, which can grant private parties rights to access them. As noted in the Guide, the power to grant rights to explore, produce, and sell these resources should be established in laws, regulations, and procedures that cover all stages of resource development. The clarity of the legal framework in this regard provides important safeguards for private investors and helps ensure that the exploitation of natural resources benefits the nation as a whole. Laws and regulations should give assurance that revenues and accumulated wealth are managed transparently through the budget process. Best practice legislation would provide standardized agreements and terms for exploration, development, and production with minimum discretion for officials; disputes would be subject to international arbitration; and individual agreements and contracts regarding production would be disclosed.

Revenue collection


Laws and regulations related to the collection of tax and non-tax revenues, and the criteria guiding administrative discretion in their application, should be accessible, clear, and understandable. Appeals of tax or non-tax obligations should be considered in a timely manner.

Accessibility and understandability

77. Revenue laws, regulations, and other documents relating to administrative interpretation of revenue laws should be accessible to the general public. In addition to being accessible, tax and other revenue collection laws should be understandable and avoid unwarranted complexity. Clear, understandable tax rules and regulations aid fiscal transparency by limiting discretion in their interpretation. However, tax and customs laws and their implementing regulations can be very complicated, particularly regarding corporate income tax and the calculation of profits. Therefore, it is critical to provide taxpayers with up-to-date explanatory materials (e.g., instructions and pamphlets), which are usually prepared by the tax agency. Tax administration staff should be able to offer professional advice and assistance to help taxpayers understand their rights, obligations, and entitlements under the tax laws. In addition, many countries find it convenient to provide taxpayers, on request, with advance rulings on how particular transactions that they are contemplating would be treated in a subsequent tax assessment. Where this practice is followed, it is important that the rulings be publicized.

78. Any exception to the application of tax laws should also be published. General tax exemptions, deductions, or special rates are normally a part of the tax law and hence, published and known to the public. However, the larger the number of exemptions, the greater the complexity and room for interpretation of the law, thus reducing transparency. Also, many countries offer (or negotiate) special tax treatment for new businesses. Transparency requires that all such tax incentives be made public—ideally with an estimate of the revenue forgone (see the discussion under practice 3.1.3).

Clear criteria for administrative application

79. A corollary to requiring that taxes be imposed under law is that administrative discretion in applying tax laws must be limited. Tax incentives that involve a high degree of administrative discretion and case-by-case negotiation of tax liabilities between officials and taxpayers should be avoided, because such practices lack transparency and have the potential for corruption. However, appropriate provision should be made for the treatment of taxpayers who cannot comply with complex rules, settlement of tax cases, agreement on installment payment schedules, and writing off of uncollectible amounts, all with procedural safeguards. Similarly, non-tax obligations should be transparently determined and nonnegotiable in their application.

80. Customs administration is another area in which transparency is critical, especially given the still high reliance on import duties in many developing countries. The Declaration of the World Customs Organization (Customs Cooperation Council), Arusha (revised 2003),44 which sets out guidelines for a program to achieve integrity in customs administration, emphasizes clarity and precision of legislation as a means of promoting transparency and integrity, and fighting corruption with respect to customs. Other resources available from the Internet can also promote greater transparency in customs administration.45 Transparency is frequently lacking in the formulation of import tariffs, where there may be several overlapping schedules that apply to any particular import, or a confusing combination of ad valorem and specific levies. In addition, customs valuation is often based not on an accurate assessment of the import value, but rather on some notional reference price or flawed assessment procedure. This creates a gap between the nominal and effective rates of ad valorem customs tariffs. It is thus important that customs have a clear statement of tariffs and how different tariffs applying to the same import relate to each other, and also have an accurate way of measuring import value. Similar considerations apply to exports, although export taxes have become increasingly rare and generally play a small role in revenue systems.

Judicial appeal for tax and regulatory impositions

81. Citizens and taxpayers should have access to clear regulatory and administrative procedures, including a well-functioning system of administrative review of decisions, as well as the opportunity to appeal to an independent judiciary. The proper administration of tax and customs matters, through the articulation of clear procedures, is an important transparency matter. Adjustments to taxpayers’ tax returns (e.g., following an audit) should be accompanied by clear and complete statements to taxpayers as to the reasons for adjustments. In most countries, these rights exist on paper; however, they often function imperfectly. In particular, the appeals system may fail to provide safeguards against arbitrary administrative action and to keep the tax administration within the bounds of the law.

82. An impartial mechanism for appealing and adjudicating decisions when the taxpayer is dissatisfied with the results of the administrative objection process should be established. This would include a full judicial process through the courts system to resolve matters of legal interpretation. The appeals process should not be overly difficult or onerous, appeals decisions should be made in a timely manner, and, subject to issues of privacy of all parties to the dispute, all decisions should be in writing. The legal and regulatory framework should be clear on the recovery of disputed debt, including that subject to appeal, and designed to ensure that tax debtors do not postpone payment by making frivolous objections or appeals. A number of countries require payment of up to half of the total sum due. Where the taxpayer has paid tax that is found on appeal not to be owed, it should be refunded with interest.

Revenue administration

83. Revenue administration should be organized in such a way as to minimize opportunities for collusion between taxpayers and officials. In this connection, administrative functions should be distributed across the administration, to provide a self-checking element whereby the work of staff engaged in one function serves as a control on the work performed by staff in other functions.

84. Reinforcing this, revenue administration should be supported by a strong headquarters responsible for the design of sound work processes and annual work programs, and for monitoring the performance of local offices in delivery. In modern tax systems, taxpayers assess their own tax liabilities with minimal intervention by tax officials, subject to ex post review by the tax administration on a selective basis. This extensive reliance on self-assessment combined with targeted enforcement is the basic strategy that permits tax administrations throughout the world to administer the tax system efficiently and to limit the opportunities for collusion between taxpayers and tax officers.

85. Information technology can also play an important role in eliminating opportunities for discretionary action as well as providing for effective monitoring of tax arrears, exemptions, appeals, and payments. Computer systems should be designed to provide a full audit trail of the information recorded in the taxpayers’ accounts, by cross-referencing this information to original source documents and to the names of the staff who entered it into the system.

86. Computer systems should have the capacity to readily exchange information among revenue departments. But it should be made clear that all taxpayer information is subject to confidentiality provisions and country-specific legal restrictions. The sharing of taxpayer information for enforcement purposes is facilitated by the use of modern taxpayer identification numbers. In addition to revenues collected by the tax and customs departments, contributions collected under the social security system (if not collected by the tax department) should be clearly accounted for, and audit information should be shared with tax departments, where appropriate.

87. As in other areas of administration, earmarked taxes and netting operations, to the extent they are used, should be clearly shown and accounted for. If, for instance, a tax department is authorized to use a share of the revenue it collects from audits for staff bonuses or certain administrative expenditures, then the rules on the use of these funds should be clearly specified to prevent abuse, and normal accounting regulations should apply.

88. Internal audit systems should be established to ensure the financial accountability of tax collection staff and systems, and adherence to tax administration policies and procedures in dealings with taxpayers. Notwithstanding the importance of avoiding collusion and negotiation between tax officers and taxpayers, potential sources of tax disputes should be eliminated during the course of an audit. Discussion with the taxpayer to clarify facts, proper evidence gathering, and third-party verification by the auditor can often prevent fact-based disputes from arising in the audit. A clear explanation by the auditor to the taxpayer of the law applicable to a transaction (including provision of a copy of the law and technical interpretations thereof by the tax administration) can often prevent a dispute on matters of interpretation at the assessment stage. Good training must be given to auditors on their responsibilities, emphasizing that the primary role is not negotiation, but rather the acquisition of facts and the correct application of the law to those facts to verify that the self-assessed liability by the taxpayer is correct.

Public comment on legislative or regulatory changes


There should be sufficient time for consultation about proposed laws and regulatory changes and, where feasible, broader policy changes.

89. Citizens should be made aware of major new policy proposals, and, if feasible, a process to permit public consultation is recommended. It is especially important for governments to give notice of legislative or regulatory changes related to key spending programs. Good practice would be to provide a period of notice regarding changes in eligibility requirements for important spending programs such as social security, welfare, or other social transfer programs that affect a large number of persons. This allows for public debate and understanding of the changes, and in some instances public consultation may lead to refinements of proposed changes.

90. Consideration should also be given to the incentives this practice creates for tax avoidance behavior. In cases where tax avoidance is expected to be large, it may not be in the interest of tax collection to preannounce the changes. Once new revenue measures have been approved, it is recommended they be sufficiently publicized so that taxpayers understand how they might be affected.

Contractual arrangements


Contractual arrangements between the government and public or private entities, including resource companies and operators of government concessions, should be clear and publicly accessible.

91. Good practice requires making the terms of any contract open to public scrutiny through the publication of such contracts or, at a minimum, disclosure of the key terms of the contract. Some countries are moving in the direction of contracting out provision of a public good or service to the private sector. A form of contracting out that is gaining increasing popularity is public-private partnerships (PPPs). As with procurement decisions, the process for determining the provider and issuing a contract needs to be open and transparent.

For all contracts, best practice disclosure requirements are as follows:

  • Contracts, including any renegotiations, should be publicly disclosed. Standardization and simplification of contracts would be desirable.

  • Future payments required under existing contracts should be reported and included in medium-term planning.

  • Government guarantees associated with PPPs or other contractual arrangements should be fully disclosed.

  • When the government bears the majority of risks associated with a project, the assets should be considered government assets and accounted for in the fiscal accounts.

Public-private partnerships

92. Public-private partnerships refer to arrangements in which the private sector supplies infrastructure assets and services that have traditionally been provided by the government.46 PPPs are attractive because they can increase infrastructure investment, and sometimes they can add to government revenue. It is also believed that better management and greater efficiency in the private sector can lead to better-quality, lower-cost services. Box 5 describes PPP arrangements in Chile that have been managed effectively.

93. A PPP typically takes the form of a build-operate-transfer scheme in which the government specifies the services it wants and the private provider designs, builds, finances, and operates the facility. Typically the asset is transferred to the government at the end of the operating contract, but other options are possible. The main purchaser of the PPP services is the government in many cases, but PPPs can sell services directly to the public, as is usually the case with toll roads or railways. Investment projects involve various types of risk, including construction/performance risk, financial risk (related to variability of interest and exchange rates), demand risk (whether demand for the service is estimated correctly), and residual value risk. PPPs seek to transfer some of these risks from the government to the private sector. However, contract renegotiations are common with most PPPs, so the burden of risk may change over time.

Box 5.PPP Arrangements in Chile

Chile’s PPP program covered 44 projects (valued at 6.25 percent of 2004 GDP) in 2004, mainly for highways, urban roads, and airports. Chile demonstrates a number of good practices with regard to PPPs and fiscal transparency. One important lesson for other countries is to have the institutional framework in place before launching a PPP program. In Chile this institutional framework was established with the 1991 Concessions Law, which requires competitive bidding for concession contracts and establishes the rights and obligations of each party, including dispute resolution procedures and cancellation of contracts. Another good practice is to apply the same rigorous evaluation methods, including cost-benefit analysis, to all public investment projects, whether they are undertaken by the public sector or contracted to the private sector. Projects must also be consistent with a broad infrastructure plan and acceptable from a fiscal sustainability perspective to ensure that PPPs are not a source of unsustainable liabilities.

In Chile, PPP contracts must clearly specify the risks that are borne by the government, and since October 2003 the government’s exposure to contingent liabilities related to guarantees provided in concession contracts has been reported in the Report on Public Finances. These include the net present value of expected minimum and maximum revenue guarantee payments (net of receipts under the revenue-sharing agreement). Recent reports include a detailed discussion on the analytical approach used and its shortcomings. In addition, Chile not only reports current cash payments to and from the concession firms, but it also reports the present value of future payments for the period 2004–30. This makes it possible to have a complete picture of the long-term costs and risks associated with the PPPs. However, transparency could be further strengthened by publishing full information on original and renegotiated contracts. A uniform template could be developed to summarize the key provisions of contracts on the Ministry of Public Works’ website and as part of budget documentation.

For additional case studies of PPPs, including a number in Eastern Europe, see the European Commission’s Reference Book on PPP Case Studies, June 2004, at

94. A concern with PPPs is that they may be used to move public investment off budget and debt off the government balance sheet, in some cases to circumvent restrictions on the overall fiscal balance or public debt. In addition, the contractual obligation to purchase services from the PPP private operator has fiscal implications over the medium term, which reduces expenditure flexibility for the government. Furthermore, resorting to guarantees to secure private financing can expose the government to hidden and possibly higher costs than traditional public financing.

95. Government guarantees can be used to reduce or eliminate the risks incurred by the private sector in connection with PPPs. All forms of guarantees related to PPPs should be disclosed, and their likely fiscal cost assessed. In addition, the public policy purpose of each guarantee, the total amount of the guarantee classified by sector and duration, and the intended beneficiaries should be disclosed. Loan guarantees can reduce the private sector’s financing risks, while demand guarantees or guaranteed payments for services sold to the government can reduce demand risk.47 Residual value risk is reduced through price guarantees at which the government will purchase the assets when the operating contract ends.

Accounting for PPPs

96. A fiscal accounting and reporting standard has not yet been developed for PPPs. Statistical and accounting guidelines tend to allocate the ownership of the PPP assets to either the public or the private partner, depending on a determination of how risks are apportioned between the two sectors. Eurostat issued a decision that says a private partner will be assumed to bear the balance of PPP risk if it bears most construction/performance risk or demand risk. This decision has often been criticized because it would allocate PPP assets too often to the private sector. The practice in a number of countries is to record PPP assets as government assets—accounting for them as public investment or as a financial lease.

97. Assessing risk transfer is difficult because the complexity of PPP contracts makes them hard to interpret. Furthermore, political pressure on the government to bail out a large (but failing) project or “essential” services means that the government may in fact bear more risk than the contract suggests.48

98. According to the GFSM 2001, PPP operations should be treated as follows:

  • Operating contracts: Payments by the government under contracts for services should be recorded as expenses in the government operating statement.

  • Concession fees and operating leases: Payments by private operators to the government should be recorded as revenue on the operating statement.

  • Financial leases: The acquisition of an asset under a financial lease is recorded in the operating statement at cost,49 together with the incurrence of a lease liability to the private sector. These asset and liabilities would be recorded on the government balance sheet. Subsequent depreciation, interest, and amortization would then be recorded on the operating statement. As the lease liability is reduced, the asset value will build up on the balance sheet.

  • Transfer of PPP assets to government: If there is provision for a PPP asset to be transferred at zero cost to the government, it is recorded as the acquisition of a nonfinancial asset at its residual value, balanced by capital transfer from the private owner. Any purchase price involved would be recorded as an expense, and the capital transfer would decrease accordingly.

99. Under cash basis accounting, the liability under a financial lease is recorded as government debt. Interest and amortization would be recorded as expenditure and financing. When a PPP asset is transferred to the government, any purchase price is recorded as investment.

Contracts for resource development

100. Although many countries have state-owned companies to exploit natural resources such as oil, minerals, and timber, licensing to private firms is also a common practice. Production-sharing contracts—whereby the company is contracted to extract and develop the resource in return for a share of the production—are becoming standard features in the oil and gas industries.50 The main parameters of production-sharing contracts for oil are the cost oil retained by the contractor to cover cost; profit oil, which covers the remaining production; and an agreed-upon formula for dividing profit oil between the government (or national resource company) and the contractor. However, production-sharing agreements may also determine tax and/or royalty liabilities by defining individual rates, payment scales, or other variables. Although the contracts may be based on a model contract, some parameters are individually defined and decided through either bidding or negotiation. Best practice is to publish actual contracts in addition to publishing the model contract, which provides only limited information. Especially where production-sharing contracts are the central instrument of the fiscal regime, all the key parameters should be available to the public in the same way that tax rates, exemptions, and deductions are publicly known. The Guide on Resource Revenue Transparency should be consulted for further details.

101. Clarity and openness of licensing procedures are fundamental to transparency through all stages of resource development. Open tendering with clear procedures and sealed bids constitutes best practice and is the basis for licensing in many advanced economies. Negotiated deals, which are more common in the mining industry, do not have sealed bids or a firm bid deadline, and the government exercises discretion in deciding terms and awarding contracts. Fiscal transparency requires limiting complexity and full disclosure of final agreements. Good practice would at minimum include ex post publication of contract awards.51

Liability and asset management


Government liability and asset management, including the granting of rights to use or exploit public assets, should have an explicit legal basis.

102. In addition to covering taxation and public expenditure, the framework for fiscal management should include primary legislation, such as a budget system law or debt management law that covers all transactions that result in a change in public assets or liabilities. In addition to a legal requirement for debt and asset management, there should be requirements for the transparent management of nondebt liabilities, including monitoring government guarantees, unfunded pensions, arrears, and any other contractual obligations of government. These disclosure requirements are discussed further in Chapter III, under practice 3.1.5.

Debt management

103. Debt management legislation should clearly assign authority to a single person, usually the minister of finance, to select the instruments necessary for borrowing; to produce a debt management strategy; to assign debt limits (if no limit is set by law), usually with reference to a sustainable debt strategy; to establish and control the organization responsible for debt management (whether it is located within the ministry or is a separate agency); and to issue regulations covering debt management. The granting of government guarantees should legally rest with a single individual, usually the minister of finance or the head of the agency responsible for debt management, with clearly specified constraints. In some countries the legislature must approve all government guarantees. The legislation should define the role of the central bank as fiscal agent of the government so that issuance of treasury securities cannot be confused with monetary policy operations. All loans should be credited to a bank account under control of the finance ministry, with liabilities incurred and terms of the loans fully disclosed to the public. For fiscal transparency, legislation should set requirements to report annually on debt stock and flows, including data on government-guaranteed debt, to the legislature and public, though more frequent reporting would be preferable. Best practice would be a requirement for an annual audit of debt management operations performed by the external audit institution.52

104. Legislation on public debt should cover all debt transactions and guarantees, including by subnational governments, extrabudgetary funds, and public corporations. Because it can be difficult to monitor debt incurred by these other entities, some countries avoid this fiscal risk by simply prohibiting these entities from holding debt, except possibly on-lending from the central government. Some countries, such as the United States, implement a credible “no-bailout” policy for subnational governments. Other countries either require central government authorization for debt-creating transactions or set limits on the debt that subnational governments or other public entities may incur. A public debt law (or other primary legislation) should clearly define all limits placed on subnational governments, extrabudgetary funds, and public corporations, and it should also cover monitoring (through secondary regulations) of these limits.

105. Fiscal transparency requires that public debt management have a legal basis that is supported by clear secondary regulations. Regulations may be in the form of an official procedural manual or other instructions that cover the details of the debt management process, operational controls, and reporting arrangements. These details would include restrictions on such things as the types of instruments that can be used for debt management, risk parameters, and content of a medium-term debt management strategy; the methods for analyzing contingent liabilities and risk of called government guarantees; as well as the usual accounting standards and reporting and auditing requirements. If the legislation does set limits on guaranteed debt, it is critical that the regulations provide clear criteria for consideration and approval of guarantees.

106. Regulations should also define the responsibilities of the debt management unit, whether this structure is located within the ministry of finance, the central bank, or a separate agency. The objectives of the unit should be clearly stated and include minimizing costs of debt servicing while taking steps to manage associated risks. The head of this unit may be delegated authorization by the minister of finance to manage domestic and external debt. In some countries, such as the United Kingdom and Ireland, the debt management agency has broad powers and independence, and monitoring by the legislature is through ex post scrutiny.

Box 6.Authority over Natural Resource Assets and Resource-Related Borrowing

The government’s involvement with natural resources should be clearly established in law, and the power to grant rights to explore, produce, and sell and buy these resources should be well established in laws, regulations, and procedures that cover all stages of resource development. The Guide provides detailed guidance in this area.

Financial asset holdings, including any related to the saving and investment of resource revenues, should be subject to clear rules for disclosure, regardless of which government agency, extrabudgetary fund, or public company holds the assets. They should be considered as part of the overall financial assets of the government, and the assets should be reported on the consolidated government balance sheet if one is maintained.

Rights to borrow for public purposes should be under the authority of one government ministry (usually the ministry of finance). Countries with important natural resources may face additional issues related to control and transparency of financial assets and liabilities because loans may be made with future resource revenue as collateral. The terms of such loans tend to be negotiated and usually are not available to the public, and the authority for such borrowing may not be subject to the usual rules and oversight. Fiscal transparency requires that the legal framework include adequate disclosure and oversight requirements for all borrowing, and that oversight agencies such as the external audit agency be given sufficient authority and capacity to implement the law. These requirements should apply equally to any borrowing or collateralization by the national resource company.

Asset management

107. For countries that accumulate financial assets through investment of savings, it is critical to have an open and clear asset management strategy.53 Countries with significant natural resource assets face important issues regarding debt and asset management, as discussed in Box 6. The objectives of savings, such as stabilization or saving for future generations, or other considerations, such as investment abroad to avoid exchange rate appreciation, should be clearly stated. Changes to asset management policy should be clear and publicly available. In addition, the asset management function should be carried out under clear investment guidelines that are issued by the ministry of finance and available to the public. The guidelines should set limits on risk, types of assets, and geographical or currency composition of financial assets. Information should be provided on how asset managers will be held accountable, such as through comparison with a benchmark portfolio. The public should also have information on total financial assets and on the return on investments. The agency or business in charge of asset management should be subject to external audit.

108. Physical assets should be inventoried, and sales and purchases monitored, so that the full stock of physical assets is known at any point in time. Under accrual accounting, the balance sheet would include nonfinancial assets. The valuation of such assets raises some transparency questions, as discussed in Chapter III.

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