Chapter 2. Treasury Management Efficiency Indicators
Author: Marco Varea and Adriana Arosteguiberry
Language:
English
Keywords:
BOOK; government; country; cost; cash management; transaction costs; payment arrears; Treasury processes; treasury reform process; PEFA treasury evaluation; Government cash management; Budget execution and treasury management
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Abstract

Treasury management is one of the areas of public financial management (PFM) that has most improved over the last 20 years at the international level, when measured in terms of incorporating new practices and expanding the use of information technology. These efforts have been widely supported by technical assistance projects provided by international organizations (Dener, Watkins, and Dorotinsky, 2011). A specific set of performance indicators that adequately addresses the different aspects of good treasury management, however, has yet to be developed. This chapter, therefore, discusses and proposes a set of indicators for this area.

Introduction

Treasury management is one of the areas of public financial management (PFM) that has most improved over the last 20 years at the international level, when measured in terms of incorporating new practices and expanding the use of information technology. These efforts have been widely supported by technical assistance projects provided by international organizations (Dener, Watkins, and Dorotinsky, 2011). A specific set of performance indicators that adequately addresses the different aspects of good treasury management, however, has yet to be developed. This chapter, therefore, discusses and proposes a set of indicators for this area.

The fact that treasury systems have attracted increasing attention is due to a number of reasons: necessity, as this is the area in which the budget is effectively executed; operability of payment systems, which is crucial and must be accurate and reliable; use of technology and more advanced methods now available in the financial system; and improving efficiency, since integrated financial management information systems (IFMIS) enable the budget, accounting, and financial systems to become integrated.

Technological innovation in public financial resource management has meant that these resources can be handled with greater efficiency. The situation has evolved from decentralized resource management with low levels of monitoring and balance sheet consolidation toward the implementation of tools and processes that centralize the government’s financial resources in the treasury single account (TSA).1

To measure this effort more efficiently, several treasury management performance indicators have been developed that address the institutional aspects such as the level of TSA scope, operational costs, or opportunity to centralize resources to generate financial benefits and take advantage of increased liquidity. One of the most relevant indicators refers to the fact that the treasury must avoid accumulating either payment arrears or large idle balances. At least for developing countries, this indicator would reveal that cash management is close to an optimal level and that expenditure flows are efficiently covered.

Performance indicators relating to institutional capacity have also been developed with regard to the processes of TSA implementation, as the latter has become the benchmark for the development of treasury systems. Efficiency gains are being sought at the inter- and intra-institutional level, but using indicators to measure this is still a work in progress.

This chapter aims to identify and analyze the treasury performance indicators currently available in the specialized literature and in the Latin American Treasury Forum (FOTEGAL) surveys. The objective is to develop a set of quantitative indicators to measure national treasury management efficiency. The first section describes the role and the objectives of FOTEGAL in building a common agenda for the treasuries of Latin America within the framework of public financial management reform. The region’s treasurers, with the support of international organizations, established the forum with a view to promote the exchange of information and facilitate technical discussions, knowledge management, and dissemination of treasury management best practices. The Forum undertakes an annual survey, as an opportunity to analyze progress and address the challenges of treasury management.

The second section suggests a set of 10 basic indicators to evaluate treasury management. This is based on assessing the efficiency of cash flow forecasting, followed by measuring how the resources collected (excluding revenue from taxation) and the payments made by the TSA are managed, as well as the effects on liquidity outcomes. When proved positive, profits can be used for active financial investment; when proved negative, the lack of short-term liquidity must be financed to avoid payment delays. The model also proposes cost indicators (the cost of collecting and processing payments), an indicator for liquidity, and an indicator for cash flow forecasting efficiency (real expenditure over planned expenditure).

The third section contains an analysis of the indicators found in the international public financial management evaluation methodologies, principally Public Expenditure and Financial Accountability (PEFA) and the Open Budget Index (OBI). This section also describes certain indicators extracted from the FOTEGAL surveys. The purpose of this comparison is to verify whether the proposed indicators may already be available in other evaluation systems.

Finally, based on the model of indicators proposed in the first section, after reviewing the existing ones and specific examples of their use in Chile, France, and Mexico, a recommendation is made of a set of 10 cash management performance indicators.

FOTEGAL: Role, Objectives, and Challenges

In April 2010, the first international seminar on treasury management was held in Lima, Peru, promoted by the Peruvian Treasury with the support of the Inter-American Development Bank (IDB), International Monetary Fund (IMF), and World Bank.2 This seminar provided the reference framework that enabled Latin American treasurers to coordinate and organize a forum—with a corporate identity—in which to promote the exchange of experiences and knowledge relating to national treasury issues.

In 2011, FOTEGAL was formally established at the Latin American Seminar on Public Treasury Management (Seminario Latinoamericano de GestiĂłn de TesorerĂ­as PĂşblicas), held in Mexico. Treasurers from 16 Latin American countries subscribed to the FOTEGAL Operational Guidelines: Argentina, Bolivia, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, and Uruguay.3 Since then, the Forum has promoted the exchange of learning and knowledge to improve treasury management, with annual meetings and other training events held for the following purposes:

  • Exchange of knowledge and updates that involve treasuries from other regions

  • Establishment and dissemination of best international practices for optimal income and expenditure management, formulation of cash flow forecasts, and issues relating to operational matters such as account reconciliation, electronic payments, arrears management, business continuity plans, legal framework, and optimal liquidity management, among others

  • Drafting and dissemination of studies and surveys on subjects of general interest

The Forum also aims to continue with its other stated objectives, such as building a website with up-to-date information on each country’s treasury; facilitating meetings and virtual conferences; and establishing alliances with other national, regional/international organizations, universities, and civil society groups to improve the formulation, execution, and evaluation of national treasury management practices.

Operational Plan and International Cooperation

Each year, FOTEGAL nominates an Executive Board made up of a President, an Executive Secretary, and a Technical Committee comprised of two of the Forum’s most recent previous presidents. The Technical Committee’s mission is essentially to advise the President on technical aspects.

With regard to training events, the alliance with international organizations—with the support of host countries—has been crucial.4 With regard to knowledge management, a virtual library specializing in treasury-related subjects has been established in response to the demand of treasurers.5 The support received from international organizations has significantly enriched the quality and the depth of discussions as they represent a primary source of comparative cross-country comparative studies, and offer training courses in which treasurers can share the knowledge and experience acquired during their interventions in their respective countries.

Finally, the surveys have been undertaken to track the evolution of specific practices and topics. These are presented to the treasurers on an annual basis and represent a valuable tool for evaluating the progress made by each country’s treasury. The studies apply the results of the FOTEGAL surveys, providing the basis for formulating some of the indicators discussed in Section 4.

Results and Challenges

The results of the efforts of FOTEGAL are summed up as follows:

  • Five annual seminars (chronologically in Peru, Mexico, Colombia, Guatemala, and Uruguay) and knowledge disseminated among more than 300 civil servants from Latin American treasuries. (The 2015 seminar is scheduled to take place in the Dominican Republic.)

  • Six treasury management and public finance courses, attended by more than 240 treasury technical staff.

  • An operational website: www.fotegal.org.

  • Strategic alliances with Mexico’s Public Sector Treasury Group (Grupo de Tesoreros del Sector PĂşblico A.C. de Mexico) (www.gtsp.mx) and the Latin American Group for Public Administration (Grupo Latino-americano de AdministraciĂłn PĂşblica), which is a regional entity of the International Institute of Administrative Sciences (www.iias-iisa.org), aiming to promote the exchange of learning and update knowledge, among others.

  • South-South cooperation, which involves the exchange of learning, best practices, and knowledge transfer.

  • Diffusion of international experiences from countries such as Australia, Brazil, France, Netherlands, the United Kingdom, and the United States, among others.

  • Preparation of technical notes and other knowledge documents.

The themes discussed have included TSA management and scope, including management and revenue collection; electronic transfer payments; cash forecasting; identification of temporary cash surpluses or shortfalls; financial instruments for short-term needs; investment alternatives for short-term financial surpluses; floating debt and payments in arrears; management of special and sovereign funds; and asset and liability management (ALM), among others. One of the themes that has most interested seminar participants and provoked lively discussion is how to identify suitable treasury management performance indicators. From the outset, treasurers have been in favor of identifying indicators that are relevant, easy to measure, and are comparable over time to show how practices in the region evolve, and that other treasuries should recognize these as the benchmarks for sound financial management.

A Theoretical Framework for the Creation of Treasury Indicators

The national treasury represents a process of complex financial transactions that are subject to legal restrictions from which a private sector treasury is exempt; it also has a different scope and various objectives. Private sector treasury indicators are unsuitable, therefore, in terms of evaluating a public sector treasury. Cash management at the national treasury means managing financial intermediation processes, whereby the treasury represents modern financial management and goes beyond its traditional role as paymaster of the state or a mere cash register. In general, the national treasury is one of the most important financial entities in a country, given the volume of resources it manages annually and the importance of its operations.

Treasury processes impact three areas: financial, accounting, and budgetary. The financial aspect has an impact on the TSA; the accounting aspect is responsible for the entries in the accounting ledgers and the financial statements; and the budgetary aspect executes the budget allocations supported by detailed financial planning. Furthermore, the financial aspect also affects the relationship between the central bank and the financial markets.6 Figure 2.1 synthesizes the main elements of the treasury cycle, with the indicators most relevant to each stage.

Figure 2.1
Figure 2.1

Treasury Cycle and Performance Indicators

Source: Authors’ elaboration.

The IMF’s Government Finance Statistics Manual 2014 defines the scope of central government, general government, the nonfinancial public sector, and the public sector (IMF, 2014: 19-20). This chapter adopts the same nomenclatures. Treasuries are equally defined in the financial management laws of most countries as being the governing bodies of governmental resources with the capacity to design, regulate, and issue guidelines to be followed by all entities that administer public resources. As such, the principle of efficiency requires that the national treasury wield control over the totality of these resources, although a combination of factors often prevents this from occurring, such as (i) financial management laws that differ in scope (e.g., affecting only the central government); (ii) laws that provide financial autonomy to state powers, primarily the legislature and the judiciary; (iii) territorial organization laws that guarantee levels of autonomy and independence in financial management for provinces, states, regions, and municipalities.

Indicator for Institutional Scope

An essential premise for making satisfactory comparisons depends on precisely identifying the extent of the scope of TSA; in other words, exactly which financial revenues and expenditures and financial assets and liabilities are the sole responsibility of the national treasury. Once these are established, the exercise consist of calculating how far the TSA’s range might be extended. Scope most commonly covers central government institutions, although this can vary among countries; for example, not all state institutions are covered in all countries. It is not unusual for the legislative powers and other institutions, such as the courts, to resist joining the TSA. These are followed by the autonomous and decentralized institutions of the central government, nonfinancial public enterprises, subnational governments, and the social security agency. One of the principal difficulties is achieving uniform interpretation with regard to the extent of scope. To make crosscountry comparisons, this chapter adopts central government institutions as a minimum standard of scope, as shown in Table 2.1 in Columns A and B.

Table 2.1

Institutional Scope of the Treasury Single Account

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Source: Authors’ elaboration.

Revenue Indicators

With regard to administrative and financial aspects, for any government treasurer the optimal scenario is that the revenue deposited in the TSA is the sum of all government resources. Most treasuries in Latin American countries, however, mainly collect revenues from taxation. With regard to operating revenues collected by public services (of the central government) and other decentralized public institutions (e.g., state universities, social security, and local governments), these are collected directly by the relevant institutions and, in various countries, are not deposited in the TSA.

To establish a basis for evaluating TSA revenue collection, therefore, it may be possible for the TSA to capture and control the resources of those institutions with significant financial dependence on central government resources (initially, the institutions listed in Columns A and B of Table 2.1, progressively adding those listed in Column C).

The following four indicators are proposed to measure scope, efficiency, economy, and the use of technology for revenue collection:

  • Amount of revenue collected by the treasury by way of the TSA/total executed budget (includes revenues received from central government nonbusiness agencies), expressed as a percentage;

  • Time taken to transfer revenue to the treasury (in days) from the collecting banks or tax collection offices to the TSA (in days);

  • Revenue collection charges paid to banks by the treasury (monetary units); and

  • Share of electronic revenue collection (as a percentage).

Expenditure Indicators

Given the treasury’s increased responsibility in terms of financial ALM, the traditional concept of treasurers as mere paymasters of the state has become obsolete. The indicators should reflect the efficiency gains made by the treasury from centralizing government payments, consolidating the management of all institutional resources, maintaining ownership—and ability to do so—while guaranteeing levels of operational decentralization and management autonomy.

Government payments should be made on the basis of a well-structured cash forecast and financial plan. In this case, more rigorous processes and higher transaction costs are required with regard to check payments, electronic transfers, direct debits, and transfers between TSA subaccounts. Five essential indicators relating to the management of payments are proposed: (i) payment efficiency with regard to the cash plan, (ii) efficiency of the TSA, (iii) time it takes to make payments, (iv) cost of the processes, and (v) use of electronic media. The indicator metrics are as follows:

  • Total expenditure/planned expenditure, on a monthly basis, in the cash plan (percentage of the average over 12 months);

  • Total government payments made by the treasury each month by way of the TSA/Total monthly central government payments, using any other account (as a percentage);

  • Time taken by TSA to make payments to the ultimate beneficiary (in days);

  • Transaction costs by payment (in monetary units); and

  • Share of payments made electronically (as a percentage of the total).

TSA Profitability Indicator and Cash Balance Management

The average profitability of TSA balances—in other words, the interest from financial investments—should be quantified. As a comparative parameter, the central bank’s prime rate can be applied as a base value; remuneration will depend on the financial market conditions in each country.

  • The TSA remuneration rate (as annual percentage rate).

In the event that a year ends with substantial expenditure payment arrears, the balance, itself, is a sufficient indicator that there is a need for measures to reduce arrears and define a strategy of progressive elimination.

  • Size of the floating debt relative to total payments made during the reference period (as a percentage).

Available Treasury Management Indicators

The literature reviewed for this study has revealed little evidence of the existence of national treasury performance indicators that would enable all the processes identified in the previous section to be evaluated.

An assessment of a national treasury should measure two main areas: financial efficiency and institutional efficiency. The former relates to the efficiency of the handling of government resources (i.e., cash management); the latter refers to whether an institution has the necessary human capital, technological resources, internal processes, and infrastructure to fulfill its functions.

A review of the literature of the last 20 years shows that there are certain treasury indicators that incorporate (i) traditional treasury indicators, using private sector criteria that are not discussed in this chapter; (ii) indicators from methodologies developed for evaluating the budget process and PEFA, among which there are specific treasury indicators; (iii) the OBI; (iv) a survey-based TSA toolkit, developed by the World Bank; and (v) the surveys conducted annually by FOTEGAL among LAC countries.7

Over time, private sector management techniques have been applied to the public sector, such as the ALM methodology. This is fundamentally related to risk management (e.g., interest rates, exchange rates, and credit risk).

Indicators from evaluation methodologies, such as PEFA, which are used for drafting reports on overall performance in PFM, can provide a useful reference point. The OBI provides a further reference.8 The FOTEGAL surveys were designed to help identify a wider range of indicators that are relevant to the treasury cycle.

Furthermore, very little literature has been found that refers specifically to treasury management—compared, for example, with literature relating to budget issues—in Latin America, although there is more general literature that excludes a regional focus. There are various World Bank publications, such as Hashim and Moon’s (2004) treasury diagnostic toolkit, which is based on a questionnaire comprising three parts: legal and organizational framework; extent of treasury scope; and system functionality.9

The World Bank’s TSA toolkit helps to diagnose the state of a country’s treasury and, while extensive and detailed, it has only been applied to one Latin America country (Dener, 2014). It includes 65 questions grouped into five categories: the legal and regulatory framework for TSA operations (11 questions); TSA procedures and interbank systems (25 questions); capacity and competencies (7 questions); information security controls (14 questions); and oversight mechanisms (8 questions).10 This toolkit contains elements to improve a treasury’s institutional capacity, such as undertaking a reform plan. In the LAC region, it has been applied solely in the Dominican Republic. The following section provides details of the indicators that have been identified, which are pertinent to national treasury management evaluation.

PEFA Indicators

The 28 PEFA indicators are comprised of the average of the scores attained in each dimension or minimum requirement. The indicators of most interest for treasuries are PI-4, PI-15, PI-16, PI-17, and PI-20. PI-4 pertains to the treasury in all its dimensions; PI-15 has two dimensions that evaluate the revenue side of the treasury; PI-16 indicates the quality of information with regard to government institutions that execute budget resources; and PI-17 indicates the treasury’s capacity to record and manage cash balances to meet payment commitments. Only the first dimension of indicator PI-20 is relevant, as it relates to the effectiveness of internal expenditure controls.

In January 2015, following a public consultation process, PEFA published its amended evaluation methodology. The information presented in this section, however, is based on the previous methodology, which included 28 indicators with their respective dimensions or minimum requirements, since only the evaluations that were conducted using the earlier methodology are available.

PEFA Indicator PI-4: Stock of expenditure payment arrears by country

Performance indicator PI-4 refers to payment arrears. PEFA describes this as a nontransparent form of payment. This indicator has two dimensions, which are stock of expenditure payment arrears (as a percentage of the total real expenditure from the corresponding financial year) and all recent deviations in that balance; and the availability of data for monitoring payment arrears. The first dimension is presented as quantitative data, while the second is an indicator of institutional capacity. The situation of 11 Latin American countries with respect to PI-4 is shown in Figure 2.2.11

Figure 2.2
Figure 2.2

PI-4: Stock of Expenditure Payment Arrears by Country

Source: Authors’ elaboration, based on data from PEFA (www.pefa.org).
Figure 2.3
Figure 2.3

PI-4: Availability of Data for Monitoring the Stock of Expenditure Payment Arrears by Country

Source: Authors’ elaboration, based on data from PEFA (www.pefa.org).

On a scale of A to D, with A being the optimal position, it can be inferred in general terms—without comparing with other regions—that this region’s situation is good or optimal in more than half of the sample countries. Only one country reported arrears of more than 10 percent of total expenditure. This indicator uses year-end data or data from the close of the latest financial year.12

While this is considered a good result, it would be more useful to measure the treasury’s capacity to permanently manage payment arrears and that it guarantees that no more than 2 percent of planned expenditure accumulates from one period to the next. The figure of 2 percent represents the benchmark that is given an A rating in the PEFA evaluation.

PEFA ID-15: Effectiveness of tax payment collection

Indicator PI-15 determines the effectiveness of tax collection, but only the last two of its three dimensions are relevant here. These are:

  • PI-15 (second dimension) effectiveness of the transfer of tax revenue to the treasury by the tax revenue administration; and

  • PI-15 (third dimension) frequency of complete account reconciliations between tax assessments, collections, arrears records, and receipts by the treasury.

This indicator is pertinent since it explains how prompt transfer of tax revenues to the treasury is essential to ensure that revenue collected is available for committed expenditures. An integrated financial management information system helps taxpayers to pay their resources directly into either commercial bank accounts or public treasury accounts.

Figure 2.4 shows that the information from the two dimensions that have a direct bearing on treasury management reveals a situation that is close to optimal in Brazil, the Dominican Republic, Honduras, and Peru. This is due to the fact that, according to the minimum requirements, all tax revenue is paid directly into accounts controlled by the treasury or transfers are made to the treasury on a daily basis.

Figure 2.4
Figure 2.4

PI-15: Effectiveness of Tax Payment Collection

Source: Authors’ elaboration, based on data from PEFA (www.pefa.org).

This situation differs from that observed in the FOTEGAL surveys, where only two countries (Colombia and Guatemala) take more than four days to transfer resources from the tax authority to the treasury; ten countries (Argentina, Chile, Costa Rica, the Dominican Republic (20 percent), Ecuador, El Salvador, Honduras, Mexico, Panama, and Peru) take three days or less, and five countries (Bolivia, Costa Rica (80 percent), Mexico, Paraguay, and Uruguay) transfer tax revenues on the same day they are collected (this point is analyzed in detail in the following section). The limitation of this indicator is particular to the subjectivity of the evaluation, as these are processes over which the treasury has no control and which lack reference values. Generally speaking, the most common practice in the region appears to be that various tax revenues are collected and transferred to the treasury accounts on the same day.

In general, accounts reconciliation, tax assessments, tax collection, payment of arrears, and transfer of tax revenues to the treasury are carried out at least every three months. These scores reflect satisfactory performance levels for Brazil, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Peru. There is a trend toward greater automation of accounts reconciliation as the IFMIS seeks to communicate with banking systems.

PEFA PI-16: Predictability in the availability of funds for commitment of expenditures

PEFA defines indicator PI-16 as the level of credibility of treasury data regarding the availability of funds for the line ministries, departments, and agencies (MDAs) that execute administrative budget programs with resources provided from the central government budget. This indicator evaluates three dimensions, which are the extent to which cash flows are foreseen and monitored; the reliability and outlook of in-year information provided to MDAs regarding expenditure ceilings and commitments; and the frequency and transparency of the amendments to budget allocations, which are decided at a higher level than ministries, departments, and agencies management.

Figure 2.5 shows that the dimensions that reflect the certainty of resource availability and cash flow monitoring are consistently high, and that all the countries that were evaluated scored the highest rating (A) with the exception of the Dominican Republic, which achieved a B (PEFA, 2012). This subindicator is associated with cash flow forecasting and the information is consistent with the results of the FOTEGAL surveys (see the following section).

Figure 2.5
Figure 2.5

PI-16: Extent to Which Cash Flows are Forecast and Monitored

Source: Authors’ elaboration, based on data from PEFA (www.pefa.org).

The procedure for transferring resources from the treasuries to the line ministries also received an A rating in five countries. These were Colombia, Costa Rica, El Salvador, Honduras, and Paraguay.

PEFA PI-17: Recording and management of cash balances, debt, and guarantees

This indicator relates to recording and managing cash balances, debt, and guarantees. There are three dimensions to this indicator: quality of debt data recording and reporting; the extent of the consolidation of government cash balance; and systems for contracting loans and providing guarantees. The pertinent dimension here is the consolidation of government cash balance.

The information yielded by this indicator has various connotations. If viewed from only a treasury perspective, the second dimension regarding cash management for debt payment provides the relevant information. As previously mentioned, however, given the current trend toward integrating the treasury and the debt office, all dimensions are essential, since the operational management of both areas is combined (Williams, 2010; Gardner and Olden, 2013).

PEFA states that:

“An important requirement for avoiding unnecessary borrowing and interest costs is that cash balances in all government bank accounts are identified and consolidated (including those for extra-budgetary funds and government controlled project accounts). Calculation and consolidation of bank accounts are facilitated where a TSA exists or where all accounts are centralized.”

According to minimum requirements, the government’s capacity to manage its cash balance depends on the majority of balances being accounted for and consolidated at least weekly, although certain extra-budgetary funds may not be reconciled. Despite the fact that certain countries in the region have regulatory frameworks—organic budget and financial management laws—that prevent them from managing extra-budgetary resources, they have developed mechanisms for doing so. This is true of El Salvador and Trinidad and Tobago.

According to the evaluations, only Bolivia and Costa Rica score an A rating in the subindicator, “Extent of consolidation of the government’s cash balances,” which may be comparable to the TSA indicator (Figure 2.6). This subindicator emphasizes the time taken to consolidate balances, although it would be more useful for monitoring and policy purposes if its analysis concentrated on institutional scope. In fact, in Uruguay, it was the use of this subindicator that revealed the number of accounts that remained outside of the natiional TSA, given that its analysis centered on the quantity of unconsolidated accounts and funds, rather than on the time taken for fiscal consolidation.

Figure 2.6
Figure 2.6

PI-17: Recording and Management of Cash Balances, Debt, and Guarantees

Source: Authors’ elaboration, based on data from PEFA (www.pefa.org).

PEFA PI-20: Effectiveness of the Internal Controls over Nonsalary Expenditure

The first requirement regarding meeting expenditure commitments relates to liquidity management and the credibility of the treasury. PEFA defines this indicator as follows:

An effective internal control system is effective when it satisfies the following requirements: (i) it is relevant (i.e., based on an assessment of risks and the controls required to manage the risks); (ii) it incorporates a comprehensive and cost effective set of controls (which addresses compliance with procurement rules and other expenditure processes, prevention and detection of mistakes and fraud, safeguarding of information and assets, and quality and timeliness of accounting and reporting); (iii) it is widely understood and complied with; and (iv) it is circumvented only for genuine emergency reasons. Evidence of the effectiveness of the internal control system should come from government financial controllers, regular internal and external audits, or other surveys carried out by management. One type of information could be error or rejection rates in routine financial procedures. Other indicators in this set cover controls in debt management, payroll management, and management of advances. This indicator, therefore, only covers the control of expenditure commitments and payment for goods and services, casual labor wages, and discretionary staff allowances. The effectiveness of expenditure commitment controls is singled out as a separate dimension of this indicator due to the importance of such controls to ensure that the government’s payment obligations remain within the projected cash availability limits, thereby avoiding the creation of expenditure arrears (ref. indicator PI-4).

The overall indicator is not relevant here, nor are the other two requirements, as these are monitoring indicators that relate to auditing. Analysis of this second requirement shows that the region has monitoring mechanisms for avoiding nonapproved expenditure. This is in line with the financial management reforms implemented over the last 20 years, establishing that for the line ministries to be able to approve a new item of expenditure, the latter must be accompanied by a certificate of availability of funds and, in macro terms, with the respective fiscal space. This ensures that the respective financing backs new items of expenditures.

The Dominican Republic, El Salvador, Guatemala, and Paraguay received C ratings (Figure 2.7). This is due to the fact that the control procedures they apply to expenditure commitments are only partially effective.

Figure 2.7
Figure 2.7

PI-20: Effectiveness of Internal Controls for Nonsalary Expenditure

Source: Authors’ elaboration, based on data from PEFA (www.pefa.org).

The advantage of using the second requirement of PI-20 is its capacity to prevent arrears. Although this monitoring indicator has an operational aspect, avoiding the accumulation of unpaid bills can be achieved by ex ante controls, instead of ex post cash controls, once the transactions have been finalized.

Flynn and Pessoa (2014) point out:

“Commitment controls based on expenditure ceilings or cash limits reconcile cash resources with commitments, thereby ensuring that spending units are able to enter into contracts or other obligations only if sufficient unencumbered balances are available—or are likely to be available—at the time of payment. Empirical evidence shows a strong relationship between the accumulation of arrears and the lack of proper commitment controls.”

Current Open Budget Indicators

The OBI survey is comprised of five sections. These are Section 1: Availability of budget documents; Section 2: Executive’s budget proposal; Section 3: Budget process; Section 4: Strength of the Legislature; and Section 5: Citizens’ budget and public engagement in the budget process.13 This survey aims to analyze the quantity of information available at each phase to measure the degree of budgetary transparency, participation, and scrutiny in each country.

The OBI indicators concentrate on information quality and dissemination at each stage of the budget cycle. Indicators 35 and 41 relate to extra-budgetary funds and arrears, respectively, during the budget presentation process. Indicator 86 relates to year-end extra-budgetary funds, while Indicator 104 addresses rules on discretion and management of surplus liquidity.

Table 2.2 sums up the indicators from the OBI surveys that involve treasury-related processes and include the averages from 14 countries. The OBI methodology, however, formulates questions without identifying the institutional responsibility. This means that there is a set of questions that, depending on the institutional structure and architecture, might be the responsibility of combined management. This is true of indicators 11, 12, 16, and 17 (public debt); indicator 36 (intergovernmental transfers); indicator 37 (transfers to state enterprises); indicator 42 (contingent liabilities); and indicator 45 (fiscal expenditure projections for at least one budget year).14

Table 2.2

Open Budget Indicators from 14 Latin American Countries

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Source: Authors’ elaborations; available at http://survey.internationalbudget.org/.Note: The sample of countries excludes Panama, Paraguay, and Uruguay, since the OBI has not published data on these countries. The OBI scale is from A to D.

A country-level analysis of each of the OBI’s treasury data indicators reveals that the information available on the use of extra-budgetary funds is low for the presentation of the pre-budget statement (Indicator 35), as well as in the year-end report (Indicator 86). The only countries that report this information from the outset are Argentina, Brazil, Chile, Colombia, and the Dominican Republic. This does not mean, however, that these funds do not exist. As previously mentioned, institutions in various countries have developed mechanisms for managing extra-budgetary resources; for example, by collecting local taxes and service charges which generate extra-budgetary revenues that are not transferred to the national treasury.

The information regarding expenditure arrears (Indicator 41) in the pre-budget statement is also insufficient, except for Chile and Mexico. This question is important because when this information is included in the outline budget, it may alert the government that additional financing is required to cover these arrears, thereby mitigating a potential financial risk. A low score for the rest of the countries might suggest a need to strengthen fiscal transparency. Argentina, Chile, Colombia, and El Salvador are, according to Indicator 86, the countries that record the real result of the extra-budgetary funds in their year-end reports; in most budget and financial management legislation, the use of this type of funds is forbidden (Figure 2.8).

Figure 2.8
Figure 2.8

Open Budget Indicators 35, 41, 86, and 104 for 14 Countries in Latin America

Source: Authors’ elaboration based on data from http://survey.internationalbudget.org/.

Finally, Indicator 104 refers to the validity of legal restrictions on whether the Executive can spend, at its discretion, the surpluses available during the budget execution phase. This indicator is relevant to treasury management, since the absence of this kind of regulation may create incentives that do not necessarily correspond to the macroeconomic planning at year’s inception, which includes fixed goals.

While this indicator may not have a direct relationship with cash management outcomes in the financial year, it does form part of the rules for budget management and financial planning and, as a part of these rules—as Lienert and Fainboim (2010) point out—it is vital to ensure that the goals of efficient financial management are achieved, which include optimal treasury and debt management.15

The scores for this indicator are high—considerably higher than the other three—suggesting that this information exists and is reported in 11 of the 14 sample countries. One possible explanation relates to the scope of evaluation of each indicator; in other words, Indicators 35, 41, and 86 only evaluate whether the information exists and then its quality. In contrast, Indicator 104 only addresses the validity of the legal restrictions on the Executive’s power to spend revenue surpluses at its discretion during the execution of the budget; this is simply of a binary nature.

Having identified the indicators used by international methodologies, the following section identifies a set of indicators that relate to the revenue and payment cycle. National treasuries may use these to monitor financial management and institutional capacity, in particular, with regard to TSA implementation processes.

FOTEGAL Treasury Management Indicators

In 2011, FOTEGAL launched a country-by-country survey covering institutional and cash flow management aspects. The survey has been improved upon each year in terms of its content and scope. What began in 2011 as a survey containing 52 questions with the participation of 10 countries had expanded by 2014 to one with 27 questions, answered by all 16 member countries. According to the components of the survey, progress on various fronts has been made with regard to national treasury management and institutional capacity in the region.

Implementation of the TSA is one of the main issues covered by the survey. Among the other most important areas are cash flow outlook, revenue collection and payments, arrears management and investment performance, and implementation of best practices in risk management. The 2015 survey is presented in the Annex as an example.

Implementation of the TSA

Table 2.3 reflects the percentage of entities that still manage resources outside of the TSA. If France is taken as an example of best practices—a country in which all central government payments are centralized into a single account—there is clearly room for improvement throughout the region.

Table 2.3

Management of Central Government Resources Beyond the Treasury Single Account

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Source: Authors’ elaboration; FOTEGAL Survey 2014 and presentation by Fainboim and Varea (2014).

A pending debate exists over whether the TSA should centralize local government payments into unitary systems. In federal countries, various competencies are assumed by local government, including the self-management of resources, making centralization virtually unfeasible.

In unitary governments, original laws on decentralization and administrative autonomy have provided these entities the capacity to manage the resources transferred from the central government. Following financial management law reform and the advance of IFMIS and TSA implementation, central administrations have begun to regain the power to manage these resources. For example, in seven countries (Bolivia, Brazil, Chile, Colombia, El Salvador, Guatemala, and Honduras), social security resources are now managed within the TSA.

In 2014, the results of the surveys regarding the extent of TSA management reveal the following situation: 9 countries (Brazil, Chile, Colombia, Costa Rica, El Salvador, Honduras, Paraguay, Peru, and Uruguay) include transfers to local governments (although they exclude the final execution of these resources); 9 countries (Bolivia, Brazil, Chile, Colombia, Ecuador, El Salvador, Guatemala, Peru, and Uruguay) include the execution of the judicial branch budget; 11 countries (Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Paraguay, Peru, and Uruguay) include legislature resource spending; 8 countries (Brazil, Chile, the Dominican Republic, Ecuador, El Salvador, Guatemala, Mexico, and Peru) include the expenditure of university funds.

Apart from the French example in which, since 2010, 6,948 subaccounts are managed by a TSA held at the Bank of France, the Australian model is also worth mentioning, whereby appropriation and cash management is part of the central budget management system. Furthermore, in the United States, revenue collection and payments are conducted by way of the electronic transfer account (ETA), which is managed by the Bureau of Fiscal Services, the agency responsible for making payments to individuals, businesses, and federal government agencies. The ETA is equivalent to the TSA in Latin America and follows the same objectives,16 while the payment-integration initiative of the Single Euro Payments Area in The Netherlands (also a TSA equivalent) acts in a similar vein.

The results of managing the average TSA cash balances should also be considered. In general terms, while the aim is to reduce balances to a minimum to enable risk management in case of unforeseen deviations—thus avoiding unnecessary borrowing (or overdraft) and maintaining stable liquidity levels—TSA balances increased in Latin America in some cases. This can mainly be explained by the fact that while the TSA extended its scope, there are as yet few options to invest the surpluses.

Cash flow planning and review

Cash flow forecasting has evolved in various countries, in parallel to the incorporation of techniques and information capable of projecting cash flows with greater accuracy. In 2012, 8 countries drafted annual plans and quarterly plans, whereas in 2014 this number had risen to 15 of the 16 countries. Moreover, 14 countries had prepared monthly plans on a daily basis, a recommended practice followed in advanced countries (Lienert, 2009). A best practice includes the preparation of rolling quarterly plans, updated on a monthly basis. To date, only 8 countries do so (Argentina, Bolivia, Costa Rica, the Dominican Republic, Honduras, Mexico, Nicaragua, and Panama).

The model of the cash plan that is most commonly applied in Latin American countries is based on daily and monthly updates, also recognized as a best practice by Gardner and Olden (2013), who maintain that “often the basis is a daily projection over the nearest month, weekly for the following two months and monthly for the rest of the fiscal year.” The scope of planning, incorporation of new technologies, and greater coordination efforts, particularly with regard to tax administration agencies—and even the inclusion of complex techniques such as Monte Carlo simulations and econometric models—are some of the factors that have encouraged better cash flow forecasting over the last three years.

Tax revenue collection and payment indicators

In most countries, cash flow forecasting is carried out using a Microsoft Excel spreadsheet; few countries have developed cash systems that interface with IFMIS. The FOTEGAL surveys reveal that the use of information and communications technology (ICT) has led to various improvements in tax revenue collection and of payments.

On the revenue side, there is noticeable encouragement for the use of electronic transfers for tax revenue collection in preference to payment by cash, check, or credit card. In contrast, certain countries have been unable to reduce the number of days that the tax resources are withheld by banks before transfer to the treasury. Resources are retained from one to three days by tax revenue collection agencies in 70 percent of countries. This revenue transfer takes four days or less in all except two countries.

Table 2.4 summarizes the situation of FOTEGAL member countries with regard to the three elements that determine the speed and effectiveness with which revenues are deposited at the treasury and their associated costs.

Table 2.4

Conditions for the Transfer of Tax Revenue to the Treasury

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Source: Authors’ elaboration; FOTEGAL Survey 2014 and presentation by Fainboim and Varea (2014).

With the progressive integration of ICT in electronic collection and payment processes, the trend in interbank compensation systems is to reduce the ordinary accounts held in commercial banks; however, until this situation is optimized, there are various mechanisms attributable to the financial system in terms of revenue transfer or intermediation. The three models are an explicit fee as a percentage of the revenue, days of float (nontransparent), and transaction charges.

The most common remuneration model is fee-for-service, practiced in 12 of the 16 countries and yet to be implemented in Brazil, Chile, Colombia, and Costa Rica. Four countries (Guatemala, Honduras, Panama, and Uruguay) use all three remuneration models. Brazil combines two remuneration models, given that the banks receive a percentage of the revenue and also profit from several days of float. In Colombia, the banks can retain resources for five or more days before transferring to the TSA. It is essential to note that the units responsible for tax collection also intervene in this process.

With regard to electronic payments, the quality of the information is questionable and few countries have disaggregated data regarding the payment method for each type of expenditure. A total of 13 countries (Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Peru, and Uruguay) record electronic payment rates of between 90 and 100 percent of expenditure. The operability of ICT in the payments system has substantially improved in response to demands from payment beneficiaries (demand for electronic transfers).

Financing the deficit and investing the surplus

As there is no standard model of an optimal cash balance, the treasurer is obliged to cover liquidity needs by identifying the so-called liquidity cushion, which is temporary savings that is set aside against a potential period of liquidity shortage. Nine countries (Argentina, Bolivia, Colombia, Costa Rica, Mexico, Nicaragua, Panama, Peru, and Uruguay) use various mechanisms to build up a liquidity cushion (e.g., projection of historical data calculated and observed from the cash-flow planning process; cash management models based on the available accounts; and liquidity analysis). For more details regarding the situation in each country, see Chapter 4.

Experiences of Countries Applying Performance Management Indicators

The French Treasury (Agence France Trésor), which manages the TSA in France, calculates three account management indicators, the results of which are incorporated into its reports to Parliament.17

  • Objective 1: Optimizing the return on temporary cash surpluses. This is calculated as a differential between the performance of cash deposits and the Euro Overnight Index Average (EONIA) benchmark; an objective is subsequently established for that differential.

  • Objective 2: Optimizing the end-of-day TSA balance of the Bank of France according to market conditions. This is calculated by the percentage of days in which the final end-of-day TSA balance reaches certain levels (between EUR 70 million and EUR 80 million or between EUR 290 million and EUR 310 million) and the TSA can enter the market when borrowing costs are low.

  • Objective 3: Advance notice to the Treasury of transactions posted to the TSA. This corresponds to the percentage of financial transactions of more than EUR 1 million notified before 16:00 hours on the previous day. This is a prior notification requirement for local governments, which was extended in 2007 to include national public agencies.

Published results indicate that in all cases, the objectives were achieved—in some cases, beyond the maximum level, as in the case of Objectives 2 and 3. Using the indicators has led to three concrete outcomes: improving the financial returns on temporary investments, based on a defined benchmark (Table 2.5);18 optimizing the TSA balances (based on prior notification of high payments); and establishing a strategy that minimizes costs in the financial market.

Table 2.5

Results of Applying Objective 1 Indicators: Invest Temporary State Cash Surpluses for the Best Return

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Source: French Treasury. Available at http://www.aft.gouv.fr/rubriques/average-end-of-day-balance_189.html#.

Objective 2 relates to the optimization of the end-of-day TSA balance at the Bank of France according to market conditions. The French Treasury entered the market for loans throughout 2013 when the financial costs were at their lowest.

In the case of Objective 3 (Table 2.6), which exceeded the goal set for 2012, the Treasury was not only able to access relevant information about the quantity of large payments due, but it was also able to set aside the necessary resources to meet the payments with the required punctuality.

Table 2.6

Results of Using Objective 3 Indicators: Advance Notice from Treasury Correspondents of Transactions Posted to the Treasury’s Account

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Source: French Treasury. Available at http://www.aft.gouv.fr/rubriques/average-end-of-day-balance_189.html#.

In Latin America, the Chilean and Mexican treasuries use defined performance indicators. Chile uses nine efficiency/product indicators, which are published annually. Among the most significant are (i) average monthly TSA balance in Chilean pesos; (ii) average monthly balance in the state bank current account in U.S. dollars; (iii) annual average of the percentage of payments made by electronic means by all treasuries; (iv) annual average percentage of tax returns (OperaciĂłn Renta) completed electronically; (v) annual percentage of payments electronically received by the general treasury; (vi) average evaluation of citizen satisfaction; and (vii), (viii), and (ix) as indicators of debt recovery through judicial recovery proceedings from small, medium, and large debtors.19

Chile’s Budget Directorate (Dirección de Presupuesto de Chile (DIPRES)) publishes the full results of all its products. Two indicators are used to exemplify the results of using the indicators; one that relates to electronic payments by the national treasury and another to the average TSA balance—in local and foreign currency—which is known in Chile as the FIscal Single Account.

The electronic payment indicator is calculated by taking the numerator to be the sum of the percentages of payments made by electronic deposit transfer by each treasury, while the denominator is the total number of treasuries included in the calculus. This indicator seeks to automate processes in the treasuries and, in terms of cash management, makes the payment of salaries and payments to suppliers more efficient (Table 2.7).

Table 2.7

Performance Indicators for Electronic Media, Treasury of Chile

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Source: Budget Directorate of Chile (DirecciĂłn de Presupuesto del Ministerio de Hacienda de Chile), available at http://www.dipres.gob.cl/595/articles-112624_doc_pdf.pdf

With regard to average TSA balances, these indicators measure the averages of the daily available balances in Chilean pesos and U.S. dollars, respectively, that remain uninvested in the Fiscal Single Account (Cuenta Única Fiscal). The aim of the indicator is that once the trading desks are closed, the available balance should be as low as possible, so that the surplus can be invested in various financial instruments. As DIPRES states, “the set goal is proposed as a maximum ceiling and, therefore, the management approach is to invest the maximum resources profitably and minimize the available balance that remains uninvested when the market closes by taking into account the revenues received and payments made on a daily basis” (Table 2.8).

Table 2.8

Performance Indicators for Average Treasury Single Account Cash Balances, Treasury of Chile

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Source: Budget Directorate of Chile (DirecciĂłn de Presupuesto del Ministerio de Hacienda de Chile), available at http://www.dipres.gob.cl/595/articles-112624_doc_pdf.pdf.Note: The monthly average values corresponding to the current account balance of the State Bank (in millions of US dollars).

The Federal Treasury of Mexico (TesorerĂ­a de la FederaciĂłn de Mexico (TESOFE)), as part of its governmental management for results program, has created a matrix of indicators for results. This contains institutional process indicators, as well as two for cash management: the percentage of federal government revenue captured by the TSA; and the percentage of payments made on time.20

TESOFE also has a matrix of indicators for 16 processes, which is part of its ISO 9001:2008 Quality Certificate. The indicators are associated with each one of the Treasury departments, which include the Under-Treasury of Operations (SubtesorerĂ­a de OperaciĂłn) with nine processes; Under-Treasury of Accounting and Operational Control (SubtesorerĂ­a de Contabilidad and Control Operativo) with two processes; Funds and Securities Oversight Unit (Unidad de Vigilancia de Fondos y Valores) with one process; Directorate-General of Legal Affairs (DirecciĂłn General de Asuntos JurĂ­dicos) with three processes; and Administrative Coordination Unit (CoordinaciĂłn Administrativa) with one process.

Apart from the experience of France, where the results of applying the indicators underpin investment decisions and resource funding, the indicators are only used for monitoring and control purposes. Furthermore, in France, the information is presented to Parliament.

Essential Cash Management Indicators

PEFA indicators are essential since they provide for significant country scope and, in some cases, there have been reevaluations; that is, evolution over time can be tracked. There are PEFA indicators for 14 LAC countries from the total of 26, albeit from different years, which hamper cross-country comparison. In the absence of a more specific previous diagnostic, a PEFA treasury evaluation can be undertaken if certain dimensions of its indicators are reorganized to obtain—albeit with limitations—an estimation of a treasury’s situation. Table 2.9 synthesizes this practical approach and explains what these PEFA dimensions measure.

Table 2.9

Reorganized PEFA Indicators and Dimensions

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Source: Authors’ elaboration.

The FOTEGAL survey is more detailed and constitutes a benchmark by which to address the treasury processes that align the incentives, which encourage efficient cash management. According to the FOTEGAL survey, the indicators used by Chile, France, and Mexico are those that best approach the concept of measuring cash management performance quantitatively.

Therefore, although some of the indicators used by these countries respond to the needs identified in Section 2, they need further additions to cover the entire cash cycle. The set of indicators is neither designed to cover all of the liquidity management processes nor to include all necessary indicators; however, they at least include the basic and essential treasury performance indicators.

A set of 20 quantitative indicators was applied to FOTEGAL member countries to evaluate their financial management and, although the proposed indicators were clearly relevant, several needed adjustment to make them comparable and to ensure they reflected specific elements such as the level of development and institutional capacity of Latin American treasuries, validity of IFMIS, and the practice and custom of using indicators for decision making.

Regarding the cash management cycle, several countries use at least one type of indicator, as in the case of cash forecasting (Mexico); measuring revenues and expenditures electronically (Chile); performance of the investments of TSA balances or, in the case of deficits, resulting financial costs; and, in the event of recurrent deficit, monitoring the accumulation of arrears (France). There are areas, however, in which—beyond previously mentioned institutional considerations—it was obvious that some relevant, yet undefined, indicators should be included. In addition, it should be also included the capacity to measure the cash flows and payments made by the TSA should also be included, along with the TSA’s scrutiny in institutional terms to clearly define its effective scope21 and the revenue collection and payment efficiency in terms of days taken for collection and days taken for payment).

Based on the above, Table 2.10 defines the 10 basic indicators that are required to evaluate cash management efficiency.

Table 2.10

Cash Management Indicators

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Source: Authors’ elaboration.

Alternatively, the amount of costs engendered by arrears can be measured as a percentage of total expenditure. As this indicator implies, if the information relating to budget execution is available, the balance of the floating debt at the end of the financial year can be included.

Regular use of this set of indicators should form part of a treasury reform process, leading to modern cash management that affects “government operations, finance and balance sheets, the central bank, and commercial banks” (Pessoa and Williams, 2012). For example, decisions on the time it takes for transfers to be made to and from the treasury impact the relationship between the treasury and the central bank, as well as their relationship with commercial banks. Ultimately, a reduction in idle balances to the benefit of the treasury should be sought. Table 2.11, therefore, may be a useful tool to inform decision making.

Table 2.11

Definition of Benchmarks to Achieve by Applying Treasury Management Indicators

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Source: Authors’ elaboration.

Having a higher number of payment days than the number of days of revenue days may be an element of a policy that aims to maintain a liquidity cushion, although this can have repercussions in monetary policy and the speed in which investments are executed.

The IFMIS is a tool that would help to address various issues of the treasury, ranging from cash flow forecasts, TSA scrutiny, and TSA interoperability with payment and debt management (USAID, 2014).

Annex 1 of Flynn and Pessoa (2014) should also be taken into consideration. This is a matrix of actions to be taken in the immediate term (throughout the year), the short term (from one to three years), and the medium term in the areas of legality, budget credibility, government accountability, financial transparency and reporting, internal controls, and the financial information system. Also, in the same document, Annex 2 is worth consulting, as it provides a sample of the countries that adopted measures to reduce the accumulation of arrears.

Conclusions

FOTEGAL, with the support of international development organizations, has become a source of South-South cooperation and has built up significant expertise in the field of treasury management. The FOTEGAL annual surveys provide information for cross-country comparison and for use in PFM studies; the data, however, needs to be systematized by differentiating questions regarding indicators that relate to institutional capacity and cash management.

Three groups of indicators have been analyzed, namely, PEFA, OBI, and those from the FOTEGAL survey. PEFA indicators are useful because they have already been applied to a significant number of countries, enabling good comparisons between different practices. PEFA and OBI indicators have a similar scope, as they adopt an approach based on structural gaps, regulatory compliance, and processes (Andrews, 2013). The FOTEGAL indicators are broader in scope and updated annually. A combination of indicators from all three methodologies provides a broad view of the institutional capacity of the treasury.

This study distinguishes the indicators of institutional processes, which are qualitative in nature, from the results and efficiency indicators of cash management, which are quantitative. The former indirectly affect liquidity management, whereas the latter can have direct repercussions on cash balances.

Among the countries analyzed, there are few noticeable differences in terms of cash management, but wider gaps appear when it comes to TSA implementation and scope and the treatment of arrears. In fact, payment arrears have garnered significant attention in the recent literature. Flynn and Pessoa (2014) describe, in detail, the factors that cause treasuries to delay their obligations and explain the economic impacts that chronic accumulation of arrears can have. Apart from the six causes previously stated (reduced economic growth, positioning by rent seekers, undermined trust in fiscal policy, second-round fiscal costs, higher service provision costs, higher interest rates, and reduced or interrupted service provision), an additional cause can be added that threatens governability. Chronic and excessive accumulation of payments in arrears can lead to increased or spiraling public expenditure. If the new borrowing levels undermine the capacity to pay and there is a high risk of default, this creates the risk of ungovernability and repudiation of new contracts (Bulow and Rogoff, 1989).

Payment arrears have to be managed, but they are also the result of a previous chain of operational policies, strategies, instruments, and mechanisms that make budget execution by the treasury viable (Radev and Khemani, 2009). Budget management has effects on cash management and the two processes must not be isolated. By linking the budget to cash forecasting, the latter becomes a strategic management tool for generating credibility when it comes to executing the budget.

By taking the use of performance indicators in France, Chile, and Mexico into consideration, together with ALM; the elements suggested by Lienert (2009) for modernizing cash management; and the conditions needed to develop applicable indicators, it can be concluded that the 10 indicators in Table 2.10 are pertinent to the cash cycle. They could be extremely useful for introducing incentives to improve management. The indicators are partial and are intended to include only an essential part of the indicators.

The results of regularly applying these 10 indicators can provide the basis for making operational and institutional coordination decisions. The aim of these decisions should be to enhance the speed of budget execution. Six indicators (three relating to revenue collection and three to payments) form the basis for operational decisions that tend to increase resource availability and provide better control of cash flows. Two indicators (relating to planning and TSA scrutiny) seek to improve institutional coordination to make budget execution more efficient. The cash forecast deviation indicator allows the treasury to improve the quality of revenue and expenditure projections and to anticipate funding needs, thereby controlling financial planning risks. The TSA indicators, by way of efficient institutional coordination, can gain more information about the central government resources managed by the treasury. The remaining two indicators that pertain to managing positive and negative balances serve as a support for decision making on strategic investment or, in its absence, short-term borrowing.

The pilot application of these 10 indicators demonstrates the complexity of obtaining comparable cross-country results. This implies that all treasuries should apply the indicators in a homogeneous way, using identical criteria.

Table 2.11 provides benchmarks to enable treasuries to begin using the indicators. It also suggests actions to help improve their performance in the short term.

Annex I: Treasury Management Survey for Treasurers in Latin America, 2015 (*)

Cash Plans

  • 1. What kind of cash forecasts does the Treasury prepare? Number the pertinent options—in order of priority, where 1 is the most significant—that relate to the plan that is used most:

    • Annual cash forecasts updated monthly ( )

    • Quarterly forecasts updated monthly ( )

    • Quarterly forecasts reviewed on a daily basis ( )

    • Monthly forecasts reviewed on a daily basis ( )

    • Other(s): __________________________________________

  • 2. How frequently are the cash flows included in the forecasts prepared by the Treasury and those mentioned in the previous section reviewed and updated? Mark all corresponding options:

    • Daily ( ) for the (monthly, quarterly) forecasts

    • Weekly ( ) for the (monthly, quarterly) forecasts

    • Monthly ( ) for the (annual) forecasts

    • Other: ____________________________________________

    Indicate whether the cash flow forecast updates are undertaken on a rolling basis.

    • Reviewed on a rolling basis ( )

    • Reviewed on a nonrolling basis ( )

  • 3. Is an ex post reconciliation of the accuracy of the cash forecasts included in the plans (i.e., comparison of the forecasts contained in the plans and the real cash flows)?

    • Yes ( ). If so, how frequently? ______________________________

      For example, monthly forecast reconciliation compared to the real cash flows.

    • No ( ). If so, please explain the reasons: _________________________________________________________________________

  • 4. Indicate whether or not there have been changes that have affected cash flow forecasting in the last three years, listing the most influential changes in order of priority, where 1 is the most significant:

    • ( ) Technological innovations

    • ( ) Adoption of a small system (or module) for forecasts

    • ( ) Use of SharePoint for forecasting

    • ( ) Changes in the planning horizon

    • ( ) Frequency of the updates

    • ( ) Changes in forecasting methods

    • ( ) Others, please specify _________________________________________________________________________________

  • 5. Expenditure each month/Planned expenditure payments each month in 2014, for each month of the year.

  • 6. Expenditure each month/Expenditure budgeted each month in 2014, for each month of the year.

Liquidity Cushion and Structural Cash Surpluses

  • 7. Does the Treasury set the liquidity cushion or reserve that it maintains for short-term cash management purposes?

    • No ( )

    • Yes ( ). If so, what methodology is used to identify this reserve? Please describe in detail, taking as much space as necessary. ___________________________________________________________________________________________

  • 8. Does the Treasury identify structural surpluses? How does it quantify them? Where are these structural surpluses invested? Please indicate, in order of priority, where 1 is the most significant:

    • ( ) Central banks

    • ( ) Commercial banks

    • ( ) Development banks

    • ( ) Other intermediaries

    • ( ) Local and/or international capital markets

    • ( ) They have been used to create a stabilization fund, whose resources must be invested in _________________________________________

  • 9. Does the Treasury identify cash shortfalls (or necessities); in other words, the cash that may be needed to finance temporary or occasional needs?

    • No ( ). Please explain why not.______________________________________________________________________________

    • Yes ( ). If so, which methodology is used to identify these shortfalls? _________________________________________

  • 10. The occasional liquidity shortfalls (or needs) are financed by:

    • Treasury bills (T-Bills)( )

    • Short-term central bank loans ( ) or from the public bank with custody of the treasury single account (TSA) ( )

    • Short-term loans from commercial banks ( )

    • Other ( )

Floating Debt

  • 11. With respect to the floating debt, is there a legal definition of arrears?

    • No ( )

    • Yes ( )_______(indicate the number and article of the relevant law and quote it).

      What was the total floating debt at the end of each year, in 2013 and 2014? ________________________________________________

      What was its average life in months in December 2014? _______________

      Are reports submitted regarding its situation? ___________(indicate regularity).

      Is priority expenditure stipulated by law or in other regulations? __________

Single Treasury Account

  • 12. Has the legal framework and/or the rules that regulate the TSA changed in the last year?

    • No ( )

    • Yes ( ) __________________ (indicate the new rules and describe the changes).

  • 13. How many bank accounts holding public resources are outside the treasury control at the central bank and in the commercial banks? Please identify the entities and resources whose accounts remain outside of the TSA, drawing a distinction between ministries, devolved, decentralized, and autonomous entities (also desegregating the Judicial and Legislative branches, the universities and others), regional governments, local governments, the ownership equity of each one of the six types of agency mentioned, social security, resources from external borrowing, donations, and others (please specify).

  • 14. If TSA scrutiny has increased over the last 12 months, please indicate what additional resources and/or agencies were included in the TSA during this period. __________________________________________________________________________________________________

  • 15. Are zero-balance accounts used as part of the TSA structure? For revenue collection? For decentralized payments?

    • Yes ( )

    • No ( )

    • Comments: _________________________________________________________________________________________

Electronic Payments

  • 16. Does the Treasury use real time gross settlement (RTGS) or automated clearing house (ACH) to make its payments? If so, for which kind of payments does it use each system? If not, please explain why. __________________________________________________________________________________________________

  • 17. a) Of the total of payroll payments made by the Treasury (current expenditure), what percentage are electronic?

    • In numbers: ________________________________________

    • In value: ___________________________________________

    b) Total amount of payments made by the TSA/Total amount of central government payments in 2014. ______________________________

Revenue Collection by the Treasury

  • 18. Does the Treasury collect the independent revenues of the following subsectors?:

    • i) Ministries ( );

    • ii) Devolved entities ( );

    • iii) Decentralized, nonbusiness entities ( );

    • iv) Autonomous entities, such as universities, but excluding the Judicial and Legislative branches ( );

    • v) Legislative Branch ( );

    • vi) Judicial Branch ( );

    • vii) Electoral organs ( );

    • viii) Subnational governments ( ).

      In the cases in which these resources are not collected by the Treasury, please estimate how much of total revenue they represented in each case in 2014.

  • 19. How many days are fiscal revenues retained by banks before transfer to the Treasury (state whether these are reciprocity days or due to other motives (technological, accounting, legal)? __________________________________________________________________________________________________

  • 20. Has the number of reciprocity days been reduced (or eliminated) over the last 12 months? If there is no reciprocal arrangement, has the time taken to transfer funds to the TSA from the moment of collection been reduced? By how many days? How? __________________________________________________________________________________________________

  • 21. Amount of revenue transfered to the Treasury each month by electronic means/Total amount of revenue each month transferred to the Treasury _________________________________________________

Financial Investments

  • 22. Does the Treasury have a policy, rule, or strategy regarding short-term investments?

    • No ( )_________

    • Yes ( )_________(please indicate whether it is published, in which case attach to the questionnaire, or unpublished). _________________________

  • 23. If the Treasury does make short-term investments, which of the following instruments does it use? Please indicate the order of priority, where 1 is the most significant:

    • ( ) Commercial bank certificates of deposit, or other commercial bank securities

    • ( ) Commercial papers, or other nonbanking private sector titles

    • ( ) Remunerated deposits at the central bank

    • ( ) Commercial banks fixed term deposits

    • ( ) Certificates of deposit or fixed term deposits at the public commercial bank that hold custody of the TSA

    • ( ) Central bank securities

    • ( ) Reverse repurchase agreements (repos)

  • 24. Have the Treasury’s options for short-term investments improved over the last 12 months? Please explain. explain.____________________________________________________________________________________

  • 25. Does the treasury receive remuneration for its deposits at the central bank that holds the TSA? If the TSA is held at a commercial public bank, does it receive remuneration for its deposits there?

    • Yes ( ). If so, how is this remuneration calculated? _________________

    • No ( ). If so, explain the motives: _____________________________________________________________________________

  • 26. If the TSA is held at a commercial public bank, is this bank subject to any restrictions regarding its assets and liabilities operation?

    • Yes ( ) Please describe the restrictions.

    • No ( )

Short-Term Financial Needs

Financial Instruments

  • 27. Occasional liquidity shortages (or needs) are financed by: Please indicate in order of priority (where 1 is the most significant, followed by 2, and so on).

    • ( ) Treasury securities

    • ( ) Short-term central bank loans

    • ( ) Short-term commercial bank loans: public ( ) private ( )

    • ( ) Short-term public commercial bank loans from the bank holding the TSA

    • ( ) Others

Special Purpose Fund and Sovereign Fund Management

  • 28. Has the Treasury taken control of managing or administering special funds (royalty, maintenance, guarantee, education, security, all other specific purpose funds (SPFs), etc.)?

    • Yes ( ). Please specify and report the approximate percentage of total resources managed by the Treasury. _________________________________________________________________________________

    • No ( ). Please specify and report the approximate percentage of total resources managed by the Treasury. __________________________________________________________________________________________________

  • 29. Are these special funds (mentioned in the previous question) managed or administered integrally, or in combination with other government resources, or individually (separately) without a cash unit? Please specify. __________________________________________________________________________________________________

    Can resources from these funds be loaned to the Treasury?

    • Yes ( ). Explain whether all resources can be loaned, or whether some funds are prevented from being included in lending resources (and identify the latter). __________________________________________________________________________________________________

    • No ( ).

    If these funds are not jointly managed or cannot be loaned to the government, how has the Treasury addressed the challenge of administering them? __________________________________________________________________________________________________

  • 30. If your country has set up sovereign funds (which include stabilization and savings funds), please specify and mention who administers each one of them and in which securities they invest (or are obliged to invest) each one of their resources.

    • ( ) Yes ____________________________________________________________________________________________

    • ( )No ___________________________________________

Annex II: Results of Applying the Performance Indicators: The Case of Uruguay

The table below shows the indicators for the pilot case applied to Uruguay. These yielded the following results:

Performance Indicators for the Treasury of Uruguay, 2014

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Source: Treasury of Uruguay, 2015.

The pilot application of the set of indicators for improving cash management in Uruguay has yielded the following observations:

Cash forecasting shows strength, in general, although there is one particular aspect that could be improved.

  • The deviation of real payments from planned expenditure is below 1 percent, which suggests there is sufficient technical capacity for drafting expenditure and revenue projections and ensuring financial planning quality and stability in the variables (which should be reliable to enable projections). There is also consistency between approved budget loans and financial planning.

  • The observed link to budget execution is an area that needs further strengthening; the Treasury controls cash flows, in accordance with its financial planning, on a weekly, monthly, and quarterly basis. At year-end, it also drafts a report giving an account of the financial year. The process remains incomplete, however, with regard to linking the monthly cash plan execution results with the planned monthly budget execution.

There is room for improvement in terms of increasing TSA revenue coverage:

  • Of all government collecting accounts, only a third channel resources through the TSA (100 percent of the indicator refers to revenue managed directly by the Treasury). One far-reaching alternative may be to convert collecting accounts into zero-balance accounts; in other words, transfer all resources to the TSA at the close of each day.

  • Increase the use of electronic media to increase TSA revenue capture. There is margin to progressively reduce manual payments (e.g., payments by check or standing payment orders) and to encourage the culture of Internet banking.

The Treasury of Uruguay’s revenues are comprised of taxes (tax office, customs excise, casinos, and import tariffs), services (lotteries), interests (financial placements), contributions from public sector enterprises, and the utilities of the central bank. Less than 4 percent of the items paid by the central bank are not processed electronically.

On the expenditure side, it appears that 99.7 percent of Treasury payments are carried out electronically. Beneficiaries, however, receive the transfer on the same day that the Treasury emits the order to pay.

When income indicators and expenditures are compared, electronic revenue collection is inferior to the level of electronic payments. This implies that there is a negative margin with little room to improve liquidity.

The times needed to execute revenue transfers and payments coincide. In other words, the number of days required for revenue transfer is equal to the number of days required for payments.

As with the coverage of all institutions in the TSA, the indicator appears to yield 100 percent. This interpretation depends on the number of central government institutions that are considered as included in the TSA.

Uruguay does not have a history of accumulating payment arrears. The results of this particular indicator, therefore, are not applicable.

Independently of the size and liquidity of the financial market in Uruguay, there is room for the Treasury to improve in: i) the unification of the TSA and ii) the development of a strategy to invest the surpluses of the TSA with safety, liquidity, and profitability, seeking returns with a defined margin over the central bank’s prime rate. This would open the path toward a more active cash management.

References

1

Throughout the text, the term TSA refers exclusively to the treasury account, in contrast to other nomenclatures used in certain countries, in which the treasury account might be defined as the Fiscal Single Account, which differs from the Taxation Single Account and the Teasury Single Account found in Uruguay, among other examples.

2

The Forum has also received financial support from the governments of Japan and Switzerland, which has enabled the invitation to seminars to be extended to international experts.

3

Since the Forum was established, Brazil has participated by delivering presentations at various seminars and joining the treasury management courses. Up until now, however, despite being invited, neither Brazil nor Venezuela has formerly joined FOTEGAL.

4

Training courses and relevant documentation are available at http://www.fotegal.org/eventos/.

6

Details are available at http://forotgn.mecon.gov.ar/sistematgn/sisteso.pdf; Law No. 28693, National Treasury System of Peru (Sistema de TesorerĂ­a Nacional del PerĂş), available at https://www.mef.gob.pe/index.php?option=com_docman&Itemid=101706&lang=es; or the system in Costa Rica, available at http://www.hacienda.go.cr/contenido/12467-tesoreria-nacional-de-la-republica.

7

There is also the ISO-9001 quality certification rating for public sector revenue collection and payment processes. One example is provided by the Treasury of El Salvador (TesorerĂ­a de El Salvador) (for revenues), and another by the Treasury of the Federation of Mexico (TesorerĂ­a de la FederaciĂłn de MĂ©xico), available at http://eleconomista.com.mx/finanzas-publicas/2012/02/28/tesofe-logra-certificacion-calidad-iso-9001.

8

Available at www.pefa.org and www.obi.org.

10

This uses a simple rating scale of 0 to 4 for all questions; the total rating is converted into a percentage (0 to 100) as an indication of the country’s performance in terms of the TSA and expenditure payment systems.

11

The most recent PEFAs were used from Bolivia (2009), Brazil (2009), Colombia (2009), Costa Rica (2010), the Dominican Republic (2012), El Salvador (2013), Guatemala (2013), Honduras (2013), Panama (2013), Paraguay (2011), and Peru (2009). The FOTEGAL countries not included in the sample have either not been evaluated or have not authorized the dissemination of their evaluation results.

12

Due to the limitations of the sample and owing to the heterogeneity of the data on each country and the disparities in the dates of country surveys, only the most recent evaluation is used in those countries where more than one assessment has been undertaken.

14

Additionally, the OBI uses the indicator data to make projections for the following survey period. The most recent survey dates from 2012 and the tool, available at http://survey.internationalbudget.org, includes a calculator for the following period—in this case for 2014—although it seems to present the same results, save for a few exceptions.

15

Lienert and Fainboim (2010) indicate that the other four goals of the budgetary system are to (i) achieve short-term macrofiscal stability and medium-term fiscal sustain-ability; (ii) enhance the allocation of budget resources; (iii) improve the efficiency of spending, equating to providing goods and services more efficiently; and (iv) improve the quality of budgetary information presented to Parliament and to the public.

20

Available at http://www.transparenciapresupuestaria.gob.mx/en/PTP/SED. The TESOFE cash management indicators are confidential; the only ones published are those included in the matrix indicators for results. Monitoring of the results obtained by these indicators can be viewed at http://www.sistemas.hacienda.gob.mx/ptpsed/datosPrograma.do?ciclo=2014&r=6&ip=E&p=003&msd=4.

21

The application of indicators that relate to the TSA shows that treasuries have different criteria concerning the measurement of TSA coverage of central government entities.

(*)

Includes the quantitative indicators proposed in this chapter.

Within Same Series

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Cover Public Financial Management in Latin America
Public Financial Management in Latin America
The Key to Efficiency and Transparency
Editor: Mario Pessoa and Mr. Carlos Pimenta
ISBN:
9781597822268
Publication Date:
19 Jan 2016
Publisher:
Inter-American Development Bank
DOI:
https://doi.org/10.5089/9781597822268.071
Pages:
403
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    Treasury Cycle and Performance Indicators

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    PI-4: Stock of Expenditure Payment Arrears by Country

  • View in gallery

    PI-4: Availability of Data for Monitoring the Stock of Expenditure Payment Arrears by Country

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    PI-15: Effectiveness of Tax Payment Collection

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    PI-16: Extent to Which Cash Flows are Forecast and Monitored

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    PI-17: Recording and Management of Cash Balances, Debt, and Guarantees

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    PI-20: Effectiveness of Internal Controls for Nonsalary Expenditure

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    Open Budget Indicators 35, 41, 86, and 104 for 14 Countries in Latin America

Treasury Cycle and Performance Indicators

PI-4: Stock of Expenditure Payment Arrears by Country

PI-4: Availability of Data for Monitoring the Stock of Expenditure Payment Arrears by Country

PI-15: Effectiveness of Tax Payment Collection

PI-16: Extent to Which Cash Flows are Forecast and Monitored

PI-17: Recording and Management of Cash Balances, Debt, and Guarantees

PI-20: Effectiveness of Internal Controls for Nonsalary Expenditure

Open Budget Indicators 35, 41, 86, and 104 for 14 Countries in Latin America