Prepared by a team from the Fiscal Affairs Department, headed by G. Kopits and including M. Albino, M. Villafuerte, and J. Viñuela, during a visit to Lima, October 9-22, 2002. The team met with the chairmen of the Committee on Budget and General Accounts of the Republic and the Committee for Decentralization and Regionalization of the Congress, with officials of the Office of the President of the Council of Ministers, Ministry of Economy and Finance, Ministry of Transport, BCRP, BN, CGR, CND, CPN, COFIDE, CONSUCODE, SUNAT, INEI, SBS, ESSALUD, ONP, PETROPERU, MIVIVIENDA, SEDAPAL, OSINERG, FONCODES, and FONAFE, and with representatives of the private sector (including the Peruvian Press Council, CONFIEP, and Macroconsult).
For purposes of this report, the term “fiscal” embraces government finances in their entirety.
Constitution of 1993.
Such as Legislative Decrees, Emergency Decrees and Supreme Decrees on issues that fall within the purview of the Presidency of the Council of Ministers.
According to the Constitutional Reform Law of March 6, 2002, regional government applies to regions and departments, and local government to the provinces, districts and population centers. Regions are created on the basis of existing departments. Nevertheless, their geographic scope can be redefined, provided they meet the terms and conditions established by the Territorial Demarcation and Organizations Law (Law 27795 of July 23, 2002).
The amendment to the LPTF was approved by Congress on April 8, 2003.
The LPSP for 2002 excludes the National Health Service (ESSALUD), the National Superintendencies of Tax Administration (SUNAT), Customs, and the Water and Sanitation Service (SUNASS), Supervisory Agencies for Investment in Telecommunications, Energy and Public Transportation Infrastructure, and legally incorporated funds such as the Consolidated Reserve Fund (FCR), the Fiscal Stabilization Fund (FEF) and other entities of minor importance.
In effect from January 2003.
Law 27783 of July 17, 2002.
The Executive Branch Organic Law has yet to be approved by Congress. The Regional Government Organic Law was promulgated as Law 27867 of November 8, 2002 and amended by Law 27902 of December 20, 2002..
Articles 10-13 and 62-71 of the Municipalities Organic Law (Law 23853 of May 11, 1984).
In addition to the Municipalities Organic Law, the Legislative Decree regulating municipal taxation (DL 776 of December 30, 1993). A new Municipalities Law is currently under consideration in Congress and is expected to be approved by 2003
Municipal budgets are governed by the State Budgetary Management Law (LGPE) and by directives of the National Public Budget Directorate (DNPP), although the LPSP frequently imposes limits on the growth of certain kinds of expenditure. Municipal control and use of funds is governed by the rules of the National Controls System (see below) and accounts must be kept in accordance with the general rules of public accounting.
This government authorization for external borrowing, required under of the new Basic Decentralization Law, conflicts with the constitutional provision on municipal borrowing, which contains no limitation.
Although the legislation governing special tax treatment for certain areas of the country has to be approved by a two-thirds vote in Congress, this restriction does not appear to have been a binding constraint.
These do not include extrabudgetary activities in the form of quasi-fiscal activities and tax expenditure, which are referred to in other parts of this report.
Its activities are governed by Article 84 of the Constitution and its own charter of December 1992. It is subject to ex post control by the Comptroller General of the Republic and to supervision by the Superintendency of Banking and Insurance (SBS). It demonstrates fulfillment of its functions through publication of an annual report (including audited financial statements) and reports on the performance of the monetary program.
The Board is composed of seven directors (the President of the Board is appointed by the executive and ratified by Congress, three directors are appointed by Congress and the other three are appointed by the executive branch with a term in office that coincides with that of the President of the Republic).
The BCRP may operate on the secondary market to purchase securities issued by the treasury for monetary policy purposes, subject to limits on the annual increase in its holdings of such securities.
The only quasi-fiscal transaction on its balance sheet derives from the 1994 recapitalization of the BCRP, through unremunerated treasury bonds which offset losses accumulated to that date (its current holdings of those bonds amount to less than US$30 million). These bonds are being retired through the transfer of 25 percent of the BCRP’s earnings to the Treasury, as required by law. In some measures of the overall balance of the public sector, the operating profits of the BCRP are consolidated with the rest of the public sector.
In addition, there is a public fund, MIVIVIENDA, that channels mortgage lending through financial institutions supervised by the SBS; it offers discounts of up to 20 percent for borrowers with a good payment record.
It raises funds through the issuance of domestic securities and external lines of credit to the government, and channels these funds to institutions supervised by the SBS for medium- and long-term financing to the export sector and to small businesses, at interest rates that exceed the cost of its funds. It also manages funds for public entities in the form of trusts and asset management contracts [comisiones de confianza].
Its five-member Board of Directors is chaired by the Vice Minister of Finance and includes the Director General for Public Budget and three other representatives of the executive branch.
The commission for collecting taxes is 0.55 percent, which would yield approximately US$30 million in 2002. It charges a fixed annualized rate of 14 percent on overdrafts.
The balance of such loans amounted to approximately US$1.1 billion in September 2002.
The legal framework for privatizations and concessions is contained in a number of statutes: Legislative Decree 757 of November 13, 1991, the Framework Law for Increasing Private Investment; Legislative Decree 674 of December 27, 1991, on Promotion of Private Investment in State Enterprises; Legislative Decrees 25575, 25681 and 25685, all of 1992, authorizing the state to provide safeguards and guarantees to protect acquisitions and investments, without limit, offering foreign investors special facilities for paying taxes and suspending payment of the debts of state enterprises included in the privatization process until the process was concluded; and Legislative Decree 839 of August 20, 1996, on the Promotion of Private Investment in Public Infrastructure Projects and Public Services. By means of Supreme Decree 027 of April 25, 2002, several entities, including COPRI, were merged into PROINVERSION.
Using a practice that became widespread in the last decade, Congress delegated to the executive branch the authority to issue legislative decrees in certain areas, including over public commercial entities. In many cases, these practices were used to the point where the separation of powers and responsibilities between the two branches of government was obscured.
Law 27170 of August 31, 1999 on FONAFE, amended by Laws 27317 and 27247. Municipal enterprises and municipally owned firms and production centers and services are not covered by FONAFE.
Excluding BN, BA, and COFIDE, which are public financial institutions, FONAFE covers 32 enterprises in which the state has a majority interest, 30 enterprises where the state has a minority interest, and 27 enterprises in liquidation. FONAFE also manages the following entities: ELECTROPERU, which belongs to FONAHPU and FCR, and ESSALUD, with its two affiliates, SILSA and ESVICSAC.
Directive 003-2002/FONAFE, approved by the Board of Directors.
Framework Law 27332 of July 27, 2000, on Regulatory Agencies for Private Investment in Public Utilities.
Supreme Decree 124 of November 29, 2001, establishing rules to ensure transparency in setting of regulated prices, whereby the information used by the regulatory agencies must be available to enterprises and users. Law 27838 of September 12, 2002, on Transparency and Simplification of Rate Setting Procedures.
IMF, Financial System Stability Assessment, SM/01/75, February 2001
Its legal basis is contained in the Constitution (Article 87) and the General Law on the Financial System and the Insurance System and the Statutes of the Superintendency of Banking and Insurance (Law 26702 of June 1996).
The BCRP’s lender-of-last-resort function is clearly defined and limited in its statutes. There is also a Deposit Insurance Fund that is financed by premiums on deposits and that has access to lines of credit from the Treasury, approved by Emergency Decree.
The legal framework governing fiscal management includes: the Constitution (Articles 74-82 on the tax and budget regime); Law 27209 of December 2, 1999, on Government Budget Management; annual laws on the public sector budget, financial equilibrium and public sector borrowing; Law 27245 of December 23, 1999, on Fiscal Prudence and Transparency; Law 24680 of June 3, 1987, creating the System of National Accounts; Law 27312 of June 28, 2002, on Management of the Republic’s General Account; Decree Law 19350 of April 4, 1972, establishing the procedure for making payments through bank sub-accounts of the Treasury account, amended by Decree Law 19463 of July 11, 1972, Decree Law 20517 of January 21, 1974, giving indefinite duration to procedures established in the two previous decree-laws; Decree Law 25907 of November 27, 1992, authorizing public entities to deposit funds in any entity of the national financial system, with the exception of funds from the Treasury; Decree Law 26162, regulating the National Controls System; Law 27066, expanding the powers of the Comptroller General; Legislative Decree 850 creating the Single National Registry of Audit Firms. In addition, the directives of the DGPP for the Programming and Formulation of Institutional Budgets for the Public Sector, for the Programming and Formulation and Approval of Institutional Budgets for Local Governments, for the Approval, Execution and Control of the Public Sector Budgetary Process, for the Execution and Control of the Institutional Budgets of Local Governments, Closing and Reconciliation of the Public Sector Budget, Programming of the Budgets of the Regulatory and Supervisory Agencies, Resource Administrators, Funds, Municipal Enterprises and Other Service Enterprises, for the Budgetary Process of Regulatory and Supervisory Entities, Resource Administrators, Funds, Municipal Enterprises and Other Service Enterprises, Classifiers for the Fiscal Year and Master Classifiers of Revenue and Financing and Glossary of Terms for the Budgetary Management System. Rules governing the cash management system: Supreme Decrees 310-1989, amending Decree-Laws 19350 and 19463 (referred to above), 347-1990 and 195-2001 and Directives of the General Directorate of the Public Treasury 077-1998 (close of operations for the preceding fiscal year), 051-2001 (procedures for the administration of directly collected revenue), 063-2001 (procedures for opening bank accounts for direct-and delegated-execution operations), 066-2001 (cash flow directives for 2002) and 079-2002 (amending the preceding directives). All these statutes can be found at http://www.mef.gob.pe.
The DNPP has found it necessary to prepare and publish a glossary of terms in order to standardize the meaning of important concepts not defined, or defined inadequately in the legislation.
The government tax system is relatively simple and consists of the personal income tax, corporate income tax, general sales tax, excises tax, payroll taxes, and customs tariffs.
Consolidated Text of the Tax Code, Supreme Decree 135-99-EF.
SUNAT has published Standards for Providing Service to Taxpayers or the Public (Notice 016-2001).
There are 98 special regimes for the income tax and 175 for the general sales tax. Four amnesty laws have been approved in the last two years.
Law 27815 of August 2002
The legal basis includes the LPTF and its regulations (Supreme Decree 039-2000-EF), Emergency Decree 035-2001-PCM, and the LTAIP (Law 27806 of July 2002). There are also specific provisions such as those referred to in footnote 31 governing public entities that fall under FONAFE.
The law requires all entities of the public administration to publish their budgets on a quarterly basis, with details on investment projects underway, information on staffing levels and on contracting and procurement procedures, and to send this information to the MEF for posting on its website. The law also requires the MEF to publish the fiscal balance for the consolidated public sector within 90 calendar days after the end of the fiscal year, together with the balances for the two preceding fiscal years; quarterly information on revenue and expenditure of the Central Government and Decentralized Agencies covered by the budget law; drafts of the Borrowing, Financial Equilibrium and Budget Law and their rationale, within the first two working days of September; quarterly detailed information on the balance and profile of the external and domestic public debt owed or guaranteed by the public sector, and by creditor, amount, terms, and interest paid and payable; a timetable of quarterly disbursements and amortizations, by source of financing; quarterly information on public investment projects; the balance of the FEF within 30 calendar days after the end of the fiscal year; results of the budgetary evaluation at the end of the fiscal year. The LTAIP also requires FONAFE to publish the consolidated budget for entities under its control; quarterly balance sheets and the savings, investment and financing account; and audited financial statements within 120 calendar days after the end of the fiscal year. CONSUCODE must publish quarterly statements of procurement and contracting by public entities, in detail and by budgetary item.
It covers institutions and agencies of the central government, regional governments (under control of the central administration) and other decentralized agencies, as well as constitutionally autonomous bodies. It excludes local governments and their enterprises, the BCRP and the SBS.
In June 2001, the MEF published a report on public liabilities, including contingencies, that serves as reference for updates. The most important obligations relate to the public pension system: the website of the ONP carries an updated actuarial calculation for the general pension scheme under Decree Law 19990, but no recent or consolidated calculations are available on obligations under the special regimes of Decree Law 20530 or the military and police pension funds. To cover this gap, Supreme Decree No. 106-2002-EF requires public entities to calculate the present value of pension liabilities. That decree, however, does not require entities to publish the method used for the calculation.
The MEF information is not consolidated for the public sector, as required by the Public Sector Borrowing Law, nor does it include short-term domestic debt. Moreover, it excludes the obligations of local and regional governments to BN, as well as certain public securities issued in the course of operations to support the financial system, and the outstanding obligations to contributors who have transferred to the private pension system. The BCRP makes such adjustments and publishes an estimate (using a methodology on which no details are provided) of outstanding obligations as well as the central government’s short-term debts (overdrafts) to BN. It does not, however, include local government liabilities to private financial institutions.
In terms of budget documentation, the 2003 budget includes aggregated reference information on the budgets of local governments and other entities (regulatory and supervisory agencies, MIVIVIENDA, and municipal enterprises and entities).
In accordance with the Constitution (Article 78) and the LPTF (Article 11), budget documentation includes a statement of objectives, the draft public budget law, draft laws on borrowing and financial balance, the MMM and detailed revenue and expenditure annexes.
An initial fiscal sustainability exercise was conducted this year in the MEF and submitted to Congress in support of the PPSP.
Article 55 of the Budget Management Law. The first medium-term National Strategic Plan was prepared for 2002-06. The National Plan merely compiles the PESMs, but does not set sectoral priorities.
Articles 12 and 13 of the LPTF.
Article 78 of the Constitution.
An evaluation of compliance with the LPTF during 2000 and 2001 is provided in “Peru’s Fiscal Challenges and Vulnerabilities” Peru: Restoring Fiscal Discipline for Poverty Reduction (Washington: World Bank and Inter-American Development Bank, October 2002)
The model includes five blocs (supply, demand, external, fiscal and prices) and provides estimates for a three-year horizon, using 67 equations and quarterly information for the period 1993-2001.
Article 11 of the LPTF.
The norms for public sector accounting are part of the System of National Accounts (SNA) established by Article 145 of the Constitution, and regulated by Law 24680 of 2000. The SNA is under the responsibility of the National Accounting Office, and the Accounting Standards Council, which is the advisory agency for the SNA. That Council includes the Peruvian Federation of Accountants, the College of Public Accountants of Lima, and the faculties of accounting sciences of major universities.
Resolution 10 of 1997 from the Accounting Standards Council and Vice Ministerial Resolution 029 of 1998 from the MEF. Public enterprises are governed by international accounting standards for the private sector (IFAC).
A cancellation does not represent the same type of operation in the two systems.
The SIAF-SP does not record the payment phase when expenditure is financed by an external credit.
A review of the expenditure classification and its relationship to the chart of accounts is currently underway. Efforts are also being made to improve the budget module so that budget formulation and amendments can be recorded in real time within the SIAF-SP. The improved version of the SIAF-SP will be implemented in 1,826 municipalities, before it is adopted at the national level.
The National Control System was established in Article 82 of the Constitution, and amended by Law 27785 of 2002.
CGR Resolution 072 of 1998 and Resolutions 123 and 126 of 2000.
Previously, this subordination was only functional.
Supreme Decree 012-PCM of 2001 and its regulations.
Selection processes include bidding, public competition, direct award, and minor award. Exemptions from bidding and competitive procedures may be allowed for contracts for public services subject to single pricing, for emergency contracts, and for contracts in which goods or services allow no substitutes.
Supreme Decree 031-PCM of 2002 contains the general policy guidelines for the Electronic Government Procurement and Contracting System (SEAC). Although public entities are being incorporated into the SEAC only gradually, as their infrastructure and technological conditions allow, it is expected that entities will begin to publish information on the selection processes in the SEAC, to be administered by CONSUCODE.
Legislative Decree 276 and regulations thereunder.
Not counting special careers for the diplomatic service, the defense sector and internal security, teachers, health professionals and university staff. In July 2001 an analysis of the personnel system was conducted by the Multisectoral Commission to Study the Situation of Personnel in the Central Public Administration.
Such as the judiciary, the Legislature, the CGR, superintendencies like SUNAT, and entities such as CONSUCODE.
The system of non-personal service contracts is also used by the private sector.
With a view to correcting these distortions, a draft law on the civil service is being prepared by the PCM: it calls for reorganizing public employees into an integrated civil service regime.
Article 41 of the LGP and the annual budget laws. Actually, reports are submitted to the Committee on Budget and General Accounts of the Congress.
Local governments and their decentralized public agencies must also submit reports on financial and physical execution of their budgets to the MEF, the Congress and the CGR, but on a semi-annual basis.
Article 81 of the Constitution.
Law 27312 of 2000.
By law, entities must submit information for the General Account to the National Accounting Office by March 31 of the following year. The National Accounting Office prepares the General Account and submits it by July 31 of each year to the CGR, which then conducts and reports on its audit to the MEF. After the account is presented (together with the auditor’s report) to the Congressional Committee on the General Account of the Republic on November 15, that committee has 90 days to examine it and issue an opinion, before the Congress makes a determination. If Congress does not issue a determination during this time, the opinion of the review committee is sent to the executive branch, which must promulgate the General Account by Legislative Decree within the next 15 days.
Departmental Resolution 01-2000 of the DNPP and Ministerial Resolution 084-2001 of the MEF.
The legal basis for the CGR is found in Article 82 of the Constitution and the recently approved Organic Law on the National Control System and the Office of the Comptroller General (Law 27785 of July 2002). While the latter requires the CGR to prepare its budget and submit it to Congress for approval, in practice it is part of the public sector budget that the MEF prepares and submits to Congress. The CGR is responsible for public sector entities, private enterprises or those with government shareholding interest, and private entities, exclusively with respect to any state funds or assets that they may receive or manage.
The CGR exercises ex ante control over borrowings, additions to project contracts and military procurement. The recently approved legislation established a linkage (gradual, as permitted by budgetary resources) making the heads of internal audit (including those of the armed forces and the national police) functionally and administratively dependent on the CGR, a move that will have the effect of diluting internal and external control responsibilities.
Some 350 external audits have been recorded to date in 2002 (out of a total of 2,600 public sector entities), of which about 100 were conducted directly by the CGR.
Nevertheless, the MEF held a seminar this year with private sector experts to discuss its forecasting models.
The MEF is in the process of conducting ex post review of assumptions in the MMM, given the model-based macroeconomic forecasts.
INEI operates under the Law on the Organization and Functions of the National Statistics Institute, Decree Law No. 604.
Article 84 of the Political Constitution of Peru and Articles 73 and 74 of the BCRP Charter.
The great majority of businesspeople view stability in the legal system as the most important measure for fostering employment in Peru; see the results of the Apoyo’s opinion poll and Market Survey, El Comercio, October 18, 2002.
In practice, the proposed change amounts to replacing the legal definitions of the government sector now found in budget management legislation and LPTF with the definition used for statistical purposes by the BCRP, without affecting the current economic and financial independence of these entities.
This principle must, of course, also apply to any enterprise or financial institution or in the private sector. Moreover, the identification of quasi-fiscal operations extends to those that have no net budgetary impact as they are internally financed through cross-subsidies (ELECTROPERU, SEDAPAL, MIVIVIENDA).
These criteria might include, for example, inter-regional equity and tax capacity, weighted with relevant quantitative indicators for determining intergovernmental transfers.
In particular, there is a need to identify the extensive quasi-fiscal operations conducted by municipal water and sanitation enterprises (in some cases without any pricing regulation), which produce deficits that require discretionary transfers from the central government.
This database would have the same scope as the SIAF-SP. The legal framework will be based on drafts of the Executive Branch Organization Law and the Administrative Career Law.
While it is relatively easy to estimate the cost of some government-type operations that are undertaken by commercial entities (for example, the financial cost of bank rehabilitation), it may be more difficult to measure the subsidy element contained in apparently commercial operations (for example, when BN makes loans to local governments). As indicated earlier, such operations at times include cross-subsidies that have no net impact on the public deficit but that are distortionary and affect the size of the public sector.
As a minimum, the budget documentation should include original and revised estimates for major aggregates for the two fiscal years preceding the current one, and a forecast of the most important aggregates for the subsequent two years.
Information contained in the MMM should of course be transparent in terms of methodology, parameters and other assumptions about underlying economic policy measures. Transparency in the accounting base and institutional coverage, as recommended, are essential for applying macro-fiscal rules in general.
Although the LPTF require fiscal sustainability calculations, the only official presentation of such calculations to date was contained in a recent statement by the Vice Minister of Finance before the Congressional Committee on Budget and Public Accounts, (September 18, 2002).
It is important to distinguish between guarantees that are certain to give rise to a government obligation, which represent actual liabilities, and those that might but will not necessarily result in a government obligation, to be considered contingent liabilities.
These medium- and long-term forecasts should be published with information on the methodology used and on the underlying demographic and macroeconomic assumptions, including the discount rate used in present value calculations.