Abstract
This Selected Issues paper on the Republic of Congo analyzes the challenges of sustainable growth in the Republic of Congo. The paper highlights that it is paramount for the authorities to avoid repeating the experience of the 1980s, particularly in light of the projected decline in oil production over the next decade. It proposes a macroeconomic policy strategy that takes advantage of this unique opportunity to foster higher sustainable growth. The paper also provides a summary of various recent assessments of the quality of the Congo's public financial management system.
III. Strategy to Improve Public Financial Management7
A. Introduction
33. This chapter discusses a strategy to improve public financial management (PFM) in Congo. Recent assessments of the PFM system in Congo point out to weaknesses in several areas, including budget preparation and execution, transparency, long-term planning, and overall credibility. With little headway made in addressing these weaknesses, there is a need to accelerate the momentum of this reform process to improve the quality of spending, enhance the impact of public spending on growth, and reduce poverty.
34. Strengthening PFM is a prerequisite for scaling up spending to meet the MDGs by 2015. 8 A sound fiscal environment and framework are crucial in making the best use of the resource allocated to poverty reduction. In contrast, spending in the context of a nontransparent and ineffective budgeting system is less likely to have any social impact: expenditure control will be weak, public procurement biased, and goods and services not fully delivered. Ultimately, the resources will thus not be used as originally intended.
35. PFM reforms in Congo are particularly relevant in the current context of high oil prices. A significant portion of the rise in oil prices is expected to be long-lasting and oil revenue will continue to be the first source of financing of public spending on priority and economic and social goals. In this context, the current weak institutional framework limits the ability to address the nation’s development needs effectively. Moreover, the additional resources secured through debt relief under the Enhance HIPC Initiative and MDRI will need to be channeled to alleviate poverty through rigorous and transparent budgetary processes.
36. Congo’s real prospects of securing significant oil revenues to fight poverty while maintaining a sound macroeconomic framework conducive to lasting growth are strong incentives for the authorities to step up their efforts to strengthening their PFM system. The authorities recognize that weaknesses in their PFM system impedes their ability to address the needs of the population and the fight against poverty; raises serious governance and issues; and fails to attract budget support. They also are aware that a weak PFM system does not contribute to transparency in managing oil resources in the face of a greater push for accountability from both civil society and international community. The country has started confronting the PFM issues but progress has been limited so far, partly reflecting weak administrative and technical capacity as well as political economy considerations. This in turn, hinders the government’s ability to design and follow through reforms.
37. The paper is organized as follows. Section B. provides a summary of various recent assessments of the quality of the Congo PFM system. Section C. reviews the key areas of PFM where there is a need to accelerate the momentum of reform to set the process on a irreversible track so that the country benefit from better management of public resources, in particular the oil windfall. Section D. discusses the reform priorities in the context of a well sequenced program and reviews the technical and institutional challenges. Section E. concludes.
B. An Assessment of the Quality of the PFM System
38. The quality of Congo’s PFM system has been discussed in several recent reports. Below is a summary of the key findings.
The Public Expenditure and Financial Accountability (PEFA) assessment 2 confirmed the poor performance at end-2005 of Congo’s PFM system across the board in key areas of budget preparation, execution, and control. PEFA attributed a median score of 2.5–3.0 in these areas, compared with the norm of international good practice of 4.0;
The World Bank Country Policy and Institutional Assessment (CPIA) further confirms Congo’s weak PFM system, especially as regards comprehensiveness and credibility of the budget, effectiveness in managing revenues and expenditures, and timeliness, and accuracy in fiscal reporting offers (Figure III.1.). The CPIAS offers a similar rating than PEFA, with scoring ranging from 2-3.
The forthcoming joint World Bank/IMF report on progress toward meeting the completion point triggers under the Enhanced HIPC Initiative reiterates the weak state of the current PFM system, reviews progress so far after a year and confirms the need to accelerate reforms in key areas, including budget planning and execution, public investment management, and transparency in the management of oil resources.
Recent technical assistance reports from the IMF and the World Bank further underscore the significant challenges of reforming PFM. 9
Republic of Congo: Assesment of the Quality of the Public Financial Management System, 20061
Citation: IMF Staff Country Reports 2007, 206; 10.5089/9781451808636.002.A003
Source: World Bank, Country Policy and Institutional Assessment, 2006.1 Scale: scores are from 1 (lowest) to 6 (highest)Republic of Congo: Assesment of the Quality of the Public Financial Management System, 20061
Citation: IMF Staff Country Reports 2007, 206; 10.5089/9781451808636.002.A003
Source: World Bank, Country Policy and Institutional Assessment, 2006.1 Scale: scores are from 1 (lowest) to 6 (highest)Republic of Congo: Assesment of the Quality of the Public Financial Management System, 20061
Citation: IMF Staff Country Reports 2007, 206; 10.5089/9781451808636.002.A003
Source: World Bank, Country Policy and Institutional Assessment, 2006.1 Scale: scores are from 1 (lowest) to 6 (highest)39. The broad conclusion that can be drawn from these reviews is that Congo’s PFM is weak, overall progress is slow, and the challenges ahead significant. This is attributable to various reasons, including technical and political economy considerations. These constraints are likely to continue in the months ahead, calling for a sustained technical assistance support from the donor community and strong ownership on the side of the authorities.
C. Key Public Financial Management Issues
40. This section identifies the key PFM priorities. These priorities aim at strengthening: (i) the allocation of public resources on projects with the highest impact on growth, employment creation, and poverty reduction; (ii) the quality of public spending; (iii) the transparency of the budgetary process; and (iv) good governance in public administration.
41. A sound PFM system is one that meets the following dimensions: (i) credibility in the sense that the budget is realistic and is implemented as intended; (ii) comprehensiveness and transparency to ensure on one side that the budget and the fiscal risk oversight are comprehensive, and on the other side that fiscal and budget information is readily available to the public; (iii) policy-based budgeting to ensure that the budget is prepared consistent with overall government policy priorities;(iv) predictability and control in budget execution, implying that the budget is implemented in an orderly and predictable manner and reviewed through well-defined mechanisms enabling the exercise of control in the use of public funds; (v) transparent accounting, recording, and reporting, ensuring that adequate records and information are produced, maintained and disseminated to meet decision-making control, management, and accountability; and (vi) external scrutiny and audit calling for the independent review of public administration.
The credibility of the budget
42. The credibility of the budget in Congo is arguably at stake. Performance in terms of budget credibility is assessed through a set of indicators, including deviations of revenue and expenditure outturns from originally approved targets as well as the size and the monitoring of expenditure payment system. There is evidence of: (i) customs collections below expectations; and (ii) very tentative expenditure costing especially for government consumption and investment projects. Also, large open–ended government contingent liabilities have built up in the energy sector, particularly at the national oil refinery (CORAF). Another indication of weak credibility has been the accumulation of external and domestic payment arrears. There are some efforts to improve budget preparation, as the authorities are now basing their budgetary projections on the macroeconomic assumptions (on growth, inflation, exchange rates, and oil prices) discussed with Fund staff in the context of program reviews. Yet, this is a starting process that needs to be pursued vigorously.
Policy-based budgeting
43. The budget process in Congo reflects a lack of overall strategic planning and is not anchored to other economic processes. This important criterion for the soundness of the PFM system is assessed through two indicators: (i) participation in the annual budget process; and (ii) a multi-year perspective in fiscal planning. The present PFM system fails on both. First, there are discrepancies between the budget and the other government policy documents (such as the interim poverty reduction strategy paper (I-PRSP), and the three-year investment plans), suggesting a loose connection between the budget and other processes, and a disconnect in setting priority spending across government agencies. Second, the authorities have yet to establish a multi-year fiscal framework, expenditure policy, and budgeting. In particular, it is essential that public investment planning be discussed and presented several years in advance, and consistent with long-term infrastructure and development goals.
Predictability and control in budget execution
44. Predictability and control in budget execution are essential to the soundness of a PFM system. The main indicators include transparency in taxpayers’ obligations and liabilities; an effective tax assessment system; predictable resources for spending commitments; internal audits and mechanisms for spending controls. All these areas display weaknesses, as illustrated by (i) a discretionary application of the tax code, which encourages fraud; (ii) discretionary negotiation of customs duties; 4 (iii) inefficiencies in tracking and fighting fraud and evasion, as result of the slow introduction of a single taxpayer identification number; and (iv) the systematic recourse to spending outside the normal spending process. 5 The latter deficiency is facilitated by the lack of expenditure tracking system as well as the absence of coordination between the Budget Directorate and the Treasury, and between the Budget Directorate and the Ministry of Planning, which considerably weakens the budget process, compromises transparency, execution, and accountability, and further complicates cash management. At the same time this provides the grounds for arrears accumulation and corruption, while increasing the cost of government procurement, as suppliers request advance payments and frequently overcharge to offset payment uncertainties. Procurement procedures also need to be tightened; the two national committees that are supposed to provide oversight over public tendering are inactive.
Comprehensiveness and transparency
45. Congo’s PFM system fails with regard to comprehensiveness and transparency requirements, as gauged by indicators like budget classification, extent of unreported government operations, transparency of inter-governmental operations, public access to key fiscal information, and oversight of aggregate fiscal risk from other public entities. The failure has been facilitated by the lack of an operational functional classification of the budget. This has facilitated misallocation within line ministries (Table III.1). In addition, it is estimated that more than 50 percent of spending for goods and services in the budget are currently unallocated. Any sound functional analysis of the budget would be pointless with such a large share of unallocated spending, including within ministries. The classification of spending as transfers is also to be reviewed. Current transfers often include subsidies to the oil sector, or amounts that actually serve to finance public investments.
Republic of Congo: Evaluation of Unallocated Appropriations in the Ministries Spending on Goods, 2005
Republic of Congo: Evaluation of Unallocated Appropriations in the Ministries Spending on Goods, 2005
| Amounts in millions of CFAF | ||||
|---|---|---|---|---|
| Ministry Code | Heading | Unallocated appropriations to executive offices of ministries | Total amount of appropriations to the ministries | Percentage of appropriations managed by ministers’ executive offices |
| 33 | Communication | 280 | 400 | 70.0 |
| 35 | Planning | 393 | 792 | 49.5 |
| 39 | Energy and water | 172 | 324 | 53.0 |
| 54 | SMEs and small-scale industry | 135 | 226 | 59.7 |
| 61 | Primary and secondary education and literacy | 3,198 | 10,715 | 29.8 |
| 63 | Culture and arts with responsibility for tourism | 228 | 399 | 57.1 |
| 65 | Youth rehabilitation and sports | 228 | 392 | 58.1 |
| 71 | Health and population | 7,884 | 9,807 | 80.3 |
Republic of Congo: Evaluation of Unallocated Appropriations in the Ministries Spending on Goods, 2005
| Amounts in millions of CFAF | ||||
|---|---|---|---|---|
| Ministry Code | Heading | Unallocated appropriations to executive offices of ministries | Total amount of appropriations to the ministries | Percentage of appropriations managed by ministers’ executive offices |
| 33 | Communication | 280 | 400 | 70.0 |
| 35 | Planning | 393 | 792 | 49.5 |
| 39 | Energy and water | 172 | 324 | 53.0 |
| 54 | SMEs and small-scale industry | 135 | 226 | 59.7 |
| 61 | Primary and secondary education and literacy | 3,198 | 10,715 | 29.8 |
| 63 | Culture and arts with responsibility for tourism | 228 | 399 | 57.1 |
| 65 | Youth rehabilitation and sports | 228 | 392 | 58.1 |
| 71 | Health and population | 7,884 | 9,807 | 80.3 |
46. The authorities have started addressing some of these issues. Recent efforts have resulted in: (i) the assignment of a functional classification code to each line item of the common charges and unallocated ministry envelopes in the 2006 budget and (ii) the recording under the appropriate categories in the economic classification of a significant share of unallocated common charges initially envisaged in the draft 2007 budget. The next step will be to press ahead with these efforts, by: (a) shifting a significant share of the unallocated envelopes of the executive offices of the ministries to the directorates general; and (b) distributing the centrally managed common charges across the ministries. It is internationally accepted that each country’s budget may contain some unallocated appropriations or a fiscal planning reserve to meet contingencies. Nevertheless, the level of the planning reserve should not exceed 3 percent of the primary current budget, defined as the total budget minus the stabilization fund, payments on public debt, and domestically and externally funded capital expenditure.
Accounting, Control and Reporting Systems
47. Comprehensive and accurate reporting is the first step to establish accountability for the use of public funds. With fragmented reporting, the budget fails to provide a comprehensive view of sectoral spending. Data is weak regarding (i) capital projects (detailed information on cost, financing sources, and implementation progress remain partial, yearly reports are not always consistent from one year to the other, public investment plans comprise a lot of spending for the equipment of spending, and little information on the few undergoing large projects): also, there is no reporting on budget execution by individual ministry on a cash basis, and Treasury provides only aggregated spending data; (ii) transfers to public companies such as SNPC, SOCOTRAM and especially CORAF, with a sizable amount of unspecified outlays (common charges). Furthermore, the authorities are not submitting on a regular basis to parliament the official financial report of the government(the loi de règlement). Of equal concern is the lack of institutional oversight of public expenditure. The Inspection Generale des Finances and the Ministry of State Control are not monitoring compliance with financial regulations, as they both lack funding. The newly created Cour des Comptes, has yet to carry out audits of the various government institutions, as it is not yet operational. The flow of funds tables are not produced on a timely basis and submitted along with information on the specific expenditure. There are also delays in completing the consolidated treasury balance, a useful tool that enables running a consistency test among budget execution data.
The External Scrutiny and Audit
48. The credibility of the budget in Congo is arguably at stake when assessed against the legal and institutional setting in place. The foundations of the legal and institutional setting for Congo’s PFM are provided by the Organic Law on Budget Laws and the Government Accounting Regulations of 2000. There is no evidence that the legal framework is not adequate for ensuring a credible budget process. Notwithstanding the existence of sound budgetary rules and procedures, the budget process is distorted by the political process and governance considerations which render elusive the separation of powers between the executive and the legislative branches on budget matters, as enshrined in the 2002 Constitution. Draft budget laws are not submitted to Parliament on time and expenditure overruns are common place. This, in turn, leaves little time for Parliament to examine and vote on the budget, further eroding the legislative branch authority while causing repeated delays in voting on both the budget laws and the budget review laws. As a result, Parliament retains little control over the budget. Further, even other institutions which are stakeholders in this process, such as the National Audit Office, cannot perform their functions as they are poorly equipped, understaffed, and not appropriately tasked with external budget control.
Transparency and Management of Oil Resources
49. Congo is experiencing difficulties in managing oil revenues in a transparent fashion. A recent audit report indicates pointed out to (i) weaknesses and limitations of the government institutions involved in the awarding process; (ii) a lack of regulations to implement the existing Hydrocarbon Code, in particular the lack of procedures for the awarding of contracts under competitive conditions and the selection process in awarding contracts to local and foreign private operators; (iii) an absence of clarity regarding the role that SNPC should play as holder of mining rights in the process of negotiation of new contracts and its participation in setting up of associations with private operators; (iv) a potential for conflict of interest concerning the sector and SNPC in view of the current institutional set up; (vi) a lack of effective controls over the enforcement of appropriate evaluation, reporting and filing procedures; and (vii) deficiencies in the Code of Penal Law as it doesn’t cover conflicts of interest in the oil sector.
Donor Practices
50. Tied aid contributes to weaken the PFM in Congo, reflecting the lack of predictability of budget support, and the fragmented information provided for budgeting and projects. This becomes a particularly acute problem when donors do not allow for competitive and transparent bidding on the investment projects they finance.
D. Priority Areas for Reform
51. Key priority measures agreed upon by World Bank and IMF staff with the authorities aim at improving Congo’s PFM system. As indicated above, various assessments conducted so far with the full consultation of the authorities have been instrumental in putting together a sequenced and prioritized action plan that distinguishes between immediate measures to be implemented and additional for the medium-and-long term. This sequencing reflects the state of Congo’s capacity. The immediate measures are summarized below:
Implement a new functional classification of the budget to improve transparency and track poverty-related expenditures. The Fund is providing technical assistance, but progress has been slow so far.
Comply with the organic budget law, particularly on the delineation of responsibilities between the ministry of finance and the ministry of planning at the commitment stage of investment spending.
Eliminate the recourse to exceptional spending procedures, consistent with the organic budget law.
Increase funding for institutions that carry out ex-post control of expenditures; make provision for some reports to be made public: improve coordination between the commitment and payment functions of the Ministry of Finance to reduce arrears.
Implement a new public investment management system, with World Bank assistance, to better align investment spending to the priorities in the PRSP.
Establish a new procurement code in line with best international standards to ensure transparency and fair competition.
Strengthen customs administration and the fight against tax fraud and corruption on the revenue side.
Improve the monitoring of the expenditure chain, with technical assistance from the Fund.
52. A common theme of the measures above is to rehabilitate the budget as a key economic policy tool. This will strengthen the budget process, which will, in turn, give the domestic stakeholders and creditors altogether some measure of confidence in the government’s ability and intention to address poverty issues and use oil proceeds appropriately. In support of policy consistency between government priorities, the Congolese authorities need to put in place a strategic planning framework linking the PRSP and/or the attainment of the MDGs with a view to: (i) use the PRSP process to enhance the link between budget and poverty reduction; (ii) strengthen the linkages between planning and budgeting; and (iii) introduce a multi-year policy framework, which outlines realistic medium-term objectives and means to attain them.
53. In addition, measures to strengthen PFM are being combined with other core elements of the public sector reform process, and with strengthening fiscal governance and transparency. In this context, based on the findings of a recent audit report of the procedures for the awarding of the Marine XI oil concession, a number of measures are being considered to strengthen management of oil resources.
In the short term, these measures include:
A clarification of the role that SNPC should play in the future. In particular, should SNPC on behalf of the government remain a holder of mining rights and a de facto promoter and negotiator of these rights or act simply basically in accordance with its mandate as a production and commercial operator;
Decisions to stop direct negotiations for new blocks and awarding contracts only after a competitive bidding;
The adoption of a presidential decree establishing the regulations under which all new contracts are subject to an open international competitive bidding and the obligations of the authorities to open bids by qualified companies all new blocks under known rules; and
The setting up of a registry of qualified firms that could either operate or co-participate in petroleum exploration and production operations in Congo.
54. Looking ahead, there are also a number of structural measures that could be implemented in the upcoming months after further evaluation. These include:
Modification of the institutional framework to provide a clear separation of responsibilities and roles between the sector authorities and the national oil company SNPC. In this context, we would advise the authorities to implement the “Algerian Model,” both in terms of institutional setup and process for awarding contracts. This model has also been implemented successfully in several Latin American countries (Peru, Colombia, and Brazil) for more than a decade;
Adoption of a new Code des Hydrocarbures and required regulations to implement it;
Reform of the Code of Penal Law; and
Adoption of any other measure aimed at improving and strengthening the general framework. In particular, a regulatory framework and implementation procedures to enhance current mechanisms related to control, filing, data management, and information gathering.
Supporting the Reform Process
55. The successful implementation of the PFM reforms outlined above hinges upon support provided by the Fund and other TA providers to build up the institutional capacity. The involvement of donors as their role is expected to expand in the context of the forthcoming PRSP. Coordination on realistic technical assistance and support for greater transparency and accountability are crucial to enhance the budget process.
E. Conclusion
56. The main conclusions that can be drawn from this chapter are as follows:
Despite some advances, Congo’s PFM system remains weak. More efforts are needed to modernize it and help improve the quality of public spending to increase growth and make progress in reducing poverty.
A credible PFM system is crucial to ensure transparent management of oil revenue, and better public investment management, especially in terms of costing, project monitoring, and control of the delivery and quality of services. This would in turn underpin the growth process.
The priority areas for reforms outlined in the paper would help set in motion the dynamics of a credible budget process in Congo. Alongside more basic reforms in accounting, control and reporting (including a functional classification system for government spending), the country needs a medium-term framework for setting government priorities and expenditure allocations.
Further progress in strengthening PFM is highly dependant on political economy factors, which need to be tackled over time as part of strengthening efforts toward governances and transparency.
Donors have an important responsibility to support and facilitate the reform process. The Fund, the World Bank, and other donors should continue their support in favor of reforming the PFM system in Congo.
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Prepared by Abdelrahmi Bessaha and Yaya Moussa, with input from Jean-Pierre Nguenang.
In order to meet the MDGs by 2015, Congo will need to spend more resources in the health and education sectors. A critical spending mass is required to start impacting poverty indicators. This highlights the importance of efficient resource management, including better budget preparation and control, and a medium-term framework for setting expenditure priorities.
PEFA is a partnership between the World Bank, the European Commission, the UK’s Department for International Development, the Swiss State Secretariat for Economic Affairs, the French Ministry of Foreign Affairs, the Royal Norwegian Ministry of Foreign Affairs, the International Monetary Fund and the Strategic Partnership with Africa.
IMF: Report on Functional Budget Classification (August 2006); and World Bank: (i) PEFA Report, June 2006; (ii) Public Procurement report, June 2006; and (iii) CIFA report (June 2006).
In 2005, the customs administration collected CFAF 43 billion and granted exonerations totaling CFAF 108 billion, of which CFAF 91 billion to the private oil companies alone.
Originally intended for urgent expenditures, the procedure known as”paiements par anticipation” (PPAs) is widely used for regular transactions. While some of these PPAs are authorized by the Directorate General for Budget (DGB) and the Financial Comptroller Budget before payment is made, all too often, these transactions are settled by the Treasury makes payment without informing the DGB.
