Existing legal framework

10. The existing Constitution and the PFA 2004, as well as other PFM laws, are mostly silent on issues related to macroeconomic and fiscal strategy and macroeconomic forecasting. The latest version of the draft Constitution, however, defines broad “guiding principles” regarding public finance (Art. 240) which, in relation to macroeconomic and fiscal policy, includes provisions on transparency and accountability, sustainable public borrowing to ensure inter-generational equity, and the prudent and responsible use of public resources. In addition, the latest draft of the PBB includes a few provisions relating to macro-fiscal policy, though these are not consolidated in a single section of the draft (see Annex IV for further details).⁶

11. Fiscal policy issues are also addressed to a limited extent in various reports and official statements by the government. In particular, the MoF’s “Green Paper” published each July/August sets out the government’s main macroeconomic and fiscal policy objectives and targets, together with a medium-term expenditure framework (MTEF) that includes projections of spending by the main economic categories and sectors for a three-year period. The 2014 Green Paper⁷, for example, sets targets for annual GDP growth of 7 percent over the period 2015–2017, maintenance of single digit inflation, and a reduction of domestic borrowing to less than 2 percent of GDP by 2017.

Key elements of the new legal framework

12. Many countries have enacted (or are in the process of preparing) a comprehensive legal framework for macroeconomic and fiscal policy. In the African region, these countries include Namibia, Kenya, Liberia, Mauritius, Sierra Leone, South Africa, Swaziland, Tanzania, and Uganda. Such frameworks typically include provisions in the following main areas⁸:

Principles of prudent and transparent fiscal management

• A borrowing policy which ensures that public debt is sustainable;

• A fiscal policy that achieves and maintains an appropriate fiscal balance;

• Policies to ensure the minimization and/or management of fiscal risks⁹ arising from factors such as unexpected changes in the macroeconomic outlook, external economic shocks (e.g., fluctuations in international commodity prices), potential calls on government guarantees, and other contingent liabilities (e.g., public-private partnerships (PPP));

• A policy for government wages that is sustainable and ensures the hiring and retention of competent staff;

• Policies that ensure a reasonable degree of predictability about the level and stability of tax rates;

• A national budget and budgetary process that promotes transparency, accountability, and effective management of the public sector;

• Policies that facilitate the achievement of value for money in the use of public resources, especially with regard to capital investment projects;

• Policies that promote the prudent management of natural resources and revenues arising from their extraction;¹⁰ and

• An appropriate balance between the powers of the executive and legislative branches in regard to decision-making on fiscal policy, information sharing and the management of the budget; and

• A provision that the Minister is responsible for ensuring that the principles of prudent fiscal management are taken into account in reporting to the legislature on all matters relating to the PFM laws.

Fiscal objectives and targets

• In accordance with the principles of prudent fiscal management described above, the government should set out medium-term fiscal objectives and targets for the next three years or more. Such provisions might take the form, for example, of a procedural rule¹¹ that allows the government to set numerical targets (sometimes called “fiscal rules”) on macro-fiscal indicators such as the level of debt, borrowing and overall public spending in an annual fiscal strategy statement;

• Once the fiscal targets have been set—for example, at the beginning of the term of a new government—performance in achieving them should be monitored regularly, e.g., in the annual fiscal strategy statement or in the budget documents, or both;

• The law should define the format and content of the fiscal strategy statement which should be submitted to the legislature for scrutiny and endorsement of the assumptions and objectives; and

• The law should define procedures and timelines for translating the objectives and policies outlined in the fiscal strategy statement into the expenditure projections contained in the Medium-Term Budget Paper (MTBP)/MTEF and subsequently into the annual budget estimates (see Section II B below).

Deviations from fiscal objectives and targets

• In many countries, the law allows the government to deviate from its fiscal objectives and targets on a temporary basis in exceptional circumstances (e.g., where there is a major commodity price shock or natural disaster);

• Such laws typically require the Minister to submit a report to the legislature that explains the reasons for such a deviation, the period the deviation is expected to last, and a plan to correct the deviation to be approved by the legislature.

Macroeconomic and fiscal forecasts

• Modern public finance laws usually require the government to prepare and make public medium-term projections of GDP, inflation, the rate of employment and unemployment, the exchange rate, interest rates, and other macroeconomic indicators; together with projections of revenues, expenditures, the fiscal deficit, public debt, and other fiscal indicators; and

• In addition, the government is often required to explain the methodologies and assumptions used in preparing these projections, taking account of domestic and international economic conditions, including the commodity markets.

13. It would be prudent to include a comprehensive macroeconomic and fiscal policy framework in the law in order to reduce fiscal risk and safeguard against any fiscal slippage in the medium- or long-term.¹² Such provisions would also improve public access to information on fiscal policy, as well as strengthening donors’ confidence and increasing the country’s creditworthiness.

14. Recommendation 2.1. The government should consider the establishment of a permanent framework of principles, objectives, and rules relating to macroeconomic and fiscal policy in the new legal framework, drawing on the issues outlined above, together with provisions for monitoring and reporting on fiscal performance.

Existing legal framework

16. The coverage of the PFM cycle in the PFA 2004 is incomplete and out of step with current planning and budgeting practices in Zambia. The constitutional amendment adopted in 2009 included two major elements aimed at strengthening the planning and annual budget process. The first provision is the early submission of the Estimates of Revenue and Expenditure to the NA in each financial year, no later than ninety days before the commencement of the next financial year, and approval of the Estimates by the end of December. The second provision requires the enactment of a PBB, as noted in Section I above.

17. The MoF has already prepared a draft of the PBB, which is based on a policy paper¹³ issued by the government in May 2014. The policy sets out the principles, institutional structures, and responsibilities and processes for the formulation, implementation, monitoring, and evaluation of NDPs, medium-term strategic plans, and annual budgets at all levels of government. The PBB provides an opportunity to fill the gaps and provide a comprehensive and well-structured legal underpinning for effective integration of the development planning and budget processes, and promotion of a credible budget process. Further, the Bill is intended to codify some good practices in budgeting, adopted in the last decade. These practices include: (i) a highly consultative approach to medium-term and annual planning and budget preparation; and (ii) an evolving performance-orientation to budget preparation.

18. However, the latest draft of the PBB reviewed by the mission requires further strengthening to clarify its intention and improve its coverage and comprehensiveness. In particular, the draft law is silent on principles of prudent macroeconomic and fiscal management, including natural resources and fiscal risks, and focuses on the institutional framework for national development planning and budget. In addition, the coverage of the PBB is too narrowly focused on budgetary central government with inadequate attention to general government and financial oversight of the wider public sector. Furthermore, the PBB does not lay down firm rules on the use of the contingency fund, supplementary estimates, and other in-year adjustments. Several major provisions lack clarity and the budget calendar is not clearly specified. These major shortcomings, including gaps and weaknesses are detailed in Annex IV.

Key elements of the new legal framework

Linking the development planning process and the budget process

19. The PFM Law should require that the government’s fiscal strategy statement and the five-year NDP are mutually consistent and provide for principles and procedural arrangements that require the preparation and implementation of the NDP to be constrained within the government’s fiscal strategy. The law should also define the procedural and institutional arrangements to ensure that endorsed objectives and priorities influence budgetary decision-making during the annual budget process. The planning framework should also define rules and institutional responsibilities that permit decisions on policy and expenditure prioritization, plus budgetary resource allocations to be undertaken with a high degree of predictability and efficiency.

20. Recommendation 2.2. Specify in the legal framework, institutional and procedural arrangements that would ensure that the government’s fiscal strategy and the five-year NDP are mutually consistent, and allow decisions on policy and expenditure prioritization and budgetary resource allocations to be undertaken within a high degree of predictability and efficiency during the development planning process.

A more binding MTBP and MTEF

21. The development of an MTEF was initiated in the early 2000s but has remained incomplete. MTEF estimates—submitted by sector ministries during the annual budget process—cover both government and donor-financed expenditure for the budget year and subsequent two years. These estimates are accompanied by detailed information about the objectives, outputs, and activities for each head. However, the MTEF ceilings are revised at least two times during the budget process to reflect policy, operational, and macroeconomic changes, and published in the Green Paper¹⁴ alongside the annual budget estimates. As a result, medium-term MTEF ceilings tend to not provide a reliable estimate of future spending allocations, and thus have not yet proven to be a solid anchor on future years’ expenditure.

22. The PFM law should specify rules and procedures, governing the requirement to commit to, report against, and be held accountable for medium-term expenditure targets and outputs. The budget process, in particular procedural arrangements, should require prioritizing, presenting, and managing expenditure in the resource constrained multi-year perspective; and present medium-term expenditure at specific times as deemed appropriate. The law should make provisions for the submission of reliable multi-year expenditures estimates, and an obligation to approve numerical expenditure limits beyond the annual budget thus moving towards reliable and binding spending plans, especially for public investments, over the medium term. Furthermore, the framework should spell out the standing requirements to enhance accountability for the MTBP performance with the executive being held accountable for any unjustified deviation from the multi-year plans.

23. Recommendation 2.3. Include provisions in the law for submission of reliable medium-term expenditure estimates, that could be approved by Parliament (not appropriated), and for monitoring the performance of the MTEF and reporting on any deviations from the expenditure targets.

Prioritization and management of public investments

24. The PFM legal framework should provide clear and comprehensive principles, procedures, and institutional responsibilities that allow rigorous appraisal and selection of development projects, sustained funding of well-designed and appraised development projects, and effective monitoring and feedback. This will ensure smooth implementation of projects that will promote value for money in public investments.

25. Recommendation 2.4. Provide clear and comprehensive principles, procedures, and institutional responsibilities that allow efficient and effective management of public investments.

Budget calendar

26. The PFM legal framework should present and articulate all key budgetary decision-making processes and dates in a coherent manner. For example, there is currently no legal requirement for parliament to discuss the medium-term fiscal and budget framework before the budget is tabled to the NA in October. The start date of the budget process needs to be brought forward to April to provide for the strategic phase of the annual budget process. This phase involves: (i) submission of the medium-term fiscal outlook to the Cabinet in April for approval and onward submission to NA; and (ii) preparation and submission of the medium- term expenditure framework by line ministries to MoF in May/June.

27. Recommendation 2.5. Define the key budgetary decision-making processes, the roles and responsibilities of each actor, required budget information and documentation, and timelines that would constitute the annual budget calendar.

Effective engagement of the legislature in budget preparation

28. The PFM law should establish the institutions and procedures required for effective parliamentary scrutiny of the budget. The PBB provides an early involvement of parliament in the formulation of the medium-term macro-fiscal policy objectives and expenditure projections under section 40(1). It could also provide for establishment of: (i) a Budget Committee, and (ii) a Parliamentary Budget Office (PBO)—to enhance the capacity of the NA in scrutinizing the budget proposed by the executive. Most countries within the region—like Kenya, Tanzania, and Uganda—have opted for enshrining the parliamentary budget institution within the overarching PFM legal framework.

29. Recommendation 2.6. Establish the institutions and procedures required for effective parliamentary scrutiny of the budget.

Unit of budget appropriation

30. The PFM law should define the unit of appropriation. This will require the authorities to resolve the nature of appropriation in light of the on-going budget reform recently introduced to migrate to output based budgeting (OBB). The current appropriation covers institutions, administrative boundaries (provinces), and missions abroad. Meanwhile, the on-going reform—moving from activity based budgeting (ABB) to output budgeting—is still in its infancy—providing limited experience to guide on the unit of appropriation. Countries like Ethiopia, Mauritius, and South Africa, in the region have opted for “programs” and not “outputs” as the unit of appropriation. This would require a transitional period to provide for reform toward an output or program-based, and use the lessons learnt to inform the decision on the unit for appropriation.

31. Recommendation 2.7. Define the unit of appropriation and provide for a transitional period for moving toward an output or program-based appropriation to allow full adoption of the reform.

In-year variations, supplementary and excess expenditures, and carry-overs

32. The PBB (Section 46), and draft Constitution (Article 244) lay down principles for making in-year changes to the annual budget. They are silent, however, on the replenishment procedures for the Contingency Fund, as well as on the rules and procedures governing the variations and supplementary expenditures above the appropriations. The current legal framework does not have explicit provisions on carryover. The PFM law should provide for the following:

• Criteria for accessing the Contingency Fund—to help define and categorize eligible expenditure pressures that could be: (i) unavoidable—when the need for additional spending is compelling and urgent; (ii) unforeseeable—when the need for additional spending stems from unexpected events that were not foreseeable when the budget was approved; and (iii) cannot be absorbed within existing appropriation—when all the potential variations set out above have been exhausted;

• Criteria, limits, and procedural guidelines for authorizing carryover unspent appropriation from one financial year into the next; and

• Discontinuation of the existing “excess expenditure” provisions and the requirement that any spending beyond the approved level of appropriations should be regularized as supplementary expenditure.

33. Recommendation 2.8. The new legal framework should:

• Specify the rules and procedures governing in-year variations of expenditure;

• Specify criteria and procedural arrangements for submitting a supplementary budget to parliament during the year;

• Define limits and guidelines to carryover unspent appropriations from one financial year into the next year and ensure they are appropriated; and

• Discontinue the excess expenditure appropriation and ensure that any spending beyond appropriation should be regularized as supplementary expenditure.

Existing legal framework and key elements of the new legal framework

Cash management and banking arrangements

35. The existing legal and regulatory framework generally conforms to the fundamental principles for establishing an effective treasury function. The Constitution and the PFA 2004 (Section 13 (1) and (2))¹⁵ provide broad principles for: establishing a Consolidated Fund and treasury account; assigning of treasury and cash management responsibility to the treasury; prescribing banking arrangements; collecting, depositing, and banking government revenues; assigning clear responsibilities to accounting officers for budget execution; requiring commitment control as part of budget execution procedures; and ensuring that all receipts and payments are effectively and efficiently tracked.

36. However, the PFA is silent on cash management institutional arrangements and its coordination with fiscal, monetary, and debt management policy framework. In particular, it does not define specific roles and responsibilities of the MoF, the BoZ, and other key stakeholders in cash management, nor provide for key institutions that include, the establishment of a Cash Management Committee (CMC) and Cash Management Unit (CMU), though the government has recently established a CMU.

37. The legal framework provides for establishing minimum banking arrangements but does not explicitly define principles for setting up and managing a TSA system. The government is in the process of establishing a TSA at the BoZ, which in principle will receive all government revenues including non-budget support donor funds and some earmarked non-tax revenues and facilitate all government payments. In addition, the legal framework does not sufficiently define or clarify the institutional scope of the Consolidated Fund or “general revenues”. The new legislation should provide a clear operational definition of the Consolidated Fund and general revenues, together with laying down the principles of a TSA system.

38. Recommendation 2.9. The new legal framework should:

• Clarify the scope of the Consolidated Fund and general revenues;

• Clarify the coverage, structures, and processes for strengthened cash management, including the requirements for establishing a CMC and CMU;

• Provide principles for effective monitoring and control of retained non-tax revenues to mitigate the risk of abuse;

• Establish the concept of the TSA and specify its coverage and the responsibilities of the MoF and BoZ for managing the TSA; and

• Provide the ST or Accountant General with access to information on all government bank account balances and flows, within and outside the TSA from commercial banks.

Asset and liability management

39. Currently, there are a number of laws¹⁶ that govern public debt management, but they are relatively outdated and incoherent in terms of new practices, and application is inconsistent. There are no provisions for specific borrowing limits in the PFA and other laws, but a range of practices on the determination and approval of terms and conditions of borrowing, are stipulated in various laws. The major shortcomings are summarized below:

• On the one hand, Section 14(1) of the Loans and Guarantees Authorization Act gives powers to the Minister of Finance to borrow, lend, and determine terms and conditions. On the other hand, Section 151(1) of the Financial Regulations (FR) allows ministries, provinces, and spending agencies (MPSA) to incur a loan on behalf of the government with the approval of the Minister of Finance and the Attorney-General. Consequently, public entities may borrow money without the approval of the treasury or the Minister of Finance.

• The law does not currently provide for any limits on the amount of loans and guarantees that are approved by the NA. As a consequence, there is limited involvement of the NA in the approval of government borrowing.

• The existing legal framework does not spell out appropriate arrangements for loan repayments, conversion, and consolidation. It does not stipulate clear restrictions and guidance on the repayment of debt prior to the redemption date or the terms and conditions under which a loan could be converted, or two or more loans could be consolidated.

• The law does not provide for the conducting of a medium-term debt management strategy (MTDS)¹⁷ as an anchor for effective debt management, as well as periodic assessment of both performance of debt management and debt sustainability.

40. The existing law does not provide principles for better management of assets, liabilities, or receivables relating to on-lending. For example, while management arrangements of PPPs are enshrined in the PPP Act of 2009, the recognition and reporting practices of the accounting liabilities that arise are not supported by legislation. In addition, the existing law does not provide for staff pensions as a liability in its accounting records and does not report on them as such in the annual financial statements. It is important that the law provides for the establishment and maintenance of asset registers and the reporting of all financial and non-financial assets and liabilities in the balance sheet. Considering that reforms in the area of asset management might take a long time, the law should allow flexibility for gradual implementation. The government should build up over time comprehensive data on public assets and liabilities to enable better management of its balance sheet.

41. Recommendation 2.10. The new legal framework should:

• Incorporate fundamental principles for managing public debt, including a requirement for the Minister to prepare a MTDS, an annual borrowing plan, and to undertake a DSA;

• Establish thresholds for approval of various types or categories of borrowing and guarantees by the MoF and the NA;

• Incorporate principles, terms and conditions for the repayment, conversion, and consolidation of loans;

• Clarify the roles and responsibilities of the MoF and the BoZ in debt management, and the establishment of a Public Debt Management Committee; and

• Lay down the principles and requirements for the reporting of government assets and liabilities.

Budget execution, and internal control and audit

42. The Constitution establishes broad principles for the control of commitments, requiring that a commitment be created only against a budget appropriation, and the PFA and FR contain additional provisions. Section 3(a) of the PFA also requires Accounting Officers to establish systems of financial management and internal control for their MPSAs. The internal audit function in the government is established and governed by the PFA (Section 10(1) and 11(1)), and includes provisions for enterprise risk management¹⁸ as part of internal control processes across all MPSAs and statutory corporations. In addition, Article 115(e) of the Constitution allows for a warrant to be issued relating to expenditure of capital projects continuing from the previous financial year¹⁹.

43. Notwithstanding such provisions, there are major gaps and weaknesses that need to be addressed. Such gaps include:

• Limited independence and powers of the Controller of Internal Audit;

• Lack of a framework for identifying, recording, managing, and reporting of fiscal risks across government; and

• Inadequate provisions for the multiyear commitment for capital projects that span beyond the three-year MTEF.

44. Recommendation 2.11. the new legal framework should:

• Provide clear principles for managing and monitoring commitments, including multiyear commitments;

• Prescribe requirements for establishing a risk management and monitoring framework across government entities;

• Provide the treasury with the necessary powers to enforce sanctions on MPSAs that do not comply with audit recommendations, including by the imposition of spending cuts and the suspension of the powers of MPSAs to manage their own budgets; and

• Require internal audit methods and procedures to comply with international standards.

Existing legal framework

Accounting standards and CoA

46. Accounting standards prescribed in the PFA²⁰ do not conform with either current practice or international accounting standards. While the Act prescribes the use of “generally recognized accounting practices” as the accounting standard, in practice the treasury is in the process of adopting the IPSAS cash basis of accounting by 2020²¹. The law needs to be updated to underpin this reform, while giving the authorities the flexibility to adapt the IPSAS to their own needs.

47. The authorities are inclined towards a flexible requirement on accounting standards in the law. The mission discussed with the authorities the possibility that IPSAS might be prescribed as the legal accounting standard for the government, with a caveat that the treasury could introduce such a requirement over a period of years through an appropriate transitional provision in the law. The treasury, however, had reservations on the inclusion of IPSAS in the law as they believe it would be difficult to change specific requirements to cater for the continued evolution of public sector accounting standards. The concern of the authorities seems well founded given the fact that the two main international accounting standard setting bodies (International Accounting Standards Board (IASB) and International Public Sector Accounting Standards Board (IPSASB)²²) continue to regularly update the standards. The inclusion of “internationally accepted accounting standards as adopted by Zambia” in the PFA, would provide the flexibility to move gradually to accrual standards and to continue to use different accounting standards—for example cash accounting—for ministries and departments on the one hand, and statutory corporations²³ on the other hand. An amendment of the current law to include the “prescription and enforcement” of standards would clearly establish the treasury as the standard setting body for government accounting.

48. The PFA authorizes the treasury to enforce a uniform CoA²⁴ which is currently used only by central government. The treasury has chosen to use the classification system prescribed in the IMF GFSM 2001 as the basis for a uniform budget and accounting classification system. This basis of classification provides the flexibility to migrate from cash to accrual basis of accounting. It also provides internationally recognized definitions for each element of classification. However, local governments and statutory corporations are maintaining their accounts on an accrual basis, and their classifications are not entirely in conformity with the uniform budget and accounting classification used by the treasury. Compatibility between the central government’s CoA and that of the local governments, is essential to facilitate the consolidation of the general government’s financial reports.

49. Recommendation 2.12. The new legal framework should:

• Provide for “internationally accepted accounting standards as adopted by Zambia” as the basis for accounting;

• Augment the current provisions for the enforcement of accounting standards to include the responsibility for the prescription of the standards; and

• Include provisions requiring local governments to ensure compatibility with the central government’s CoA.

Annual financial reports

50. The government is committed to improving the timeliness of the submission of annual financial reports. The draft amended Constitution proposes²⁵ to reduce the period of submission by three months and provides for the submission of the audit report to the NA within nine months of the end of the financial year. This reform will generate timely and reliable data on budget performance for the previous fiscal year, which is required to inform budgetary decisions during the annual budget process. However, enforcement of the timelines will be a challenge given that there are significant delays in the submission of accounts by controlling officers. The full implementation of the Integrated Financial Management Information System (IFMIS) will improve the ability of controlling officers to adhere to prescribed timelines for submission of accounts. Additionally, adherence to timelines should be enforced by the inclusion of sanctions in the PFA to penalize defaulters (see Section II F).

51. The content of, and processes for, the preparation of annual financial reports are set out in a number of articles in the Constitution²⁶ and the PFA²⁷. The reports presented to the NA are comprehensive²⁸ but the legislation allocates responsibility for preparing reports to a wide range of officials, and the procedures are not clearly specified.

52. Recommendation 2.13. The revised legal framework should:

• Elaborate the contents of financial reports and prescribe the timelines for their preparation, submission, consolidation, audit, and publication for different levels of government.

• Prescribe the principles for the consolidation of the budget outturns of local governments, statutory bodies, and SOEs in the general government’s Annual Financial Report.

In-year financial reports

53. There are no provisions in the law for producing in-year management reports. Periodic financial information and statements necessary for the efficient management of budget execution, are not being compiled and disseminated regularly²⁹. These include reports on delayed remittance of government revenues, outstanding commitments, and age-wise analysis of debtors, creditors, and unreconciled bank accounts. Many of these statements can be printed through IFMIS. Additionally, MPSAs using the IFMIS system have access to an extensive range of monthly and cumulative budget execution data which can be reviewed using customized reports, as required. The electronic interface within the IFMIS would need to be underpinned by suitable provisions to legalize electronic authentication of transmitted data.

54. The law does not prescribe the roles and responsibilities of the Controlling Officer and the treasury in the submission and consolidation of data on monthly budget outturns and financial reports. Section 3(2)(b) of the PFA makes the ST responsible for submitting a report on the quarterly review of the performance of the budget to the Minister, who is responsible for presenting half yearly budget performance reports to the NA. However, the responsibilities of the Controlling Officer are not stated. Neither does the PFA contain provisions regarding the content and timelines for the process of preparing and disseminating consolidated reports of budgetary outturns and financial performance.

55. Recommendation 2.14. The new legal framework should:

• Prescribe the contents, timeline, mode of publication, and use of monthly quarterly and half-yearly budget performance reports; and

• Include sanctions to penalize Controlling Officers who fail to observe the provisions in the PFA for periodic in-year budget performance reporting and monitoring.

External audit

56. The Constitution (Article 121 and 122) and the Public Audit Act (PAA) provide the AG with some degree of independence. Limited independence is assured as a result of: (i) the AG’s appointment by the President; (ii) his assured tenure untill the age of 60 years³⁰; (iii) the extensive scope of audit; (iv) the AG’s unrestricted access to accounting records; and (v) his ability to report to the NA through the President. However, the AG’s independence continues to be restricted due to dependence on the government for financing the OAG through the budget, and, dependence on the Public Service Commission for the recruitment of OAG staff.

57. The proposed draft Constitution (Article 291 and 292) enhances the independence of the AG and the OAG. The draft (i) gives the AG a clear mandate to audit all levels of government and other institutions financed from public funds; (ii) provides for the decentralization of the OAG to provinces and districts, to facilitate the implementation of the AG’s mandate to audit all levels of the government; (iii) directs the prescription of finances for the OAG; (iv) clarifies procedures for staff appointments and human resources management in the OAG; and (v) empowers the AG to recommend prosecution of officials as and when required in the exercise of his mandate³¹. This enhanced independence accorded to the AG (and the OAG) is in conformity with good international practice.

58. The draft Constitution, however, does not provide sufficient clarification on the financing of the OAG or the management of its human resources. The practice in some of the countries in the region, in this regard, is shown in Table 2. It will be seen from the table above that funds for the OAG are either charged to the Consolidated Fund or appropriated by parliament on the recommendation of one of its internal committees. It is prudent that in order to enhance fiscal discipline, the preferred option should allow the OAG to determine its own budget in consultation with the MoF and submit the estimate for approval by the NA.

Table 2.

Funding and Staffing of Offices of the Auditor General in Selected Countries

Table 2.

Funding and Staffing of Offices of the Auditor General in Selected Countries

	South Africa	Kenya	Tanzania	Uganda
Funds for the OAG	Appropriated as recommended by oversight mechanism of parliament	Approved by National Audit Commission and appropriated by parliament	Appropriated by parliament and paid into an Audit Revenue Fund	Approved by parliament and a direct charge on the Consolidated Fund
Appointment of OAG staff and human resources management	By Auditor General	By National Audit Commission/Auditor General	By Controller & Auditor General	By Auditor General in consultation with Public Service Commission

View Table

Table 2.

Funding and Staffing of Offices of the Auditor General in Selected Countries

	South Africa	Kenya	Tanzania	Uganda
Funds for the OAG	Appropriated as recommended by oversight mechanism of parliament	Approved by National Audit Commission and appropriated by parliament	Appropriated by parliament and paid into an Audit Revenue Fund	Approved by parliament and a direct charge on the Consolidated Fund
Appointment of OAG staff and human resources management	By Auditor General	By National Audit Commission/Auditor General	By Controller & Auditor General	By Auditor General in consultation with Public Service Commission

59. The provisions in the draft Constitution (Article 275) regarding the institution of a State Audit Commission (SAC) also needs further clarification. The draft proposes that the SAC be mandated to oversee the operations of the OAG and make recommendations to the President on the appointment of the AG. The composition of the SAC and the responsibilities and procedures related to its oversight are not elaborated. The mission was not able to get further details on the background for the proposal to set up the SAC, but it appears that one of the responsibilities of the SAC would be to prescribe the financing and staffing of the OAG. In this respect, the SAG will be similar to the “oversight mechanism” of the NA of South Africa³². Given the augmentation of the independence of the AG proposed in the draft Constitution and the existing oversight of the OAG by the PAC, there may be no need to establish the SAC.

60. Recommendation 2.15. The revised legal framework should:

• Supplement the provisions in the draft Constitution with additional provisions that ensure independence in the areas of financing the operations of the OAG and its human resource management;

• Reconsider the provision for establishment of SAC in light of the independent OAG; and

• Specify mechanisms to ensure independence in financing and staffing the OAG.

Classification and overarching issues

62. The current classification of institutions is based on their legal form, rather than their source of finance³³. The PFA 2004 is silent on the classification of government-controlled institutions, but in practice they are broadly classified into GAIs and SOEs. Apart from some minor exceptions, a statutory body established by a specific act of parliament is classified as a GAI, while a company incorporated under the Companies Act or an entity created under some other general law (e.g., a society) is classified as an SOE. However, different oversight arrangements are necessary for entities mainly funded by the government budget and enterprises mainly financed by sales in the market. In the former case, it would be appropriate for the government to exercise tight control over the preparation and execution of the budget by the entity concerned, as well as its borrowing; while in the latter case, oversight should focus on the monitoring of financial targets (e.g., targets of a return on equity and a leverage ratio), together with targets of dividends, both of which are agreed with the government. Under the current classification scheme, it follows that the government may find it difficult to apply appropriate oversight procedures.

63. The current legal framework is unclear about the responsibilities of key players in the financial management of local governments, GAIs, and SOEs. Such key players include the councils of local governments, the boards of GAIs and SOEs, the MoF, the MoLG, and other line ministries. As mentioned in Section II F, the division of responsibilities between these players is not mentioned in the law, and in practice there is no clear understanding of who is responsible for e.g., the financial management of individual institutions or the fiscal sustainability and transparency of these sub-national sectors.

64. Recommendation 2.16. The new legal framework should: reclassify existing GAIs and SOEs based on clear criteria on the sources of finance and the extent of government control, in line with GFSM 2014 methodology, and include in a Schedule to the law, a list of all GAIs and SOEs, to be updated regularly³⁴.

65. Recommendation 2.17. The new legal framework should specify the responsibilities of the local government councils and GAIs’ and SOEs’ boards for the internal control and financial management of each institution, those of the MoF for the fiscal oversight, and those of the line ministry for the attainment of the sector policy and plan through these institutions.

Local governments

66. In Zambia, there are 103 local governments, including 4 cities, 15 municipalities, and 84 districts. Currently, local governments provide a limited range of services, their fiscal impact is small (equivalent to less than 2 percent of central government expenditure) and their level of indebtedness is generally minimal. However, in December 2014, the President’s Office issued a circular which requires devolution of a broad range of functions, including primary health care and primary education, to local governments starting in January 2015, though no budgetary resources have yet been transferred.

67. The process of determining the local governments’ share of the government revenue is not set out clearly in the current legal framework. Until now, local governments have received two types of grants from the central government—a grant equivalent to the amount of property tax on government buildings and a flat-rate grant. However, to support the planned devolution of functions, the LGA was amended in 2014 to establish a Local Government Equalization Fund (LGEF) to which not less than 5 percent of total income tax is appropriated each year by the State budget. The LGA requires that the LGEF be distributed to each local government using “a formula based on the population…, adjusted by poverty levels”. In practice, however, the LGEF is not fully operational and the distribution formula is yet to be determined. The current legal framework is not clear about the methodology and procedures for determining the distribution formula, although clarity and transparency in these arrangements are critical for the financial planning of local governments.

68. The planned devolution of spending authority to local governments requires the MoF to develop a stronger fiscal oversight function. In practice, the financial management of local governments is overseen solely by the MoLG, and the MoF has no unit responsible for managing local government finance issues. However, the fiscal decentralization strategy requires the MoF to take over key responsibilities for overseeing the financial management of local governments. In addition, the draft new Constitution (Article 200(2)) envisages that the MoF be responsible for determining the distribution formula of the LGEF.

69. The oversight responsibilities of the MoLG are also not fully supported by the legal framework. The budget of each local government is currently prepared in accordance with the MoLG’s circular—issued concurrently with the MoF’s budget call circular—and submitted to the MoLG’s district officers for approval 60 days before the beginning of the financial year. When the NA makes changes in the national budget, the MoLG’s district officers also instruct local governments to modify their budgets accordingly. Since 2013, the local governments have been required to submit to the MoLG, five-year strategic plans and three-year budgets. However, the LGA is largely silent on the budget process of local governments and does not give adequate legal backing for current practices.

70. In relation to borrowing, the LGA permits local governments to borrow from domestic banks without the approval of the MoLG or MoF. The MoLG approves borrowing only for financing capital expenditure. In practice, in the rare cases where such borrowing takes place, local governments voluntarily seek the MoLG’s approval because otherwise financial institutions would be unwilling to lend. The current legal framework does not, however, provide legal underpinning of these current practices.

71. Recommendation 2.18. The new legal framework should:

• Specify the responsibilities of the MoF for managing the LGEF, and the process and formulas for determining the distribution of grants to local governments;

• Require budgets and borrowing of local governments to be approved by the MoF and MoLG; and

• Codify the requirements and procedures for local governments to prepare multi-year budgets and strategic plans.

GAIs

72. There are more than 100 GAIs which are to be included in the general government sector. The 2013 annual financial statements of the government lists up 108 GAIs, but the list is not comprehensive and there may be other institutions which should be classified as GAIs and subject to the provisions of the law³⁵.

73. The current legal framework is silent on the MoF’s power to oversee GAIs, except for representation of the ministry on the boards of these entities. However, as discussed above, the board is responsible only for the proper financial management of each entity and so is not an optimal mechanism for the MoF to exercise fiscal oversight. In practice, the degree of fiscal oversight exercised by the MoF varies across GAIs. The National Road Fund Agency, for example, is under the direct supervision of the MoF, its budgets are prepared and approved as part of the national budget, and the execution of its budget is closely monitored by the MoF. In contrast, some GAIs are overseen solely by the responsible line ministry and the MoF seldom receives or scrutinizes their budgets or financial reports. In relation to borrowing, many GAIs are allowed to borrow under their own laws. Although in practice only a few GAIs (e.g., the Food Reserve Agency) borrow from sources other than the government, any borrowing from a financial institution requires only the approval of the line minister, unless the GAIs request a guarantee issued by the MoF.

74. The current legal framework does not specify a process for appraising the fiscal impact of establishing a new GAI. In practice, when a new GAI is being established, the MoF is not always involved in the appraisal of the financial implications.

75. Recommendation 2.19. In relation to GAIs, the new legal framework should include a comprehensive list of GAIs in the Schedule of the law and establish a common oversight framework with the following requirements:

• The budgets of all GAIs should be submitted to the MoF for approval by a specific deadline;

• Borrowing of all GAIs should be subject to the prior approval of the MoF; and

• The financial implications of a proposal to establish a new GAI should be assessed according to standard procedures in which the MoF is required to provide an opinion.

SOEs

76. There are around 40 SOEs and the MoF owns their shares on behalf of the government. The 2013 annual financial statements of the government list up 42 SOEs. However, several SOEs receive grants or transfers from the State budget for their recapitalization and capital projects³⁶ and might need to be reclassified as GAIs (see Section II F). Section 3 of the Ministry of Finance (Incorporation) Act, Chap. 349 authorizes the MoF to own shares in SOEs.

77. The division of responsibilities for SOEs’ financial management between the SOEs’ boards, the MoF, the parent line ministry, and the Industrial Development Corporation (IDC) is yet to be clarified in the legal framework. The IDC was created in 2014 as a company under the Companies Act and is under the supervision of the Ministry of Commerce. Although it is not yet fully operational, it is intended that the IDC will hold all of the government’s shares in SOEs and manage a fund (called the “Sovereign Wealth Fund”) into which 70 percent of the dividends paid by SOEs will be deposited. Similarly to the case of GAIs, the current legal framework is silent on the roles of key players in the oversight of SOEs. The transfer of shares in SOEs from the MoF to the IDC, in the near future, is likely to make the division of responsibilities more unclear. In practice, the MoF as well as the “parent” line ministry oversees the financial management of SOEs mainly through representation (as a member or observer) on the boards which typically approve the budgets, financial targets, capital projects, and borrowing of the enterprises concerned. Under this arrangement, the MoF’s oversight focuses mostly on the financial management of individual SOEs, rather than their impact on the macroeconomic and fiscal framework.

78. The current legal framework does not specify the procedures to be followed should there be a proposal to create a new SOE³⁷. In contrast, the procedures required to privatize an SOE are described in the Zambia Development Agency Act, 2006.

79. Special arrangements apply in regard to the participation of the government in Zambia’s mining sector. A holding company, ZCCM Investments Holdings Plc (ZCCM-IH)³⁸, owns shares (ranging from 10 percent to 100 percent) in most of the copper mining companies. In turn, 87.6 percent of the shares of ZCCM-IH are owned by the MoF. In relation to the transparency of resource revenues from state-owned mining companies, Zambia joined the Extractive Industries Transparency Initiative (EITI) in 2009 and its EITI reports, which are publicly available, include a broad range of data on resource revenues from state-owned and other mining companies. However, the legal framework provides an unclear definition of the boundary between the revenues that belong to the state-owned mining companies and those which the companies receive on behalf of the government. The law also does not require state-owned mining companies to make a full disclosure of information that relates to:

• Quasi-fiscal activities carried out by the company on behalf of government, such as an obligation to finance the construction of public infrastructure; and

• Any reduction in resource revenues or dividends to be paid by the company, in exchange for obligations to conduct quasi-fiscal activities.

80. Recommendation 2.20. In relation to SOEs, the new legal framework should include a comprehensive list of SOEs specified in the schedule of the law; the respective responsibilities of the boards, MoF, parent line ministries, and IDC; and establish a common oversight framework with the following requirements:

• All SOEs should establish financial targets (including the payment of dividends in accordance with government policy), and submit reports monitoring the implementation of these targets to the MoF according to deadlines specified in the law;

• The budgets of SOEs should be submitted to the MoF for approval by a specified date;

• The financial implications of a proposal to establish a new SOE should be assessed by the MoF and reviewed by the Cabinet before a decision is taken on the proposal; and

• Information on the revenues and financial operations of state-owned mining companies should be fully disclosed.

Roles and responsibilities of key players in PFM

82. In general, Zambia’s PFM legal framework provides a reasonably comprehensive list of roles and responsibilities. The roles of the Minister of Finance, the ST, Controlling Officers, Accounting Officers, the Accountant General, the Controller of Internal Audit, the AG, the NA and several other institutions are clearly defined in the Constitution, the PFA 2004, other public finance laws, and the FR. Earlier sections of this report, however, have proposed that revisions to the PFM legal framework should:

• Enhance the powers of the NA to scrutinize budget execution, and to review and comment on financial reports submitted by the executive be substantially enhanced;

• Ensure the independence of the AG, in particular in regard to the financing of his office, and the salaries and terms and conditions of his staff;

• Elevate the position of the Accountant General to that of a PS;

• Clarify the respective role of the MoF and the BoZ in relation to cash management and debt management; and

• Clarify the respective roles of the MoF, parent line ministries, the IDC, and management boards in monitoring the financial performance of GAIs and SOEs.

83. The role of the NA in the budget process is relatively weak in comparison to many countries. The draft Constitution proposes a clarification of the NA’s role which would allow the NA to make amendments to the executive’s budget proposal, provided that the total level of expenditure and revenue is not changed. However, the following issues should be addressed by the new legal framework in order to: (i) enhance the powers of the NA to scrutinize fiscal policy and budget documents; (ii) monitor budget execution; and (ii) review a wider range of financial reports submitted by the executive than at present.

• Parliamentary engagement and scrutiny of macro-fiscal policy making - As discussed in Sections II A and B, the NA should be consulted on medium-term fiscal objectives and targets, and policy measures to be set out in a fiscal strategy statement, in order to ensure the NA’s participation in formulation of the macro-fiscal policy. Several PFM laws in the region specify the NA’s power to scrutinize and endorse a pre-budget document (e.g., Kenya, South Africa, Tanzania, and Uganda);

• Parliamentary amendment powers - Although the power of Parliament to amend the budget varies widely between countries, some restriction on the amendment power is necessary to ensure consistency of the annual budget with fiscal objectives and targets previously scrutinized by the NA. If the draft Constitution does not come into force in the near future, the new PFM law should incorporate a similar restriction on the parliamentary amendment powers;

• Sequence of parliamentary approval - To allow adequate time for parliamentary scrutiny and ensure that it follows a top-down sequence, the new PFM law or parliamentary standing orders should clarify the sequence and timing of parliamentary approval of a fiscal strategy statement, the Finance Bill, and the budget. In the region, for example, Kenya and South Africa specify the time-limits for Parliament to scrutinize the budget framework papers and the Finance Bill;

• Accountability mechanisms to fiscal objectives and targets - As discussed in Section II A, the government should be accountable to consistency between previously formulated fiscal objectives/targets, current budgetary outturns, and final accounts. Some PFM laws in the region require submission to Parliament of in-year fiscal performance reports which assess compliance with fiscal objectives plus targets; explain the significant deviations, if any and seek for endorsement of corrective plans for deviations (e.g., Kenya and Tanzania); and

• PAC recommendations and Treasury Minute - In order to ensure the timeliness and effectiveness of the PAC recommendations, it would be advisable for the new PFM law to set out the timeframe: (i) for the PAC to debate the Auditor-General’s regular and special reports and make recommendations on them; and (ii) for the government to respond to the PAC’s recommendations through Treasury Minutes.

84. If it is decided to establish a PBO, the law should limit clearly its functions to the production of independent, objective, and professional analysis for the NA on matters related to the PBG, the budget, and the Finance Bill. In order to ensure the independence and objectivity of its analysis, the new PFM law or parliamentary standing orders should ensure that the institutional set-up of the PBO guarantees its operational independence. To this end, for example, the head of the PBO could be required to be appointed through an open, competitive process and be dismissed only on limited grounds and with the adequate due process. In the region, for example, Kenya, Uganda, and Tanzania, have established new PBOs of this type under PFM laws. If they are well-designed, with clear remits, analytical independence, and sufficient technical capacity, such bodies can help improve parliamentarians’ understanding of the budget provisions and of the wider economic and fiscal position, and so improve the quality of legislative oversight and scrutiny.

85. In addition to these specific proposals, there may be other areas of the law in which the roles and responsibilities of PFM players and stakeholders are not defined with sufficient clarity. These issues may arise because of new PFM practices that have emerged since the original legal framework was enacted, as well as institutions and functions that have been superseded (e.g., the Crown Agents).³⁹ In addition, the definition of the roles and responsibilities of the different players is presently scattered among various laws and regulations. One of the tasks of the technical working group that has been proposed in this report to take forward the work on the revision of the PFM legal framework, should be to consider areas where modifications to existing roles and responsibilities need to be made, and where definitions can be streamlined and consolidated.

86. Recommendation 2.21. The technical working group should consider all relevant changes in the roles and responsibilities of key players in PFM as part of their work in preparing the revised legal framework. Specifically, the framework should clarify the roles of the NA in the budget formulation, including top-down sequenced budget approval, parliamentary amendment powers, and accountability mechanisms.

Sanctions

87. The enforcement measures under the existing legal framework focus on sanctions against individual officers. Under the PFA, the ST could recover the loss of public money from the controlling officer (Section 30), and any public officer could be penalized by fines or imprisonment for violation of the PFA (Section 51). In practice, however, these sanctions are rarely enforced, partly because other civil, criminal, and disciplinary sanctions are available under the common law and the Disciplinary Code and Procedures of the Public Service Commission.

88. In addition to the personal sanctions noted above, the new legal framework could include a broader range of sanctions to be imposed on MPSAs, local governments, GAIs, and SOEs as organizations. Although personal sanctions are still important and should be maintained by the new legal framework, adding organizational sanctions would facilitate the enforcement of the law, because they are generally less drastic than personal sanctions and could be imposed more effectively by the MoF or the NA⁴⁰. Such organizational sanctions could include, for example, publishing information on cases of financial misconduct; calling the controlling officer to a public hearing at the PAC; requiring additional reporting to the MoF and/or the NA; approving a financial management improvement plan; imposing tighter controls over certain categories of expenditure; and appointing a financial overseer who takes over some financial management powers of the controlling officer.

89. Recommendation 2.22. The new legal framework should:

• Specify a broad range of sanctioning measures to be imposed on MPSAs, local governments, GAIs, and SOEs for financial irregularities.