1. Previous PEFA assessments of PNG were carried out in 2005 and 2009.1 In 2014 the PNG Government launched an internal PEFA assessment with a national government team using the existing PEFA framework (January 2011). The present mission validated the PNG government’s internal assessment, and also carried out a baseline assessment using the testing version of the revised (2015) framework.2 The framework is composed of a set of 30 high level indicators, which measure the performance of PFM systems, processes and institutions. The indicators are organized around seven pillars, shown in Figure 1 below, representing core dimensions of PFM performance. The assessment focuses on the PFM systems and how well they work and is intended to provide a pool of objective information to assist all stakeholders understanding the current status of PFM and on decisions on future reforms. Such reforms will enable the Government to achieve improved overall fiscal discipline, a better allocation of resources through the budget, and greater efficiency in delivering public services. The assessment focused mainly on the central government. The data used for rating the indicators mainly covered the years 2011, 2012 and 2013.

2. Overall PFM performance, as measured by the indicators grouped under the seven pillars, is mixed (Figure 1). PNG scores relatively well on Pillar I – Credibility of fiscal strategy and budget. This score reflects the fact that the variance between the original budget and actual outturn at aggregate level was kept at a minimum, whereas the composition of expenditure by economic and administrative classification is substantial. PNG’s performance also scores reasonably well on Pillar IV – Policy based planning and budgeting – and Pillar II – Comprehensiveness and transparency - which suggests that the budget preparation process supports the use of the budget as a policy tool and a wide variety of budget information is available. PNG’s performance on other pillars, however, is weaker. There is considerable scope for improvement in accountability, one of the corner principles of good PFM (Pillars V and VII); the management of public assets, liabilities and associated fiscal risks (Pillar III); and the quality, availability, comprehensiveness and timeliness of fiscal accounts (Pillar VI).

Credibility of fiscal strategy and budget

3. The aggregate credibility of the budget appears satisfactory as overall deviations from the original budget estimates were relatively small, though expenditure composition shows a high level of variance. There was a tendency for spending on wages and salaries, goods and services and other items of recurrent expenditure to be higher than the approved budget, and for spending on the development budget to be lower than the approved amounts. The under-spending in development expenditure was mainly due to capacity limitations, weak project implementation and possibly a lack of reporting on execution of donor-funded projects. Over-spending in the recurrent budget can be attributed to weaknesses in expenditure controls, including inadequate commitment controls, as discussed in more detail under Pillar V. The lack of data integrity is a big issue, both for aggregate and individual budget items, thus reducing the overall quality of financial reports.

Comprehensiveness and transparency

4. Comprehensiveness and transparency in the budget could be improved. The classification of the budget is reasonably robust, but two financial systems (IFMS and PGAS) used by the departments adopt different classifications which impacts negatively on the comprehensiveness and quality of data in the budget execution reports. The current budget presentation is insufficiently analytical and open to neither external scrutiny nor policy accountability. The extent of unreported government operations appears to be large, but given the number of entities involved and weaknesses of reporting, it is difficult to quantify. More comprehensive and timely reporting on the operations of the large number of statutory bodies and donor funds, and greater transparency regarding trust accounts is needed. This would facilitate cash management and reduce the vulnerability of PNG to large but difficult to quantify fiscal risks.

Asset and liability management

5. Public asset and liability management is one of the weakest areas in PNG’s PFM system. There are numerous statutory bodies fulfilling a range of commercial, social and regulatory functions together with 12 state-owned enterprises (SOEs) that are wholly-owned by the government. Many of these entities are several years in arrears in submitting their annual financial statements, and many have received audit disclaimers or adverse opinions. The preparation of capital budgets is fragmented, and needs to be further integrated with recurrent budgets. Few departments undertake rigorous economic analysis of proposed public investment projects or provide systematic reports on the physical and financial progress of these projects. The legal basis for borrowing and the issuance of government guarantees is unclear, fragmented and to some degree contradictory. As a result there are gaps in the coverage of reports and some loans might not be reflected in the system. No register of the guarantees issued by the government has been set up. There are also no mechanisms for recording and monitoring payment arrears.

Policy-based planning and budgeting

6. PNG’s budget process is orderly and well understood, and some progress has been made in embedding the medium-term dimension into fiscal planning. The government prepares a broadly credible medium-term fiscal strategy (MTFS) comprising fiscal targets established in law. The MTFS is used to prepare an overall resource envelope for public expenditure and individual ceilings for spending agencies, but these ceilings are prepared for a single year only and do not cover half of the budget representing development/capital expenditure. The budget documents for 2015 contained a section describing revenue measures and developments, in which major changes in revenue policy were explained and costed. Typically Parliament has less than one month in which to consider the budget. Given this short time period, and the absence of an effective committee to review the draft budget proposal, the scope of legislative scrutiny is very limited.

Predictability and control in budget execution

7. The control of budget execution is weak. PNG’s main revenue collecting agencies, the Internal Revenue Commission (IRC) and the Customs Service, collect about 96 percent of PNG’s domestically generated revenues. Although cash is transferred to the Waigani account (which comprises some elements of a treasury single account) on a weekly basis, bank reconciliations are a major problem, with long backlogs for some accounts. A cash flow forecast is prepared for the fiscal year, and is updated weekly on the basis of actual inflows and outflows. Departments are advised one month in advance of their monthly warrant ceilings, but the information is not fully reliable. The current rules allow extensive administrative reallocation with Treasury approval and are not always respected. Payroll controls are weak, and are compromised by the decentralization of responsibility for controls and reconciliations to the spending departments and provinces. Non-compliance with internal control regulations, numerous reallocation decisions and delays in

implementing the IFMS further impede the ability of the government to implement the budget as originally approved.

Accounting, recording and reporting

8. There are concerns regarding the persistent lack of reliability of accounting records. Many bank reconciliations are not carried out in a timely manner, and backlogs arise in the clearance of suspense accounts and advances. Even if reconciliations are completed, there are many significant unresolved items. While the government prepares different types of in-year reports, the coverage and classification of data do not allow direct comparison to be made with the original approved budget and the information is not up-to-date. No recognized accounting standards are used to prepare central government financial statements. The financial statements are only submitted for audit 15-16 months after the end of the year concerned, compared to the good practice standard of 3-6 months. The quality and timeliness of the annual financial statements have been criticized by the Auditor General.

External scrutiny and audit

9. There is annual coverage of all government entities, using professional standards and highlighting material issues and systemic risks. The Office of the Auditor General (AGO) undertakes mainly financial and compliance audits, together with some performance audits. The audits follow a systems- and risk-based approach. The Public Accounts Committee (PAC) holds in-depth hearings on the AGO’s reports, and also makes recommendations, focusing on entities which have received adverse comments. There is little evidence, however, that the findings and recommendations of AGO or PAC reports are followed up systematically. This finding reflects the absence of effective accountability mechanisms in the Government, and the absence of legal recourse to impose penalties on non-complying officials for breaches of the law and financial misconduct.

PFM reform process

10. A piecemeal approach is currently taken to the planning and management of PFM reforms. Recent efforts have been made to address some of the deficiencies of the current systems and processes, but the institutional arrangements for planning and managing the PFM reform process need to be strengthened. Nevertheless, the authorities are keenly aware of the need to address underlying PFM weaknesses at a pace allowed by the political and economic conditions in PNG.

11. The significant deficiencies of the existing PFM systems require a strategic approach to developing and implementing a reform agenda. The assessment identifies a broad range of issues that need to be addressed, some urgently, some over the medium-term. Many of these reforms are substantial and technically and politically challenging and call for considerable dedication and commitment not only from the staff in the Departments of Finance and Treasury, but also at the political level and other departments of government. The authorities should prepare an

action plan that identifies the priority areas and appropriate sequencing of PFM reforms, together with measures to address the accountability gap in PNG.

12. The process of implementing and internalizing PFM reform initiatives is constrained by limitations of capacity at all levels in the DoF and in the line departments, as well as by weak institutions and poor financial integrity. Reform measures will need to be carefully prioritized and sequenced so as not to overload the limited capacity. The first priority should be placed on strengthening core functions of PFM systems which will provide the platform for more advanced reforms. Advanced reforms will generally not produce any significant results before core functions of the PFM system are in place. For instance, performance budgets will not serve any meaningful purpose in the absence of timely and reliable budget reports. Issues related to the enforcement of financial regulations also need to be addressed.