Sao Tome and Principe 2019
In order to build a solid foundation for future reforms, the Government in Sao Tome and Principe has chosen to conduct a new PEFA assessment, with the specific objective of measuring the performance of the PFM system in the Country. This assessment will be used to draw a new PFM reform strategy, that would be beneficial for improving the country’s democratic and economic governance by strengthening the government's ability to formulate and deliver transparent, comprehensive and liable budgets within the medium- and short-term frameworks.
This assessment exercise was led by the Ministry of Planning, Finance and Blue Economy (MPFEA) and started with technical and financial support of the European Union / DEU, in Gabon.
For quality assurance purposes, several reviewers provided comments, including all the entities of the Government involved in the assessment, as well as the PEFA Secretariat and many external partners, such as the International Monetary Fund (IMF), the African Development Bank, the World Bank and the European Union.
Despite the involvement of the PEFA Secretariat at all stages of this PEFA, its Terms of Reference were not submitted for approval by the PEFA Secretariat, before appointing the consulting firm and initiating the first field mission, and thus, the PEFA Check could not be granted to this report.
This executive summary provides an integrated and strategic overview of the report results. It covers the impact of public finance management of the government, over a three year period time, in fiscal and budgetary outcomes, namely, the achievement of aggregate fiscal discipline, the strategic allocation of resources and the efficient public service delivery, and outlines the main performance changes in public financial management (PFM), since the previous 2013 assessment, and is structured within the following 5 topics.
1. Purpose and management of the 2019 PEFA. The main reason of the assessment is related to the need of the Sao Tome and Principe government to build a solid foundation for future reforms aimed at improving the democratic and economic governance of the country, reinforcing the Government's ability to formulate and deliver transparent, comprehensive and credible budgets within a medium and short-term framework that will strengthen the aggregate fiscal discipline, the strategic allocation of resources and the efficient delivery of public services.
This assessment exercise was led by the Ministry of Planning, Finance and Blue Economy (MPFEA) and started with technical and financial support from the European Union / DEU in Gabon and implemented by a team of consultants from the DT Global consortium. All government institutions and government officials with PFM related positions in STP were involved in the PEFA assessment and made critical analysis and comments to the preliminary report and all of them have been considered in this version.
For the smooth operation of the missions and the high quality of the reports, a monitoring and quality procedure had been established.
2. Scope, coverage and schedule. The PEFA performance framework has covered the entire General Government (GG), including the Budgetary Central Government (BCG), according to the PEFA methodology requirements for each one of the indicators, and all management units, local governments and revenues collected by the Directorate of Taxes and the Directorate-General of Customs. The central and decentralized services of the BCG departments constitute a single institutional unit. The other units with distinct legal personality and operational autonomy, such as agencies or offices that are placed under the technical and financial tutoring of the line ministries are also included in the evaluation, as entities that are part of the BCG.
This evaluation covered the last three fiscal years, namely 2016, 2017, 2018, while some indicators were evaluated on the dates of the intervention.
For the PFM assessment in STP, was used the updated 2016 PEFA methodology, implemented in 3 sequential phases: pre-assessment, operational assessment and validation of the assessment, which were carried out by the PEFA team from April to November 2019, within a maximum working period of 7 months and 194 working days, as established in the ToR.
3. Summary of the integrated assessment and the impact of the PFM on budgetary and fiscal results. Considering the specificities of the country-specific economic, political and administrative structure, and highlighting the key strengths and weaknesses identified in the report that are likely to influence the performance of the PFM, the government's three main fiscal and budgetary results, i.e., the fiscal discipline, the strategic resource allocation, and efficient service provision have been impacted, as follows:
Aggregate Fiscal Discipline. The aggregate fiscal discipline is limited due to the weaknesses of the internal control mechanisms in place for budget execution, as well as unreliable revenue and expenditure forecasts.
The country's economic weaknesses do not provide the space for significant revenue collection, while the technical limitations the two main revenue administrations are encountering do not allow them to effectively proceed with revenue collection. The proposed by the Government budget, once approved by the National Assembly, on an aggregated basis, is bypassed by the budget units (BUs) and the Government, using extensive administrative reallocations, during the fiscal year. The treasury shortfalls and cash management weaknesses, combined with the low CG control over the extrabudgetary entities’ expenditures and revenues, as well as over the extrabudgetary revenues and expenses of budgetary entities and State Owned Enterprises, do not allow for the expenses to be committed within the available resources, resulting in significant, mismanaged and uncontrolled internal debt. The controls over contractual commitments is not effective and results in high stock of payment arears. Finally, the weaknesses of the internal and external audit functions do not sustain the fiscal discipline.
Strategic Allocation of Resources. The chart of accounts in STP allows for some multidimensional expenditure analysis, but there is no any strong link between the government's strategic plans, the Mid-term Expenditure Frameworks (MTEFs), and the annual budgets, towards the achievement of steady results that would be supported by the strategic allocation of resources. This situation is due to: (i) the lack of economic, political and socio-environmental analysis needed for the definition of the government's strategic plans and the preparation of pluri-annual plans and medium-term perspectives, that could support the elaboration of the government's annual activity plans and the refinement of the budgeting process and (ii) the limitations of the programmatic approach in budget preparation. The current procedures for the elaboration of investment plans, are not usually provided well before the preparation of the annual budgets and they do not follow any pre-established investment projects’ selection criteria, or implementation and monitoring procedures. Also, the implication of recurrent investment costs over the life of each investment is not considered during the budgeting process and the investment projects are not selected and prioritised after an economic and financial analysis, meant to generate the best return and cost-benefit ratios.
Efficient delivery of public services. The current shortcomings in the procurement system’s competitive bidding negatively impact the efficient delivery of public services, especially in the education, health and agriculture sectors. Similarly, the weaknesses of the internal control and accountability mechanisms cannot yet be overcome because of (i) the persistent absence of procedures manuals and (ii) up-to-date organic laws, while the weaknesses of the internal and external audit functions do not strengthen the accountability and the efficient use of public resources. The financial integrity’s shortcomings and the considerable delays registered for the elaboration of consolidated annual and quarterly financial statements limit the impact of the audits, which, in turn, hinders the effectiveness of the National Assembly’s oversight of the public accounts. The lack of annual targets for government objectives and expected achievements, in the operational and financial reporting, as well as in the publication of performance targets and results from the institutions with administrative and financial autonomy, undermines the effectiveness of any attempt to analyse the efficiency of the use of the available resources by public service providers.
In relation with the revenue collection, the operational inefficiencies of tax collection entities have resulted in high volumes of accumulated tax arrears. The failure to collect tax debts effectively, undermines the credibility of taxation and the principle of equal treatment of the taxpayers. The weaknesses in the revenue estimates process, during the preparation of the State Budget have a major impact on budget’s execution, jeopardizing the efficient provision of public services.
4. PFM performance variations. The main PFM performance variations since the last 2013 PEFA assessment, are summarized in part 4.4 of this report and detailed in Annex 4 of this report.
To this end, an additional evaluation was conducted, based on the 2011 PEFA methodology, to compare the evolution of the PFM performance since the 2013 PEFA (Annex 4).
Among the 28 individual indicators compared, 12 indicators were unchanged, while 16 have been downgraded.
However, the downgrading is not due to actual facts, but mostly to the criteria used and the evidence (or lack of evidence) in the 2013 PEFA assessment and, also, the consideration of decorative, discontinued and/or not fully implemented reforms, with no positive effects in the PFM in STP.
5. PFM Reform Agenda. In the PFM reform programs implemented or in progress in the country, the following achievements can be highlighted:
• Adoption of international good practices, such as those set out in the IMF’s Fiscal Transparency Code, and the International Public Sector Accounting Standards Board (IPSASB);
• Identification of specific objectives, or Measures, to better establish the responsibilities and to facilitate the monitoring of the corrective actions’ implementation;
• Preparation of a matrix of measures and actions for the Public Finance Reform with 14 objectives, associated with the Directorates of the Ministry of Finance and other State bodies according to the 2016 Public Finance Reform Plan, with a brief description of its content and meaning;
• Improvement of budget’s reliability, by strengthening the public financial accountability and management, building up statistical capacity, and improving the framework for property’s registration (WB project);
• Institutional strengthening, extension of the tax base and governance arrangements for the public companies (WB project);
• Improvement of revenue and expenditure forecasts, cash management, revenue collection and debt management, as well as containment of public sector payroll and payment arrears of the power company (AfDB project); and
• Strengthening of the SAFE-e system for budgeting, human-resource management, procurement, asset management and internal controls, as well as strengthening of the revenue collection system. (AfDB Project).
6. Main deficiencies identified. As part of this PEFA assessment, the main deficiencies identified are the following:
• Reduced capacity to make macroeconomic and fiscal forecasts;
• Reduced capacity to develop fiscal strategies;
• Incomplete State Budgets’ documentation, without medium-term projections (MTEF);
• Misaligned State Budgets and sectoral strategic plans and national strategies;
• Challenges in producing accurate expenditure and revenue projections, not addressed in the recent years, diminishing budget credibility;
• Weakened revenue management;
• Extensive administrative reallocations during the fiscal year;
• Not fully adhered to international standards economic and functional classifiers;
• Reduced clarity of the budget proposal submitted to the Assembly, due to the limited information submitted by the Government;
• Transfers from the central government to the sub-national governments based on practices rather than predefined rules;
• Missing information on service delivery performance, without proper reporting;
• Limited public access to budget information;
• Lack of an integrated and inclusive process for the management of state assets and liabilities;
• Public investment program based on not clearly defined criteria;
• Poor management of public sector financial and non-financial assets;
• Weak management of domestic public debt and guarantees;
• Weak reconciliation of revenue accounts;
• Only short-term horizon visibility for the availability of resources, due to weaknesses in the information provided by MPFEA to the budget units about the fiscal space allowed;
• Very little information available on payment arrears;
• Poor control system in payrolls;
• Reduced visibility in the public procurement and contracting processes;
• Generally weak internal controls;
• Inefficient internal audits;
• Relatively poor financial data integrity, with lack of information about institutions with administrative and financial autonomy, such as INSS and the State Owned Enterprises;
• Coverage and submission of the external audits by SAI not meeting the international best practices;
• Inexistent legislative scrutiny of the public accounts and external audit reports.