Since 2004, the Royal Government of Cambodia (RGC) has been carrying out an ambitious and sequenced Public Financial Management Reform Program (PFMRP) to modernize and harmonize its public financial management systems and practices. The PFMRP was designed as a comprehensive, long-term vision in four platforms or stages. In each platform and stage, the Ministry of Economy and Finance (MEF) formulates Consolidated Action Plans (CAP) providing orientations and milestones so that Line Ministries (LMs) and institutions including all entities under MEF can prepare their specific detailed action plans to align to the government CAP.
The PFMRP has provided since 2004 for a gradual and step-by-step approach to PFM reform, to evolve from a centralized and input-based management to programmatic planning and budgeting, unified Treasury procedures and accounting and reporting standards and has built credibility in the government budget process and significantly improved technical capacity within the government institutions. The RGC has applied the Public Expenditure and Financial Accountability (PEFA) framework to assess its Public Financial Management (PFM) systems and guide its reform process since 2010. The first PEFA assessment was undertaken in 2010, the second in 2015. This 2021 assessment is the third assessment undertaken by the MEF with technical support from the European Union (EU).
Purpose, and management of the assessment
The main purpose of this 2021 national PEFA performance assessment is to provide the RGC with an objective, evidence-based and up-to-date diagnostic of the national level PFM performance based on internationally recognized PEFA methodology. The RGC and development partners, and other stakeholders are able to identify gaps or deficiencies in the current PFM system, as well as validating the efficiency and effectiveness of reforms to date. The results of this assessment are important inputs for the RGC, development partners, and other stakeholders in identifying gaps or deficiencies in the current PFM system, as well as validating the effectiveness of reforms to date. The findings of this PEFA assessment assist the RGC to formulate further reforms in ‘CAP3+2’ and ‘CAP 4’ and discuss further related assistance with development partners. The PEFA report also provides a new baseline for future PFM assessments.
The MEF is leading the implementation and monitoring progress of the PFMRP based on the PEFA framework. This PEFA exercise has been carried out as a self-assessment whereby “the Government evaluation team (GSC team) prepares this assessment report, while the international experts review the quality and provide feedback to improve reports in line with PEFA standards.” This approach is to ensure the full government ownership in the process and strengthens the MEF and relevant entities’ technical capacity and knowledge in PFM systems.
Assessment coverage and timing
This assessment is based on the 2016 PEFA methodology revised and issued by the PEFA Secretariat in February 2016; and applies the guidance on tracking performance change since the previous 2015 Cambodia PEFA assessment, using the 2011 PEFA Framework, in Annex 4. The timeframe of the assessment covers the three completed fiscal years from 2017 to 2019 for budget execution, 2020 for the last budget preparation and takes into account the data available and PFM reform progress until July 2020 as the cutoff date for the assessment.
The assessment covers LMs/institutions at central/national and subnational administrations (only level 1, capital and provincial administration). It also includes public enterprises (PEs), and extra budgetary entities known as public administration of establishments (PAEs), in line with requirements for PI-6 and PI-10. As the main line ministry driving the PFM reform in the government, the MEF provided most documentation on budgets, fiscal reports, medium-term development plans, financial reports, legal documentation relating to PFM, and other relevant information necessary for this assessment. The revenue authority, the supreme audit institution, public institutions, and other line ministries and agencies were also consulted. The analysis provided a reasonable basis to understand the PFM arrangements and support the assessment of all 31 PEFA indicators except PI-30 and PI-31.
Impact of PFM systems on the three main budgetary outcomes
Overall, the results of the PEFA assessment show that PFM systems in Cambodia have significantly improved in the areas related to fiscal and budget management but improvements are still needed in areas related to fiscal transparency and reporting, public investment management, medium-term budgeting, expenditure arrears, and payroll. The assessment shows that 5 of the 31 indicators score either “A” or “B”, for a performance considered above the basic alignment with good practice; 16 indicators score “C” or “C+” that suggests basic alignment with the international PFM standards; and 8 indicators scored “D” or “D+” that suggest weak performance, 1 indicator (PI-30) is ‘NU’ and 1 indicator (PI-31) is ‘NA’ as indicated under Table 0.2. A summary of findings on the individual elements of the PFM system – indicator by indicator – can be found in section 4.1 of the report and is reflected in the table of scores at the end of this executive summary.
Aggregate Fiscal Discipline
Overall, aggregate fiscal discipline is assessed as solid, reflected in an effective control over spending during the assessment period despite an underestimation leading to basic performance in revenue collection. The aggregated budget execution rate is within 5% (PI-1, rated ‘A’) and the expenditure composition outturn by function and economic type is above average (PI-2, rated ‘C+’) with a score ‘C’ for variance on administrative classification, ‘B’ on economic classification, and use of contingency rated ‘A’ On the revenue side, performance is average (PI-3, rated ‘C’) however, management of tax revenue arrears are an issue (PI-19.4 ), rated ‘D*’).
Few critical weaknesses of the PFM system undermine the aggregate fiscal discipline. The management of expenditure arrears is still an issue due to the lack of an effective tracking and monitoring system for invoices for goods and services, preventing the ageing of arrears on payments to suppliers to be monitored correctly (PI-22.2, rated ‘C’). The financial reporting and monitoring of PAEs and PEs financial performance is still in its transitional phase for PAEs (PI-6, rated ‘C+’) as well as monitoring of fiscal risks from other public sector entities (PI-10, rated ‘D+’), and the monitoring of contingent liabilities and ‘Public Private Partnerships-PPP’ needs critical improvement (PI-10.3, rated ‘D’) and PEs (PI-10.1, rated ‘C’).
In addition, the Public Investment Management (PIM) function is in its early stage of development for investment financing by the national budget since the MEF is preparing a set of rules and regulations and integrated framework to manage PIM (PI-11, rated ‘D+’).
Public asset management can be further strengthened (PI-12, rated ‘C’) due to the lack of a comprehensive and reliable procedure for recording, valuation and depreciation of non-financial assets. On the other hand, debt management is strong and reconciliation with creditor is solid and carried out on an annual basis (PI-13.1, rated C).
Internal control on non-salary expenditure is partially effective and there is a need to strengthen the effectiveness of expenditure controls and compliance with payment rules and procedures (PI-25, rated ‘C’).
The reliability of in-year fiscal reporting will greatly benefit from a timely daily, monthly and annual closing of account procedures. The present in-year budget reporting does not include all donor- financed project expenditure. The annual financial statements would need to be submitted to the NAA earlier after the closure of accounts as currently it takes more than 9 months to complete (PI-28, rated ‘C+’) and send them to the NAA. Too many payment orders are delayed in the last quarter of the fiscal year resulting in a delayed closing of accounts and affect the effectiveness of the budget execution. Financial data integrity (PI-27, rated ‘C+’) is still a concern and there is a need to improve timely clearance of suspense accounts (PI-27.2, rated ‘D’), and advance accounts (PI-27.3), rated ‘C’).
Strategic Allocation of Resources
Systemic PFM strengths include the orderly and participatory approach to the annual budget formulation, including a timely and well organized legislative review (PI-17, PI-18 and 31, rated ‘B+’, ‘C+’ and ‘C+’ respectively) as well as reliable and timely information provided on the budget allocations and transfers to Capital/Provincial (C/P), District/Municipality (D/M) and Commune/Sangkat (C/S) administrations (PI-7, rated ‘A’). The comprehensiveness of the budget documentation (PI-5, rated ‘B’), and its classification is in accordance with basic standards but can still be improved (PI-4, rated ‘C’).
The five indicators concerned with ‘policy-based fiscal strategy and budgeting’, (PIs 14 to 18) are all reflecting a basic performance and alignment to PFM standards. The medium-term budget expenditure is still in the developing stages with weak links from one budget cycle to the next (PI-16, rated ‘D+’). An overview of fiscal risks that could point to future financing demands from PEs and other fiscal operations is currently not being prepared (PI-10, rated ‘D+’) but debt reconciliation process is performed annually with all creditors (PI-13.1, rated ‘C’). There is a needto further improve public investment management (PIM) across the whole infrastructure project life cycle (PI-11, rated ‘D+’).
The alignment of medium-term budgets and sectoral strategic plans and BSP needs further strengthening (PI-16.3, rated ‘C’). Flexibility to adjust the budget is built on extensive powers given to the MEF by the legislation to adjust the budget (PI-21.4 rated ‘C’). Revenue forecasts as endorsed by the NA and integrated in the budget process need to be more realistic to allow for a more effective use of the public resources (PI-3.1, rated ‘D’).
The Chart of Accounts (CoA) reform needs to be further improved to align with the budget classification framework for functional and programmatic classifications in order to serve as a useful management and reporting tool for line ministries, and to be integrated with the Financial Management Information System (FMIS). This includes streamlining budget execution procedures and payments processes both in the MEF and line ministries and the removal of parallel paper processes. The extension of the administrative classification would also support a better monitoring of the sectors’ budget execution with a full mapping of the functional classification (PI-4, rated ‘C’). Challenges need to be addressed to improve the quality of programmatic financial data further.
Efficiency in Use of Resources for Service Delivery
The high predictability in funds available to LMs/institutions and local governments during budget execution (PI-21. 2, rated ‘B’) and to SNAs (PI-7.2, rated ‘A’) support efficient service delivery. It is however needed to strengthen the system further in order to ensure that public resources can be effectively prioritized in the case of major shocks affecting aggregate revenue collection (such as the covid-19-shock, withdrawal of the EBA, or natural disaster). While the commitment control systems are solid (PI-25.2, rated ‘C’), the government currently focuses on revenue diversification policies, optimal mobilization of potential domestic revenue, especially from telecommunication, mine and oil sources. In parallel, it aims at improving spending efficiency in areas such as Salary, Goods/Service, and Public Investment.
Of particular concern to guarantee an efficient use of public resources is the lack of monitoring and transparency of the procurement systems (PI-24, rated ‘D+’) combined with the poor performance in management of expenditure arrears (PI-22, rated ‘D+’). Strengthening in these two areas is key to improve the Value for Money on public spending.
The performance monitoring and evaluation systems for service delivery have to be improved for key LMs (PI-8, rated ‘C+’) and linked with basic performance of public asset management (PI-12, rated ‘C’). In general, the PEFA assessment reveals that use of resources could be better monitored for an efficient and effective use of resources by LMs (PI-8, rated ‘C+’).
In addition, deficiencies in the internal control systems (PI-23.4, rated ‘D’, PI-25.2, rated ‘C’ and PI-25.3, rated ‘C’ and PI-26, rated ‘C+’) and limitation in availability of public information and overall fiscal transparency (PI-9, rated ‘D’) despite timely and orderly reviews by the legislature (PI-31.1, rated ‘NA’) that have a negative impact on the overall efficiency and effectiveness in use of public resources.
Performance changes since the previous assessment PEFA (2015)
The 2021 PEFA assessment includes tracking the PFM performance since the previous 2015 PEFA assessment and identifies performance changes using the previous 2011 version of the PEFA framework so that it is possible to compare both sets of score directly. Performance improvements have been identified in nine indicators PI-2, PI-6, PI-7, PI-10, PI-13, PI-14, PI-19, PI-23 and PI-25. On the other hand, PI-3 received a lower score as the deviation between revenue planned and outturn is large, and PI-11 also deteriorate. PI-26 related to the external audit function is not assessed as PI-30 in section 3 and the 3 performance indicators related to Development partners (D1-D3) are not assessed as the assessment is focusing on the areas of RGC’s PFM reform and ODA is covered by RGC PFM systems. The changes in the indicator scores are presented under sub-section 4.4 and Annex 4.
The comparison between 2015 and 2021 has highlighted the following impact on the three budgetary outcomes:
- Aggregate fiscal discipline has improved as well as budget credibility in terms of expenditure and revenue administration management, PAEs’ monitoring, transparency of taxpayer obligations and liabilities. There have been improvements to both budget classification and the associated documentation: top-down budget (MTBF) is piloted for recurrent expenditure, and information on resources received by schools and hospitals. However, limited information on contingent liabilities is still an issue and fiscal risk remains unreported. Revenue forecasts approved in the budget are systematically underestimated (PI-3 rated ‘D’). Revenue administration systems do not control fully tax liabilities (PI-14, rated ‘C+’) and significant levels of tax arrears are still outstanding need to focus PI-15. Dim (i) rated ‘NR’). The lack of an effective tracking system for invoices for goods and services received from suppliers remains (PI-4 Dim(ii), rated ‘C’) and the need to adopt a defintion of expenditure arrears that aligns with international standard. The RGC also needs to further strengthen its tax administration risk management systems (taxpayers’ compliance, and risk assessment), and monitor PAEs and PEs for timely and comprehensive financial reporting.
- Strategic allocation of resources has improved and variance in expenditure composition has reduced confirming the orderly and participatory approach to the annual budget formulation in accordance with a well-established budget calendar, including a timely and well-organized legislative review as well as reliable and timely information provided on the transfers to C/P, D/M and C/S (PI-8, rated ‘B’). However, strategic sector planning remains overall weak, except for health and education (PI-12, rated ‘C+’). Also, the medium-term expenditure framework is not fully developed and integrated in the formulation of annual recurrent and capital budgets, with the absence of clear links in budget allocations from one budgeting cycle to the next. Next to the BSP and the PB under implementation, a formal Medium-term expenditure budget framework needs to be defined.
- Efficient Service Delivery has improved that there has been significant progress in the information available on resources received by schools and hospitals (PI-23, rated ‘B’) and public access to key fiscal information (PI-10, rated ‘B’). However, other weaknesses remain in the monitoring and evaluation of performance of service delivery units and policy-budget linkage (PI-12. Dim (i) rated ‘C’).
Ongoing and planned PFMRP
The past 15 years of PFM reforms have delivered substantial improvements in PFM and contributed to the economic and social development over the period. The government has followed a process of building “platforms”, each of which represents a step change in PFM systemic performance. This approach has been followed consistently and has proved effective in coordinating and prioritizing PFM reforms. PFM reforms under the platform approach have progressed from platform 1 ‘budget credibility’, platform 2 ‘financial accountability’, platform 3, ‘policy-budget linkage’, and upcoming platform 4 ‘performance accountability’
The PFMRP-Stage 3 relating to the 2021 PEFA assessment period, has been set out by the PFM Reform Steering Committee (PFMR-SC) with three priority objectives including: (1) strengthened management and implementation of expenditure and revenue collection, (2) strengthened and extended FMIS and (3) strengthened and expanded program budget.
In this stage, 6 core strategies were endorsed for driving PFM reform to achieve its vision, namely Budget System Reform Strategy 2018-2025, Revenue Mobilization Strategy 2019-2023, Public Investment Management System Reform Strategy 2019-2025, Budget System Reform Strategy for Sub-National Administration 2019-2025, Public Procurement System Reform Strategy 2019-2025, and Business Streamline Strategic Plan for FMIS 2019-2025 with respective detailed action plans. Beside these core strategies, the results of this 2021 PEFA assessment are to be used as a complementary tool that highlights strengths and weaknesses to be addressed within the sequencing PFM reform, and to help formulate CAP3+2 (2021-2022) and CAP4 (2023-2027).
The 2021 PEFA assessment has shown overall that most of the RGC PFM systems are aligned with basic standards and few even meets requirements for good practice. The next CAP3+2 PFM reform phase will need to focus on targeted reform priorities as well as key weaknesses identified such as credibility of revenue forecasts adopted in the budget, alignment of medium-term budget expenditure to strategic priorities, PIM, state property management, and comprehensiveness and inclusiveness of fiscal and financial reporting, and internal audit functions.
The weaknesses identified above will be addressed in the next CAP-4 platform to ensure that PFM functions are operating more effectively and contribute to achieve the 3 budgetary outcomes (fiscal discipline, strategic allocation of resources and efficiency in use of resources for service delivery).
Last but not least, the RGC is more than ever committed to strengthen PFM functions further in order to operate effectively, efficiently, and transparently and be accountable. This PEFA assessment will support the implementation of the next stage of the PFMRP to improve and develop the PFM legal framework, institutional mechanisms and build capable human resources to contribute to sustainable PFM systems. The results of PFM reform need to contribute to achieve the three fiscal outcomes; namely fiscal discipline, strategic allocation of resources, and efficiency in use of resources for service delivery.