SUMMARY OF FINDINGS

PFM strengths and weaknesses

The assessment recognized solid performance in a number of areas. Budget documentation (PI-5) is comprehensive and well presented with a useful mix of narrative, tables, and charts. The documentation clearly presents the fiscal aggregates a summary of the economic outlook and basic macroeconomic assumptions underpinning the data. The budget is formulated on a solid Medium Term Fiscal Strategy (MFTS) and Medium-Term Fiscal Framework (MTFF) (PI-15 and PI-16). The Medium-Term Fiscal Strategy (MTFS) and MTFF integrate fiscal ratios and estimates revenues and expenditures for the budget year and two outer years.

There is a strong and effective Chart of Accounts (CoA) which includes segments for Administrative Head (Ministry); Department and Program; Fund Source/Project; Type/Location; and Natural Account (economic item). The CoA meets Government Finance Statistics (GFS), Classification of Functions Of Government (COFOG); and International Public Sector Accounting Standards (IPSAS). The CoA is used for budget formulation, execution, and reporting (PI-4).

Internal controls for non-salary expenditures (PI-25) performed reasonably well, except that this scoring was reduced due a lack of system-based commitment controls with that functionality yet to be implemented in the Financial Management Information System (FMIS). Despite the payroll controls being largely manual PI-23 scored reasonably well, except that no dedicated payroll audit has been undertaken in the past three years.

There were some good elements (dimensions) under Asset Management (PI-12), Debt Management (PI-13), Fiscal Strategy (PI-15), and Parliamentary Scrutiny of Budgets (PI-18). There is strong monitoring of Financial Assets, with PI-12.1 scoring A, although monitoring of nonfinancial assets and transparency of asset disposal, PI-12.2 and PI_12.3 were lacking assessed at D. Approval of Debt and Guarantees, PI-13.2 was positive, scoring A, and PI-13.1, Recording and Reporting of Debt and Guarantees scored C. However, PI-13.3 was rated D as there was no Debt Management Strategy (although government has a stated policy not to incur any new borrowing. PI-15.1 and PI-15.2, Fiscal Impact of Policy Proposals and Fiscal Strategy Adoption each scored A. Three dimensions under PI-18 scored A, but the overall rating for the indicator was C+ (M1 weakest link method) due to dimension PI_18.2, which scored only C due to there being no public consultation, and the legislature having less than 3 weeks to debate the budget. Additionally, strong performance was noted on the medium-term perspective in Budget Estimates (PI-16.1) and provision of clear guidance through budget circulars on budget preparation (PI-17.2) with each of these dimensions scoring A.

Revenue Administration (PI-19) and Revenue Accounting (PI-20) were a mixed bag, with clearly defined rights and obligations, but primarily due to the strict rules under Parties to the Nauru Agreement (PNA) and Vessel Day Scheme (VDS); all collections paid directly into accounts held and controlled by the Treasury – effectively operating as a Treasury Single Account (TSA) (PI-21.1)

The assessment identified many weaknesses under Pillars Six and Seven (Accounting and Reporting; and External Scrutiny and Audit) – PIs-27 to 31. COVID may have some part to play in the late submission of annual audited statements—however there appears to be a broader governance/compliance issue. PI-6 and PI-10 reflect similar challenges with no public corporations, extrabudgetary units, and subnational governments preparing and submitting annual financial statements for Audit.

Procurement (PI-24) reflected a score of D across the indicator. Open and competitive procurement is completely absent, with a total lack of compliance with the prescribed procurement laws and regulations. Not one single procurement was subjected to any competitive tendering process.

Previously, MFED had an operational Internal Audit function, but this has not been operational for some years. This reflected in a lack of payroll and procurement audit as well as inadequate ex-post audit of investment project implementation.

Whilst anecdotally, expenditure arrears are purported as being low, there is no data available, nor is there any ongoing monitoring and analysis of arrears.

Annex 5 sets out observations on Internal; Control, with cross reference made to the ratings against the relevant dimensions.

Impact of PFM performance on three main fiscal and budgetary outcomes

1. Aggregate fiscal discipline

Despite the challenges highlighted above Tuvalu has maintained fiscal stability with just one year reflecting a budget deficit, which was ultimately financed from surplus (previously accumulated) cash reserves. The budget is relatively small, as is the supporting administration, and due to the small size, it has been possible to manage and control budget execution manually where systems are still not yet fully operational (for example commitment and payroll controls). Effective fiscal discipline has also been facilitated by a strong medium-term orientation in planning and budgeting (as evidenced in PI-16). Anecdotally, expenditure arrears are small highlighting good fiscal discipline, and a policy decision has been made not to incur any new public debt. Fiscal discipline is underpinned by sound macroeconomic and macrofiscal forecasting and fiscal strategy (PI-16 and PI-17).

Government has a stated policy to not incur new borrowing, and public debt is already very low compared to peer countries. This has resulted in minimal debt servicing costs thereby reducing fiscal pressure on the budget and freeing up monies for policy implementation and service delivery.

Aggregate fiscal discipline over the past three years has been impacted by lack of credible budgets, with two of the years reflecting optimism bias in revenue projections and the third year under-projecting revenues. On the positive side, MFED, through a sound internal control framework, has been able to constrain spending to revenues collected, avoiding large expenditure arrears, maintaining sustainable fiscal balances.

2. Strategic allocation of resources

Tuvalu has a well-defined budget process, with clear guidelines which include the specific requirement to align budgets to Tuvalu’s national development plan “Te Kete” which clearly articulates the national priorities, which are reflected in the Ministries’ Corporate Plans and Annual Workplans. For infrastructure, a medium-term infrastructure plan (2020-25) was formulated in 2020 under the auspices of the National Infrastructure Steering Committee—titled the Tuvalu Infrastructure Strategic Investments Plan (TISIP). This plan listed and prioritized the new and proposed infrastructure projects seeking funding in line with the Tuvalu’s Te Kete National Strategy for Sustainable Development (2021-2030).

Tuvalu has a strong planning and budgeting framework with strong linkages between policy based planning and medium-term budgeting. Ministries are provided clear guidance on budget preparation via robust budget circulars. Budgets have a strong policy focus, highlighting the impact of proposed policy changes. This is underpinned by a strategy with detailed objective and targets, against which performance can be measured; medium-term expenditure estimates; and robust legislative scrutiny of budgets.

3. Efficient use of resources for service delivery

Ministries are producing Corporate Plans and Annual Work Plans annually specifying objectives by department and program, including service delivery. Information is published annually on policy or program objectives, outputs to be produced and outcomes planned for most ministries, and this is disaggregated by Department and program. Information on resources received by frontline service delivery units is collected and recorded for at least one large ministry, and a report compiling that information is produced at least annually. Evaluations of the efficiency or effectiveness of service delivery has been carried out within the last three years, including one large ministry.

However, monitoring of actual performance achieved is limited impacting effective performance management decision making.

Performance change since previous assessment

Given the elapsed time since the previous assessment and the different methodology used, it was decided that there was little comparability between the ratings from the two assessments. It was therefore agreed that no comparison would be undertaken and presented. Annex 6 is therefore removed accordingly.

Progress in Government PFM reform program

A significant recent reform has been the implementation of the new FMIS, with initial design and configuration commencing in 2020, go-live taking place April 2021, and first full year’s operation for core modules in 2022. The FMIS is based on the TechOne package solution, replacing the previous ACCPAC Sage 3000 solution. As part of the FMIS implementation, a new CoA and budget classification was developed and implemented. It should be noted that implementation commenced during the period of COVID lockdown, and levels of vendor support were not optimal. Not all modules were implemented most notably the Purchase Orders module, which could have been configured for automating budgetary commitment controls—currently this control is undertaken outside of the system. Similarly, work on completing bank reconciliation functionality is still ongoing. Furthermore, work is currently ongoing on the implementation of the HRM and Payroll modules and transitioning to the new TechOne cloud-based model.

Other system reforms include the implementation of the Automated System for Customs Data (ASYCUDA) system in 2022, aimed at improving trade facilitation and strengthening customs clearance processes, and the strengthening of the customs trade portal for importers to process their goods.

Several laws have been updated relating to the PFM cycle, including the constitution in 2023, the Public Finance Act, and Audit Act both updated in 2022, and Public Procurement Regulations were updated in 2021. These updates and amendments are designed to strengthen the legislative, regulatory, and control frameworks. However, governance and compliance will need to be strengthened if these reforms are to be effective—for example, despite very clear guidance on procurement, and reporting requirements (from budgetary central government, extrabudgetary units, public corporations, and subnational governments), compliance is extremely low and non-existent in some instances.

As part of strengthening policy-based budgeting, Tuvalu’s national development plan “Te Kete” clearly articulates the national priorities, against which budget spending must be aligned. Resource allocation is dictated by how strong projects are linked to these national priorities. Additionally, Ministries are producing Corporate Plans and Annual Work Plans annually specifying objectives by department and program. However, performance reports against those plans are not currently produced.

Fiscal risk is now being analyzed and reviewed. In 2023 MFED published its first fiscal risk report, which will be updated every two years in future. Tools have been developed with support from development partners for GDP and macro-fiscal modeling, providing the framework for improve forecasting and planning.

Capacity Development remains a priority to address acute capacity constraints. Specifically, The Ministry of Home Affairs, Climate Change and Environment (MHACCE) is working with the Kaupules (local governments) to strengthen their financial management skills, and the Office of the Auditor General (OAG) with support from the Pacific Association of Supreme Audit Institutions (PASAI) has embarked on capacity-development for its staff in improving audit work. The OAG has also conducted some performance audits on key areas relevant to the government.

The Ministry of Finance and Economic Development (MFED) formulated the PFM Reform Roadmap 2020-2024 in December 2020 (updated from the 2017-2022 roadmap), which built upon findings from the (Australian) Assessment of National Systems (ANS) 2018.

A significant recent reform was the implementation of the new FMIS going live April 2021 - based on the FinanceOne package solution, which replaced the previous ACCPAC Sage 3000 solution. Currently, work is ongoing with regard to implementing the Human Resource and Payroll modules and transitioning to the new cloud-based model. The FMIS implementation involved the development of a new CoA. However, it is understood that selected modules only were implemented and automated functionality does not cover all elements of the PFM cycle. For example, the Purchase Orders and Accounts Receivable modules have not yet been implemented.

The MFED has been investigating modalities for Climate Budget Tagging and plans to commence implementation with the formulation of the FY2024/25 budget preparation. Government decided to change its financial year end from December to June. This was implemented with the passing of a 6 months’ Budget in December 2023 for the period January to June 2024. For the purposed of this PEFA assessment, the last completed fiscal year will be deemed to be the year ended December 2023. Other reforms include the implementation of the ASYCUDA system in 2022, aimed at improving trade facilitation and strengthening customs clearance processes.