The main report is structured as follows: Chapter 1 is an introduction explaining the context, purpose, and process of preparing the report, specifying the institutional coverage; Chapter 2 provides an overview of relevant country-related information that provides the context underpinning the indicator results and the overall public financial management (PFM) performance; Chapter 3 provides the detailed assessment of performance in terms of the seven pillars of the PFM system. It provides analysis and measurement of results in terms of the 31 performance indicators (PIs) of PFM performance; Chapter 4 includes the broad conclusions from the analysis of PFM systems. It also identifies the most important system weaknesses in that respect and contains a section on the internal control framework. Chapter 5 provides an overview of government initiatives to improve PFM performance summarizing the approach to PFM reform, including the institutional factors that are likely to have an impact on the planning and implementation of reforms. Annex 1 provides summary tables of PI scores assessed using the 2016 Public Expenditure and Financial Accountability (PEFA) assessment framework. Annex 2 provides a summary of observations on the internal control framework. Annex 3 lists the sources of information and related supporting work. Annex 4 contains the PEFA assessment scores comparing 2012 and 2016 Assessments using 2011 PEFA framework. Annex 5 contains a PEFA Assessment Management organisation. Annex 6 includes the data tables used for the PEFA assessment.
Assessment Purpose, Coverage, Management, and Timing
The Government of the Republic of Zambia (GRZ) sought a repeat PEFA assessment on the new 2016 Frame work as part of its program of assessments since PEFA began in 2005. Its purposes are:
• Providing a baseline for future assessment of PFM performance using the PEFA Framework for assessing PFM and related guidance;
• Establishing and explaining the level of change in performance based on the PEFA indicator scores by comparison to the results found during the previous assessment to provide a clear picture of specific changes in performance since the 2012 assessment;
• Providing a credible basis for the preparation of the next PFM reform strategy (2017–2019). Where weaknesses remain or new gaps are identified, provide sufficient information that can be used to identify possible interventions for improved control mechanisms; and
• Identifying progress achieved and providing a revised baseline for the government’s PFM reform strategy and the programs that support PFM reform strategy.
Public financial management reforms are presently concentrated at the central level in Zambia. The PEFA Assessment therefore focusses on the Central Government level only.
It covers the budget entities of the central Government level only. It covers the budget entities of the central government, including Ministries, Provinces and other spending agencies (MPSAs). Government functions at the lower levels - District bodies, municipalities and other local councils are outside the scope of this assessment.
The 2016 PEFA assessment is undertaken by GRZ jointly with the World Bank and other development partners. The assessment was conducted by a team of Government officials and World Bank staff and consultants. It followed the PEFA Secretariat recommended methodology with the goal to obtain the PEFA Check quality assurance credentials from the PEFA Secretariat including the required peer review process. The Assessment was conducted under the Government’s Zambia Public Financial Management Project Phase I, funded by the multi donor trust fund. The Joint Government Donor Committee (JGDC), chaired by the Secretary to Treasury and co-chaired by the Head of Development Cooperation, German Embassy in Zambia, served as the Steering Committee for this assessment.
Summary Assessment of PFM Performance
The PEFA Framework has been enabling the GRZ to examine, both at the broad and detailed levels, how each area of its PFM systems is performing and how performance has changed since previous assessments. The first and most important step is to look at the results at the broad level of the seven PFM pillars of the budget cycle. This enables the government to see where reform efforts have not yet enabled the PFM system to reach a satisfactory level.
There has been strong performance for almost all the PIs for policy-based fiscal strategy and budgeting, and external scrutiny and audit. However, there has been relatively poor performance for almost all PIs for management of assets and liabilities, and predictability and control in budget execution. Budget reliability, transparency of public finances, and accounting & reporting have more mixed results.
The groundwork of a transparent, well-scrutinized PFM system and a modern budget development process is in place to set up the approved budget outcomes in a well-ordered way. The technology in the accounting system is also well established with the Integrated Financial Management Information System (IFMIS) rolled out to 48 of the 56 MPSAs. The processes for management of assets and liabilities and for budget execution involve large numbers of public sector staff working throughout Zambia to provide service delivery using the resources that are allocated. Supporting them to do this effectively and within their budget allocations requires a strong enabling framework supported by immediate reliable information on available budget. PIs associated with reporting have been affected by residual manual accounting systems that do not interface with the much more efficient IFMIS.
The most significant result from the assessment aspect of budget outcomes has been the conclusion in PI-2 that budget certainty through ceilings is eroded by variations during the year; and overspending allocations in some departments has been endemic while for others it has been endemic underspending. However, the health and education sectors have generally spent close to budget. These well-established patterns suggest that the original budget allocations have not been set properly to achieve budget outcomes. The impact of PFM weaknesses falls on the allocation of resources and on service delivery. The current budget preparation process has not assured the approved strategic allocation of resources. The continuing deficiencies in internal control systems and financial reporting identified by the Auditor-General raise fiscal risks and the possibility of wastage and leakage of funds, thereby detracting from maximum operational efficiency in the usage of resources.
Fiscal discipline was strong at the aggregate level but needs more control at the expenditure head level as compositional outturns were not consistent with the approved budget. The commitment control system was not working as intended as excess expenditure was incurred. Audit queries on individual transactions were indicative of inadequate internal controls according to the recent Public Accounts Committee (PAC) report .
The PIs on management of assets and liabilities introduced by the 2016 PEFA Framework revealed weaknesses in public investment management as no framework existed for the coordination, appraisal, screening, and selection of major public investment projects. This has resulted in significant rise in costs and liabilities accruing to the government. A department has been established under the Ministry of National Development Planning (MNDP) to address the risks to fiscal discipline through the development of the public investment management framework. Public asset management monitoring was also weak and the Asset Policy was still in development. A joint IMF-World Bank Public Investment Management Assessment (PIMA) was conducted in February 2017, to provide baseline to reforms on Public Investment Management. Debt management was compromised by an expired debt management strategy. A draft debt management procedures manual had been prepared but not finalized.
Strategic allocation of resources was negatively affected as evidenced by the variability in expenditure composition outturn. As such, service delivery was affected by reduced releases for some expenditure heads. Further, predictability of in-year resource allocation was inadequate in that monthly rather than quarterly funding profiles were made available to MPSAs. The in-year budget execution reports were neither timely nor user friendly. In addition, some managers did not have adequate information on their budget position as there were still some manual accounting processes in place that did not interface with the IFMIS, thereby affecting their ability to produce timely reports.
Impact of PFM reforms on the three main budgetary outcomes and the way forward
The PEFA Assessment focused on the three main fiscal and budgetary outcomes which are – (i) aggregate fiscal discipline, (ii) strategic allocation of resources and (iii) efficient service delivery.
According to the results of this 2016 assessment of the performance of the PFM systems, the achievement of the three main fiscal and budgetary outcomes continue to be affected by several substantial weaknesses.
Aggregate fiscal discipline can be improved by serious strengthening of budget approval and execution processes. These processes presently result in very substantial variations between budget and actual expenditure for many administrative heads and for some economic classifications, especially subsidies (PI-2); and substantial growth in already excessive expenditure arrears (PI-22). Steps are available to remedy these defects. Improvements are needed in the budget challenge processes to ensure that budget estimates represent the accurate or close to accurate figures required by the sectors. Enactment of the Planning and Budgeting Bill is needed for strict adherence to the constitutional provisions on funding and improved expertise is needed for officers to properly use the IFMIS for budgeting and coding. Control of arrears is impeded by poor monitoring systems but the full implementation of the Treasury Single Account and additional functionality in the IFMIS is to capture all expenditure arrears will enable ready response by management.
Strategic resource allocation weaknesses result in fiscal space being constrained by spending on general public services; and progress since 2012 in reducing the GDP proportion from 68% to 33% in 2014 reversed to 42% in 2015. As with fiscal discipline the budget preparation processes must enable competing claims to be assessed transparently and the budget execution processes must deliver on the decision; so, the same weaknesses apply and the same remedies are needed for the budget process. Poor public transparency for fiscal information (PI9) is also a concern here as information on the use of resources in line with government publicized priorities is needed for the legislature, civil society and the media to assess the extent to which the government is implementing its policy priorities. Incomplete rollout of the IFMIS was delaying public availability of budget execution reports. Such delays limit the capacity of the legislature, civil society and media to assess the extent to which the government is implementing its policy priorities.
Rollout of the IFMIS to deconcentrated sites and enactment of the Planning and Budgeting Policy and associated legislation will strengthen relevant de-jure and de-facto procedures for budget execution reporting.
Efficient service delivery is heavily dependent on effective planning and oversight mechanisms. Predictability of resource flows is important for planning and performance for these PIs (PI-7 Transfers to subnational governments, PI-16 Medium term perspective in expenditure budgeting, and PI-21 Predictability of in-year resource allocation) was reasonable. Oversight by management, internal audit, external audit, and the Legislature is extensive and reports showed some limitations in internal controls over payment rules and procedures for expenditures. There are programs in place for capacity building in internal and external audit to improve internal controls.
Main Performance Changes since 2012 PEFA Assessment
With the introduction of the PEFA Framework 2016, this assessment will be the last that makes an assessment that is comparable with the three previous assessments. Therefore, it is appropriate to review progress made over the 12-year period for the 6-pillar PEFA structure. Going forward, the 2016 assessment report will provide the new baseline on the revised 7-pillar structure including the new Pillar 3 - Management of assets and liabilities. Table B compares performance ratings for the PEFA assessments of pillars using the 2011 framework. Section 4.4 provides a detailed assessment by PI and dimension.
Table B on changes in performance showed that the PFM system in 2005 did not perform well with most indicators being rated C or D. Progress made by 2008 had declined by 2012, but recovered in 2016 to a position where half the indicators are performing at A or B levels.
• Aggregate expenditure outturn performance improved from D to B due to a significant reduction in deviations between aggregate budgeted and actual expenditures. The 2012 assessment had deviations of 11 percent, 19 percent, and 32 percent for the 3 years 2009, 2010, and 2011. The 2016 assessment had deviations for 2013, 2014, and 2015 were 7 percent, 6 percent, and 15 percent of the budget.
• Transfers to subnational governments improved from C to B+ because the GRZ introduced a single formula based Equalization Grant in place of a number of earlier transfer types.
• Revenue administration deterioted from B to C+ due to high uncollectable arrears.
• Procurement management improved from D+ to C+ through an improved complaints handling process.
• Annual financial reports by the GRZ has improved from C+ to B+ through more timely submission of financial statements for audit.
Ongoing and Planned PFM Reform Agenda
The ongoing reforms on PFM are summarised in Chapter 5; many reforms have been implemented over the last few years while others are still in the process of being implemented. The GRZ recognizes that the reform process is not yet complete and remains focussed on the implementation of the PFM Reforms. The commitment of GRZ to PFM reforms with highest level of attention at senior leadership level is critical for the success of the reforms. As far as possible, existing government structures and responsibilities are used for implementation of the PFMRP by mainstreaming the arrangements and ensuring sustainability. In addition to PFM Reform Project Phase I and several other bilateral support initiatives of development partners, European Union is working with the Government towards a PFM reform project to support some of the areas currently not supported.
GRZ plans to develop the PFM Reform Strategy of the government informed by the PEFA Assessment. Government plans to develop the Phase II of the PFM Reform Project based on the results of the new PFM Reform Strategy.