Assessing Public Expenditure Management in Cambodia

Cambodia Public Expenditure Management 2015

At the heart of economists is predominant on how to use the resources. When it comes to public resources, management of these resources is the concern of ministries of finance or economy, central banks, and the other international governmental organisations like the World Bank, Asian Development Bank, International Monetary Fund, and so on (Mundial, 1998). Thereby, an approach like public expenditure management is pioneered for “public sector budgeting that is oriented toward achieving socially desired outcomes” (ADB, 2001, p.1). Those desired outcomes are aggregate fiscal discipline, allocative efficiency, and operational efficiency (ADB, 2001).

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In the case of Cambodia public financial system, Royal Government of Cambodia (RGC) started a public financial management reform agenda in 2004 to build on budget credibility, financial accountability, linkage of budget to policy, and accountability for results, respectively. However, it leaves to a question on its quality of public expenditure management.

Therefore, this paper will first assess the 2015 Cambodia’s public expenditure management system and further discuss on what ways the system should be reformed. The analysis of the proceeding arguments is using a 2015 report of the evaluation on the public financial management system of Cambodia by General Secretariat of Steering Committee of the Public Financial Management Reform to gauge with Schick’s three elements of public expenditure managements namely aggregate fiscal discipline, allocative efficiency, and operational efficiency in order to assess the quality of existing system followed by suggestions for the reforms.

Aggregate Fiscal Discipline

Aggregate fiscal discipline is simply understood as the idea of “keeping government spending within sustainable limits” (ADB, 2001, p.1). Schick (1998) explains it requires the total spending and other budgets to be independent and enforced by the government throughout the year. It shall be disciplined rather than accommodating the raising demand from each spending agency.

Looking at Cambodia case, it has been found that the aggregate fiscal discipline is deemed a good performer. It demonstrates an A rating on aggregate expenditure out-turn against the original approved budget scoresheet which signifies a less significant variation between approved budget and actual spending. “The deviations in absolute terms were 2.4%, 3.1% and 6.1% in 2011, 2012 and 2013 respectively i.e. below 5% in two of the three years”, cited from the PEFA (2016).

However, this has been criticised by Allen (2009) over the budget credibility proclaimed by the Royal Government of Cambodia during its stage 1 reform. He believes budget credibility does not apply in such the context. This is caused by the exceeded percentage of actual spending budget to planned budget based on the statistical term. Nonetheless, albeit it exceeds the budget plan, it is at acceptable rate. Schick (1998) also discusses about the soft aggregate targets or flexible targets when government is required to respond to adapt to changes in economic conditions. European Monetary Union and American Gramm-Rudman-Hollings law in 1985 are in the practice of a flexible approach which budget limit is decided each year but it is open to “agreed constraints” (p.54). Thereby, we can say Cambodia is meet to the Schick’s core idea on aggregate fiscal discipline that spending shall stick to the plan within an acceptable variation.

PFMRP (2015) also outlines a number of factors that attribute to this success. First, it is the budget preparation process that is orderly and timely prepared. All spending ministries understand the ownership of their budget and final approved budget before the fiscal year starting. Second, budget execution reports are produced monthly for the monitoring progress. Third, all spending ministries are using suggested financial tools like cash flow planning to help them to meet their budget commitment. Last but not least, an oversight from government plays a role. Public enterprises and local administrators are ensured they have not requested an unexpected demand for the government resources.

Nevertheless, one caveat need to be noted regarding the medium-term expenditure framework. Under Schick’s rule on aggregate fiscal discipline, he further extends to another important composition referring to the medium-term outlook. “The limits are set for the medium-term (3-5 years) and budget decisions are made within a medium-term expenditure framework”, cited in Schick (1998, pg. 13). However, in respect to Cambodia’s medium-term expenditure framework, it is still at her early stage of development. There is still a weakness between the linkage from one budget cycle to another cycle (PFMRP, 2015). Thus, among two compositions in order to comply with Schick’s idea on aggregate fiscal discipline, Cambodia has achieved one but not in a sustainable platform.

Allocative Efficiency

In interpretation on allocative efficiency, Schick (1998) elaborates it to the distribution of resources for public programs in order to meet the government’s strategic objectives. In ADB (2001), it compares the concept to the calculation of “last dollar spent on each program yields the same net benefit to society”; alternatively, it means “spending the money on the right things” (p. 2). This requires a strong governmental capacity to make use of the available resources for setting their priorities, shift from old to new priorities, and direct from less to effective programs. Schick further suggests that government needs to be both strategic and evaluative. The former is about defining what the government wants to accomplish out of from the expenditure while the latter is a reflection of the outcome (Schick, 1998).

Cambodia has a significant limitation on this allocative efficiency element. Royal Government of Cambodia fails to establish a comprehensive medium-term expenditure framework and links both together despites the strengths of “orderly and participatory approach to the annual budget formulation including a timely and well organized legislative review as well as reliable and timely information provided on the transfers to communes and sangkats, which prepare their own budgets independently” (PFMRP, 2015, p. 3). When we match the outcomes to Schick’s principle, it implies Cambodian government is lacking of its strategic capacity.

Not only the strategic capacity is missing, but it is also limiting on the evaluative capacity. Three evidences illustrate the evaluative incapacity in according to PFMRP’s (2015) report. First, there is a lack of unified chart account for the classification of budget. Second, it is found no detailed report is produced for the implemented programs. Third, there is also no collection and processing information presenting that service delivery units were really received.

The problem of prioritisation and strategic planning have been discussed by ADB (2001). These difficulties arise on the fact that government does not know the preference of the citizens. More technically, economists call it the problem of preference revelation. In addition, Schick (1998) also explains about the issue of budget allocation in poor countries that their spending is relatively more covering to operating costs and military expenses than to the other social sectors like health or education. 42.24% of Cambodia approved national budget for 2015 is to be set to primarily spend on administrative cost, defence and unclassified spending 11.18%, 15.55%, and 15.51% respectively (source, own calculation). This reflects almost half of budgets is to spend on government running costs and less prioritized areas. In term of evaluative capacity problem in Cambodia, one likely reason can be derived from the lack of political commitment and money (Schick, 1998).

Operational Efficiency

Operational efficiency is to be economical for the operations carried by the government to control its running costs (Schick, 1998). PFMRP (2015) report described it as “financial resources are used to create value for money in the provision of public services and that waste is avoided” (p. 4).

In Cambodia, it also has a problem with the element of operational efficiency. PFMRP (2015) finds several significant flaws. First, procurement systems do not work monitoring control and there is a problem of transparency of information. More importantly, it also does not have an independent procurement complaints review body. As evidenced, it gets a score of D on “transparency, competition and complaints mechanisms in procurement” category (PEFA, 2016). Second, governments delay in paying to its suppliers and services. PEFA (2016) states that “overall the stock of arrears is greater than 10% of total expenditure. The estimate is likely to further increase if data was available on invoices for which payment orders have not yet been issued.” Finally, there is no audit performance and internal control system that have been fully conducted. PEFA (2016) shows several deficiencies in this such as comprehensive payroll audit in the last three years has not been found, there is a great number of non-compliance with rules, no control guidelines are produced for capital expenditure and asset management, effectiveness of internal audit score is C, and finally external scrutiny and audit are unable to rated given documentary evidence is not able to be provided.

This operational efficiency problem is concurring with rent-seeking behaviour as discussed by Allen (2009) in his report on the challenge of reforming budgetary institutions in developing countries. Based on his claim, corruption can be one of the considerable factoring hindering operational efficiency in Cambodia on the grounds that Cambodia scored 21 score out of 100 based on Corruption Perception Index (CPI), in according to Transparency.

Suggested Reforms

It is the fact that developed countries such as France, the U.K. and the U.S has taken more than 200 years to development “sound budgetary institutions”, cited in Allen (2009, p. 1). Toward a country like Cambodia which is also a developing country, it is no doubt that it requires her significant works to reform her public financial system. Royal Government of Cambodia acknowledged its weaknesses and initiated a reforming program since 2004. The launch of 10-year Public Financial Management Reform Programme (PFMRP) is a reform mechanism that is “built on four sequenced and prioritized platforms: a more credible budget, effective financial accountability, a fully affordable and prioritized RGC policy agenda, and RGC managers fully accountable for program performance” and the progress is ongoing (Saravuth & Murphy, 2008, p.2).

The following discussions will suggest on how Cambodia’s public expenditure management system shall be reformed in its leadership as a precondition to successful reform and focused on the basics first based on Schick’s principle to ultimately tackle the underlying problems.

1. Leadership

Leadership plays an important role in reform. When it comes to public expenditure management reform, a strong and an active finance minister is required to coordinate and drive the budgetary system reform (Allen, 2009). He further gives an example of reform taken place in New Zealand where a finance minister was a main driver in reforming the system. Tommasi (2009), in a book of Strengthening Public Expenditure Management in Developing Countries: Sequencing Issues, also sees the importance of active and strong leadership from the minister of finance to build up the consensus among different groups, and to design and implement the reform. Browne (2010), in his book called reforming budget systems: a practical guide, listed the five preconditions for successful budgetary reform. Those are 1) recognition of problem by stakeholders, 2) high-level political commitment, 3) smart objectives, 4) adequacy and consistency of resources, and 5) institutional reform, respectively.

In the reference to Cambodia context, it is arguable that Cambodia has met the first precondition when the prime minister Hun Sen has acknowledged that there is problem in the system and said “we need to reform the way we reform” (Saravuth & Murphy, 2008, p.1). However, it needs a second precondition of strong commitment and leadership in order to strive the reform successfully. It is also observed that a successful reform in Cambodia tends to start with the change in the leaders. Starting with new minister of education, Hang Chuon Naron, he has gained a publicity sight for his reform after his inauguration in 2013. Kelsall, Khieng, Chantha and Muy (2016) finds that “new leadership in the education ministry promises to bring faster, deeper reform than ever before” (p.2). Another example is to minister of land management, urban planning and construction, Chea Sophara. He was swapped by prime minister, which is a part of a ministerial reshuffle in mid-2016, to hold the new position in order to tackle the land issues in Cambodia. From international agencies and Cambodia citizens are well-aware of his reputation as a leader who can get the things get done. At the early stage, he started with a new committee to solve the land dispute issues and establish the Department for Social Land Concessions to support the process of land disbursement to poor families. Albeit no major significant result is appearing yet given it is just progressing, both local and international human rights activists are optimistic about “the initial actions of the new minister signify a major shift in the government’s land policy and are not just part of another pre-election stunt” (Andreas, 2016). Both examples are revealing the importance of leadership in leading the reform. However, one cautionary note is that without a strong political support from government, it is believed both will find challenges in driving the reform as well. Thus, it is strongly convinced that a change in leader in ministry of economy and finance with a full-determination and full-capacity leader can help improving Cambodia’s public expenditure management into a better level like the other ministers as well.

2. Getting the basics first and right

Schick suggested on the idea of “getting the basics right” as the lessons to the developing countries for their public expenditure reform (World Bank, 1998). Otherwise, it may risk of failures. Brumby and Schiavo-Campo (2008; 2009, cited in Allen, 2009) study on the MTEF of African experiences revealing some positive effects but states it as “costly failure”, diminishing the basic PFM improvements, and little progression on other economic objectives like financial control, macroeconomic balance and spending efficiency. Therefore, Schick suggests as the following to start the reform –

• Foster an environment that supports and demands performance before introducing performance or outcome budgeting.
• Control inputs before seeking to control outputs.
• Account for cash before accounting for accruals.
• Establish external controls before introducing internal control.
• Establish internal control before introducing managerial accountability.
• Operate a reliable accounting system before installing an integrated financial management system.
• Budget for work to be done before budgeting for results to be achieved.
• Enforce formal contracts in the market sector before introducing performance contracts in the public sector.
• Have effective financial auditing before moving to performance auditing.
• Adopt and implement predictable budgets before insisting that managers efficiently use the resources entrusted to them (World Bank, 1998, p.8).

Therefore, it is suggested Cambodia to take all the above points into the consideration for its reforming agendas. Two appealing examples are given which they will show Cambodia is still lack of the basics. First, it is relating to the accounting standard. Within the current system of cash basis accounting and reporting, it still has not met to the cash-based International Public Sector Accounting Standard (cash-IPSAS) standard yet (PFMRP, 2015). PEFA (2015) shows a score of D+ for the quality and timeliness of annual financial statements. Second is the loophole in the controls for non-salary expenditure. It is found that only basic set of controls is in place except assets and capitals expenditure troublesome the control system which leads to a score of C in comprehensiveness, relevance and understanding of other internal control rules/ procedures (ibid, 2015). Therefore, it is essential for Cambodia to work out on those basic elements first before proceeding to achieve another stage of public expenditure management system.

However, it is generally neglected to get the basics done first. This problem is driven by its unattractiveness to finance minister and politicians because its outcomes are not sparkling while it is a tendency to look for the adaption of the latest fiscal innovation running by the West instead (Allen, 2009). That is the reason why in this paper it shall suggest leadership to be the first whom he or she will be able to put the basics principle in the top priorities for driving the reform agendas.

Conclusion

In short, from all of the above discussions, it reveals that the quality of Cambodia’s 2015 public expenditure management is not up to the international practices yet and still requires lot of works for further improvements. From all the three elements, it can be seen the Cambodia government could only control its spending agencies well to meet the limited line annually. This reflects it meets one core composition of aggregate fiscal discipline. Whereas, it lacks of another sustainable part when the medium-term expenditure framework is not well constructed yet. Consequently, it also leads to the allocative efficiency and operational efficiency problems.