The Design and Implementation of Treasury Systems Ali Hashim

Europe and Central Asia Region World Bank May 3,2005

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Part I : Basic Concepts

IFMIS: Integrated Financial Management Information Systems Not a very specific term May mean different things to different people.

What are the main systems for Government Fiscal Management ? Macro economic forecasting Budget preparation Budget execution, accounting and fiscal reporting Cash management Debt management Revenue administration (Customs and Tax) Civil service management Auditing
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Information Systems Architecture for Government Fiscal Management

Ministry of Finance Functional Process
Central Bank Debt Management Economic Policy Budget Management

Treasury
Cash Management Central Office Regional Units

Govt. Spending Agencies

Revenue Collection Agencies Taxes Customs

Paying/ Receiving Banks

Audit Organ.

Macro Economic Forecasting

MACRO ECONOMIC FORECASTING

Macro Economic Framework Budget Guidelines AGENCY BUDGET PREPARATION

Government Banking Arrangements

Budget Preparation

BUDGET PREPARATION Investment Estimate of Borrowing and Public Debt Interest Current

Budget Proposals; old & new programs Revenue Estimates Approved Agency Budget

Vendors

Budget Management Accounting & Fiscal Reporting

Previous years data

TREASURY SYSTEM

AGENCY BUDGET EXECUTION CENTRAL BANK (TSA)

Report on Payments & Receipts to TSA BUDGET MANAGEMENT & FISCAL REPORTING Ac.Receiv. Ac. Payable

C O M M E R C I A L B A N K S

Feedback from Audit

Treasury General Ledger Reports on Revenue Receipts

Cash Management Debt Management

DEBT MANAGEMENT Domestic Foreign

CASH MANAGEMENT

Cash Forecasts; Allocations Payment Instructions to Central Bank

Tax Payers

Revenue Administration Civil Service Management Auditing

POSITION MANAGEMENT PAYROLL & PENSIONS PERSONNEL MANAGEMENT

TAXATION

CUSTOMS

AUDITING

Sample Transactions from Government Systems to Auditing

The World Bank has financed a number of Treasury Systems Projects world wide. In some countries these projects have involved building on and repairing existing financial management arrangements and systems In transition economies, they have required setting up institutional structures and accompanying systems, ab-initio, as these countries move from centrally planned to market economies 6

It has been easier to implement Treasury systems, ab-initio, at green field sites such as countries of the Former Soviet Union In other countries, e.g. Turkey, Pakistan, where the reform required that old systems be repaired and modernized, greater difficulties have been experienced due to resistance to changes in the organizational and legal framework, functional processes and procedures.
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Why Treasury Systems ? Ensure that expenditures are in accordance with budget appropriations, commitments and cash allocations, thereby enabling better control over expenditures, fiscal deficits, and arrears Enable better cash management and reduction of idle balances by bringing all government accounts under the control of Treasury and consolidation in a Treasury Single Account (TSA) Provide more accurate and timely information for decision making and accountability by integrating transaction processing, enforcement of controls, accounting and comprehensive reporting. 8

Why Automated Treasury Systems ? Effective economic management requires the availability of timely and accurate data on all government expenditures and revenues and balances in government accounts. Without some degree automation this data may simply not be available with the required degree of timeliness and accuracy since this requires compilation and consolidation of transaction data from across a country wide network of offices

Why Automated Treasury Systems ?

In addition automated systems enable: Integration of transaction classification and posting with transaction processing thereby increasing data integrity Automation of many controls and procedures

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What do Treasury Systems do? Record initial budgets, revisions, spending unit expenditure plans Distribute budget appropriations, spending limits and warrant allocations Record commitments Record receipt of goods and services Authorize payments after checking for controls Give payment instructions to Bank Record revenues and other receipts Enable posting of all transactions, enforcement of controls, accounting and comprehensive reporting
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What legal and institutional reforms are needed prior to work on systems design?
Budget management law that provides a framework for management of public funds GFS compliant Budget classification system/Chart of Accounts Banking arrangements for consolidation of funds in a Treasury Single Account at the Central Bank Re- engineered functional processes and institutional arrangements for TSA based for payment and receipts processing 12 Cash management unit within treasury

What needs to be done so that various systems modules can work together as an integrated system? The systems modules should: Be able to exchange information without difficulty Be organized along functional and not organizational lines Share commonly used data

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How to achieve systems integration? Develop an information systems architecture that provides an over view of the GFM systems network in terms of its: Components- scope, scale and type Connections- information flows Agencies responsible

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Development of an information systems architecture requires an analysis of: Functional processes Responsibilities of agencies Information flows in processes and between organizations Nature, volume and frequency of flows Data characteristics

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Treasury System: Core Functional Processes and Information Flows Case1: Treasury is directly responsible for making payments; Central Bank responsible for banking operations
Consolidated Fiscal Reports
Budget appropriations

Budget Appropriations

Ministry of Finance

Cash forecasts T R E A S U R Y L E D G E R S Y S T E M

Central System

Government Banking Arrangements

Commitment Limits

Line
Ministries &

Fund allocations

Central Spending Units

Commitment and verification transactions

Central Treasury and Treasury Offices at Center

Tax Payers

Suppliers

Payment transactions against TSA

Payment orders Accounting reports

Central Bank (TSA)

Credit to suppliers Acs

Commer cial Banks

Daily file of payments and receipts

Receipts deposit to TSA

Commitment and verification transactions

Regional Systems
Regional Treasury Units

Regional Spending Units

Payment orders

T L S

Payment transactions against TSA

Daily file of payments and receipts

Regional Central Bank Branches

Credit to suppliers Acs

Bank Branches

Summary of receipts

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Accounting reports

Treasury System: Core Functional Processes and Information Flows Tax and Customs Receipts and Refunds

Request for Tax Refund

Tax Payers

Electronic file and documents to Tax Administration

Tax Administration

Refund Payment Order

T R E A S U R Y

Daily file of Tax Payments and Documents to Treasury

Tax Receipts Deposited in TSA and Tax Payer Documents to Central Bank

Tax Refund payment order drawn on TSA

Refund Deposit to Tax payer Account

Confirmation of Export for VAT Refunds Duty Payment advice to Customs

Treasury Offices

L E D G E R S Y S T E M

File of Custom Duty Payments

Central Bank (TSA)

Customs Duties Deposited in TSA

Commer cial Banks

Customs Administration

Duty Refund Payment Order

Duties Refund payment order drawn on TSA

Refund Credit to Importers Acs

Customs Duties

Duty Refund Request

Importers

Confirmation of Receipt of Custom Duty

Customs Warehouse

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Imported Goods

Alternative Arrangements for Payment Processing

Fiscal reports

MOF
Budget appropriations Budget appropriations

Case 1: Treasury is Responsible for Payment Processing; Central Bank responsible for banking operations

Expenditure transactions from Treasury to TSA Bank; Reports to Treasury on payments and receipts

Spending Ministries and SUs

Treasury (Central & Regional Offices)

Treasury Ledger System

TSA held at Central Bank

Commercial Banks

Payment requests from Ministries and SUs to Treasury; Financial reports from Treasury

Payments to Suppliers Accounts; Government Receipts

Fiscal Reports

MOF

Case 2: Ministries and SUs are directly responsible for Payment Processing; Central Bank responsible for banking operations

Budget appropriations

Budget appropriations

Treasury Central Office

Central Treasury Ledger System

Reports to Treasury on Payments Payments to Suppliers Accounts; Government Receipts and Receipts

Reports from ministry systems

Spending Ministries and SUs

Ministry Level Ledger Systems

TSA held at Central Bank

Commercial Banks

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Expenditure transactions from Ministries to TSA Bank; Reports to Ministries on payments and receipts

Alternative Banking Arrangements (Banking Operations carried out by a Commercial Bank acting as a Fiscal Agent of the Central Bank)
Fiscal reports from system

MOF
Budget appropriations Budget appropriations

Central Bank (TSA)

Case 1: Treasury responsible for payment processing;

Spending Ministries and SUs

Treasury (Central & Regional Offices)

Treasury Ledger System

Fiscal Agent

Commercial Banks

Payment requests from Ministries and SUs to Treasury and Financial Payments to Suppliers Accounts; Government Receipts reports from Treasury Expenditure transactions from Treasury to TSA Bank; Reports to Treasury on payments and receipts

Fiscal Reports from System

MOF

Budget appropriations

Case 2: Ministries and SUs are directly responsible for Payment Processing

Budget appropriations

Treasury Central Office

Central Treasury Ledger System

Central Bank (TSA)

Reports from ministry systems

Reports to Treasury on Payments and Receipts

Payments to Suppliers Accounts; Government Receipts

Spending Ministries and SUs

Ministry Level Ledger Systems

Fiscal Agent

Commercial Banks

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Expenditure transactions from Ministries to TSA Bank; Reports to Ministries on payments and receipts

Investment Cost Elements for a Treasury Project

(Base Costs + Taxes and Duties+ Contingencies)

Policy and Design Consultancies Legal Framework (Budget Law, CoA, Budget Classification Strc.) Functional Requirements (Information flows, documents, procedures Technical Design and Architecture (S/W, H/W, Comm Specs) Project Management Equipment and Software Servers/Work stations ( incl. systems software and office software) Printers and office equipment LAN Networking/WAN Networking/Information Security Misc- Site Preparation & Installation Application Software (Licenses, Parametrization, etc.) DBMS and Application Development tools Training End User Training Technical Training for IT staff in the use of Specific Tools used 20 Financial Management Training for Managers

Recurrent Cost Items

Hardware Maintenance / Replacement Application Software and DBMS/ Tools Telecommunications Costs Stationary, Utilities, Office Premises Staff Costs On Going Training
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License fees ( 15% of installed software)

Activities and tasks involved in the implementation of a Treasury system Develop Legal and Institutional framework Develop functional design, manuals and procedures Develop technology design and architecture Procure Application Software Parameterize/Customize S/W Test Application S/W for functionality
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Activities and tasks - continued Implement system at Pilot sites Procure and Install hardware at pilot sites Institute change management procedures Train end user and technical staff Implement systems Replicate systems across all sites

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Indicative Implementation Schedule

Legal and Institutional Framework Functional Design, Budget Classification, CoA, Procedures and Manuals Technical Design Systems Procurement Gap Analysis, S/W Parameterization /Customization/, Testing Change Management & End User Training Pilot Systems Implementation Systems Replication
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12-18 months

12-18 months

24-36 months

Part II: Implementation Experience

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Some Treasury Systems ProjectsFinanced by the World Bank Kazakhstan Treasury Modernization Project Ukraine Treasury Systems Project Russia Treasury Development Project Hungary Public Finance Management Project Turkey Public Finance Management Project Pakistan Improvement in Financial Reporting and Accounting-PIFRA-project Indonesia- GFMRAP
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Institution Building / Technical Assistance Projects with Treasury Components

Azerbaijan- IBTA II Turkmenistan Albania Armenia Uzbekistan-under preparation Slovakia Moldova under preparation
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Kazakhstan Treasury Modernization Project

Project approved: July 1966 Loan amount: $15.8 million Government Financing: $5-10 million Project Status: Treasury Organization / Legal Framework in place Treasury Offices in Oblasts and Rayons Payments and Receipts Centralized through Treasury Interim Computer System was first Installed ORACLE- FINANCIALS based full function system installed and working
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Ukraine Treasury Systems Project Approved: March 1988 World Bank Loan: US $16.4 million Government financing: $10-15 million Status: Treasury organization / Legal framework in place; business processes re- engineered Payments and receipts centralized through Treasury for both central and local government Automated Treasury system installed and working at HQ, 27 oblasts, and about 650 rayons

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Russia Treasury Development Project Project approved: June 2002 World Bank Loan: $231 million ( Ist tranche) Estimated Cost: $400 million Status: Treasury Organization, Legal framework in place, business processes re-engineered Payments and receipts processed through Treasury Treasury Single Account established at Central Bank of Russia Assorted Interim systems in use New systems to be implemented under this project
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Hungary PFMP Treasury Component Project Approved: 1998 Loan Amount: $7.5 million Government Financing: $5-10 million Status: Treasury Organization, Legal framework in place, business processes re-engineered Payments and receipts processed through Treasury Treasury Single Account established at Central Bank of Hungary Custom developed treasury system installed and in use Covers Central Government transactions

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Critical success factors

Government commitment and management support Good project management Interagency cooperation Orientation and training Technical skills Management of change
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Commitment and Support of the MOF -1 A Government wide payment and accounting system, has implications for multiple agencies and possibly for multiple levels of government. Implementation of such systems therefore requires the full and active support of the MOF.

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Commitment and Support of the MOF -2

It is difficult to get senior policy makers in the MOF actively involved if reform measures are framed in terms of resolution of an accounting problem, e.g. non-conformity with international accounting standards, use of an archaic chart of accounts, lack of timely reporting etc. Such a strategy will focus primarily on the reform of the organization and processes related to the accounting function.
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Commitment and Support of the MOF -3

Such projects should be framed as initiatives designed for reform of the expenditure management systems rather than merely accounting systems reform. This raises the importance of the problem to a level where senior level policy makers in the country and their counterparts in donor organizations can relate to it. Linkages can then be established between the Treasury development program and requirements under policy based lending from both the Bank and IMF. The MOF then starts taking an active interest in ensuring that project milestones are met.
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Project Management and Interagency Coordination The project needs to be headed by a competent public sector manager from the functional side who enjoys the respect of his colleagues and superiors in the Government service system and should have adequate financial and administrative authority.

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Core group of professionals need to be set up from the core functions, who are trained and can act as change agents as the system is rolled out. Representatives of participating agencies need to be represented on the team to manage the interface with their agencies. Project secretariat should have specialist staff with experience in the installation of large scale IT systems and IT procurement
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Orientation and Training -1 A large number of stake holders in various agencies need to become familiar with project scope, advantages (what it will do for them) and timeline. A very large number of staff need to be trained in the actual use of the system. This number and the training task could appear overwhelming if a training plan is not prepared in a structured manner. 38

Orientation and Training 2

Training effort needs to be coordinated closely with implementation plans and focused to specific requirements of a given site implementation Training should be imparted just before implementation Most staff need to know only specific features of the system Help Desk; Hand holding clinics.
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Technical Skills and Capacity: Lack of career prospects for technical IT staff within Government has been a major area of concern for sustainability of such projects This could be remedied within the context of an overall civil service reform effort - this is however, a long term measure Other solutions: Hire specialist IT staff on contract at private sector salaries Outsource the technical operations and 40 maintenance of the system

Management of Change
Need to overcome opposition from vested interests who perceive the new systems as a threat advantages of new system need to be recognized by MOF management and opposition resisted perception of the system being a threat has to be removed Lack of incentives for change in a civil service Setting Bureaucracies are normally risk averse Give examples where this has been done successfully 41 Show case results internationally

Extending the central system to sub-national levels

This has posed problems in many countries. Subnational levels of Government normally like to be able to control payments without reference to a functionary of the center. The solution to this problem has to be found in the context of the local political economy and the relationships between the central and sub-national governments.

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If the central government is the sponsor of the project then the scope should be restricted to central government payments and receipts. If the central government wants to extend its control to provincial level payments then it should have some financial leverage and control over provincial finances; e.g. it should be funding a major portion of the LG budget. Two types of solutions Use of same system across multiple levels of government Use of common standards, CoA and data exchange protocols

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Russia: The Provincial treasuries are required to use the central system if it is a deficit province. Surplus provinces can develop their own treasury systems based on agreed standards and provide data at specified time periods to the Federal Government. Ukraine and Kazakhstan: Central and Local Governments use the central treasury system. Moneys are banked in the Central Bank.
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Pakistan: Central and Provincial governments are required to use the same system. Moneys banked at the Central bank/ National bank in Separate accounts.

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Use of the Central System and Central Government Treasury offices for payment processing can alleviate capacity constraints at local Government level. However, care should be taken to ensure that this system use is provided as a service rather than an attempt to control local government budget execution by the center. Local government moneys should not be co-mingled with central government.
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Realistic time frames for reform program

The functional reforms have taken several years to be implemented. Sustaining management support over long periods has been a problem. Linkage to IMF program and/ or SAL operations has often been used to reinforce commitment Some times interim technical solutions have been implemented to support these reforms followed by full function systems. This has proved useful. The whole process has can easily take 8-10 years Procurement delays using Bank procedures
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ECA- Technical Infrastructure and Capacity

Technical capacity has not been a major constraint in ECA Relatively good quality telecommunications Expertise in the technical areas is relatively easily available from the local private sector. However, there is a dearth of expertise in the functional areas. Pay and remuneration in Government is a key constraint. 48

Some closing words

Institutional and political economy issues

are more difficult to resolve and take more time for resolution than technical issues Reform of underlying fiscal management processes should be the basis for systems design

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Treasury System Modules Management of Budget Authority

MOF/ Loads Budget Appropriations ( Initial, revised and suppplementary) Line Ministries enter consolidated cash requirements for year for all subordinate spending units. Treasury makes apportionments for line ministries and line ministries make allotments for subordinate spending units Treasury makes Warrant allocations to ministries and ministries make sub warrant allocations for subordinate units

Line Ministries

Budget appropriations

MOF/ Treasury

Apportionments

Warrant allocations

Commitment Management

Spending Units
Cash forecasts

Spending Units register commitments/ enter purchase order and contracts data after checking for budget availability Central Bank TSA
Payment orders

Payments

Vendors/ Govt. Creditors Banks

Payments Management

System passes commitments data to Accounts payable module and Treasury authorizes payments from TSA after checking funds availability/ prior commitment

Fiscal Reports to MOF

Receipts

Tax Payers Bank

Revenue Collection Agencies

Receipts Management

Loan/ Aid Receipts to TSA

System records receipts information provided by the Banks

Donors/ Aid Giving agencies

Cash Management
Fiscal reports Revenue forecasts Borrowing requirements

Develop revenue and expenditure forecasts/ monitor cash balances/ determine warrant amounts/ borrowing requirements

Debt Management Department

Debt Management

Debt Management Department enters debt commitments, debt servicing expenditure and loan/ aid receipt transactions

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Fiscal Reporting

Develop Overall Fiscal Reports