Pakistan Institute of Public Finance Reading Material

PUBLIC FINANCE MANAGEMENT

Adam Smith, writing in 1776, devoted a large portion of 'The Wealth of Nation' to the
role of government. He recognized the need of public sector to provide for the defense of
the nation, the administration of justice, and the carrying out of some needed public
works that would not be otherwise provided by private activity. Public Sector, broadly
speaking, includes Federal Government, Provincial Government, Autonomous
Organizations and Local Bodies. In order to perform the tasks mentioned above, public
sector does require finance and that is done by means of raising revenues and then
incurring expenditure.

The finance, as we all know, is the most vulnerable of the created things. Its ever
readiness to be abused through fraud, negligence and inefficiency makes it potentially
risky. With times, the risk element has tremendously increased. Instead of shells, metals,
hides, skins and other commodities having money value, we exchange currency, and
financial instruments, which can be easily pilfered. In financial systems, where ownership
is divorced from management, as in public sector, there is even more need for close
controls. Moreover, the growing size of public sector requires huge size of finance and
could only be run efficiently by installation of a perfect financial management system.

Structure of Financial Administration: Ministry of Finance is at the apex of

government financial administration. It co-ordinates all internal and external financial
management activities and plays a pivotal role in implementing the national fiscal
policies, overseeing revenue collection, cash management and public debt. It issues
policy guidelines and norms to regulate government fiscal operations. In provinces, the
counterparts of ministry of finance are provincial finance departments. The work
connected with finance is conducted through the administrative secretaries and below
them through the heads of departments and controlling officers. All of them have
established budget and account cells with different names for budgeting and accounts
work. In the field, there are heads of offices, or DDO’s which perform all the work of
drawal and disbursement. They take assistance from accounts and budget staff working
under them.

Ownership and Custody of Funds: The federal government and each of the
provincial governments have the cash balances of their own. Whatever cash comes in
shape of taxes and subscriptions to new loans, belongs to the government concerned. The
cash is lodged with the State Bank of Pakistan (SBP). Each of the governments has
opened its separate account with the bank. The SBP has offices only in big cities. At
other places, the agency of National Bank of Pakistan (NBP) is used. The latter has a
dense network of branches all over the country and all its branches operate the federal
government’s account for receiving taxes and other moneys. But for payment of claims,
only the designated branches - usually the main branches at the district headquarters -
operate that account. The provincial government’s receipts can likewise be paid at all
branches of National Bank of Pakistan in the province, but the payments are made only at
the designated branches.

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The State Bank of Pakistan maintains complete account of cash, received and paid and
sends to the Accountant-General concerned a closing balance statement of the
Government at the close of each month.

FINANCIAL MANAGEMENT CYCLE: Finance is one of the

most important area both in government sector as well as in private. There is no
government activity, which does not ultimately involve receipt of expenditure of money.
Experts have divided the financial management activities in to four phases. Each of
which has assumed so much importance that it is a discipline itself. The activities though
begin at a point of time and end at other but repeated in phases exactly in the same order
over period of time and form a cyclic process known as Financial Management Cycle.
Each phase of the cycle consists of some sub-phases as illustrated in the model at Fig:
1.1.

PLANNING: Planning is a complex process, requiring looking much in advance. It

is not amenable to any rule of procedure. Unexpected situations, major international
events or a break-through in technology can give a big jolt to development strategy either
way. The planners find it safer, therefore, to start with ‘perspective plans’ of long range
flexible forecasts involving strategic analysis of major economic issues which the
country would face in next ten to thirty years. As those issues are little clearer in their
relevance to a shorter timeframe, ‘medium term plans’ of three to seven years are
formulated within the framework of the strategic plan. Medium term plans include, in
more detail, the plan targets, programs and policies, classified by major sectors of
economy, regions and even commodities. The medium plans are made operational by
breaking down to concrete programs and projects in shape of ‘annual development plan’
and funneled in ‘development’ budget as distinguished from ‘current’ budget.
In government financial management, the planning, therefore, has two sub phases - one
that relates to 'non-development' or 'current' services and programs and the other to
'development'. The current programs and services are like provisions of daily
consumption in our households, fruit, gas and electricity, which we use all the year round.
On the other hand, the development programs are like refurbishing the drawing room or
adding a new room to the existing structure of our hose for the growing needs of the
family. The latter requires a lot of outlay and we 'consume' the investment over a much
longer period of time. The development expenditure in government of Pakistan is taken
to mean the following:
i) That it creates material assets;
ii) That it is designed to keep intact, to enlarge and improve the physical
resources of the country;
iii) That it will improve knowledge and productivity of the people; and
iv) That it will encourage efficiency with which available resources are used.
Pakistan has accorded a special status to development planning in its Constitution. It has
created National Economic Council under the chairmanship of the Prime Minister. The
Council has been assigned to review overall economic condition of the country,
formulating plans in respect of financial, commercial, social and economic policies. For
the activities, the expenditures on development programs are kept separate from those on

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current or non-government budgets and accounts. Virtually, we prepare two sets of

budget and accounts - one for the development expenditure and other for the current or
non-development.

Fig 1.1
Phases of Financial Management Cycle

Current Development
Service Program

Planning

Legislative Pre ante Revenue

Review Review Estimates

Review Budgeting

Audit On-course Expenditure

Review Forecasts

Implementation

Development Revenue
and Current Collection
Expenditure

Accounting

Legend
Feedback

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BUDGETING: The budget system with all its paraphernalia, we witness today,
took very long time to develop. It started in Britain with the signing of Magna Carta in
1217 AD. First, it was intended to curb King's powers to tax but later in 17th Century, the
separation of King's expenditures from those of the state, permitted expenditure control
through budget. A single consolidated fund was created in 1787 AD, ensuring greater
control by Parliament. It was not untill 1822 AD that the budget was first time presented
to the British Parliament. During 18th and 19th centuries, the system spread to some
European Countries and USA. With the extension of British rule after the events of 1857
AD, the practice came to us in the Sub-continent.
The importance of budget is that no fiscal program becomes operational unless it is
included in it. Budgeting is the way of looking ahead, and forecasting revenues and
expenditure for the ensuing year. The focus is mainly on the current expenditures, but the
outlay on development projects during the next year is also included.

Budget Formulation: The budget formulation starts in Pakistan in November every

year. Each Drawing and Disbursing Officer prepares the estimates of revenues, which he
hopes to collect and those of expenditures, he needs to make during the next year. The
estimates of revenues collectable are worked out on the actual demand based on the
current taxation structure and recoverable arrears. Guidance is, taken from actuals of last
three years, however.
The expenditure proposals are based on the actual expenditure of eight months of last
year and that of four months of the current year. The actual expenditure of the last three
years is also inserted in the proposals to show the trend.
The proposals of development expenditure are based on the cost estimates of the
approved projects. For ongoing projects, the basis of estimates is more or less similar to
that of current expenditure.
The proposals thus completed are submitted to the head of department, through the
controlling officer, if one functions in between, and consolidated by the latter. The head
of department and administrative ministry consolidates these estimates further and
develop the total estimates for the department or function as a whole for consideration by
the ministry of finance/finance department.
Budget Authorization: The Ministry of Finance or the provincial Finance
Departments consolidates the budget proposals for the federation or province, as the case
may be, and determine the resource gap, or shortfall in revenues. Proposals are developed
to meet the gap by additional taxation and other measures. Division, as the case may be,
and obtains the approval of Cabinet. The entire proposals are ultimately laid before the
Parliament after the approval of cabinet. They are discussed, along with the mode of
financing, in accordance with the provisions of the Constitution. The enactment of
Finance Bill marks the end of authorization process. The approved estimates are then
communicated to the administrative ministries, heads of departments and down to the
heads of offices for implementation.

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IMPLEMENTATION: The approved budget lays down, in money terms, the

targets of revenue collection and the programs and services on which the funds are
expendible during the ensuing financial year. An activity authorized in the budget is
accompanied by receipt of money into or expenditure from the government kitty. It is,
therefore, essential that the accounts and other records supporting those activities are
correctly written up. The budget implementation is the means of translating government
fiscal policies into reality through collection of revenues and incurrence of expenditure
on approved services and projects. The officials engaged in this phase are guided by
rules, departmental regulations and executive orders issued from time to time. Account
keeping is an essential activity related to implementation.

The implementation of budget means collection of revenue and incurrence of expenditure

on approved services and projects. The DDO’s and other government officials engaged in
implementation are guided by the rules, departmental regulations and executive orders
issued from time to time. The main rules are in treasury rules and financial rules.

Account–Keeping: Account-keeping in an essential activity related to budget

implementation. In Pakistan the Government Accounts are kept in two sets. One set of
accounts is kept by the DDO’s and the other by the DAO’s/AG. The DDO’s keep
accounts of moneys collected by them and remitted to bank and the moneys withdrawn
and disbursed by them. The DAO’s/AG keep account of money remitted to the
bank/treasury by the DDO’s, taxes deposited direct by the tax payers and the amounts
withdrawn by the DDO’s. The two sets of accounts are reconciled monthly at DDO level
and periodically at the controlling officer/Head of department level with the Accountant
General’s office. The DDOs’ have primary responsibility for reconciliation of
expenditure with the Accountant-General/District Accounts Officers.
REVIEW: Review implies looking back in the past. It is traditionally considered as
the concluding phase of the financial management cycle. But facts point to a different
situation. The reviews actually begin with planning, go along budgeting and throughout
the implementation phase.
The kind of reviews that we witness in financial management practice can be divided in
three groups as under:
• Ex ante assessment
• On course review
• Ex post facto review
Ex ante Assessment: Ex ante assessment implies review before implementation. The
entire system of planning, budgeting, delegation of powers and requirement of taking
approval from an authority other than the spender and pre-audit system operates as an ex
ante assessment of proposals.

On course Review: The on-course-review means concurrently reviewing and

supervising activities or operations. These reviews carry the advantage of providing
direction and guidance to the entity officials and avoid waste and misdirection. They
carry an edge over post review. The on-course-review use the entire system of internal

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controls operating in an entity - supervision, monitoring, carrying out physical

inspections by senior official, appropriation control and cash management.

Internal Controls: Internal controls comprise the entire plan of organization and all the
coordinate methods and measures adopted within an entity to safeguard resources, check
accuracy and reliability of financial and management data. They promote operational
efficiency and encourage adherence to prescribed policies and achievement of pre-
established plans, goals, and objectives. The internal control starts with distributed
system of responsibilities and operate by continuous review of operations within the
entity. The separation of responsibilities enables exercising stricter control over revenue
collection, expenditures and property.

Appropriation Control: Appropriation control is of the nature of both external and

internal control over the flow of funds. Primarily this involves review of expenditures
against budget grant at the time of preparing bills and making out proposals for
expenditure by the DDO. By way of external control, the drawing officer is required to
supply the information about funds within the bill or on a separate slip to the treasury,
district account officer or the accountant general whoever is concerned with making
payment. The latter checks those figures to see if the funds available and the claim can be
met out of the available funds.

There is another check over flow of expenditure. The accountant general or the district
account officer (but not the treasury) after compiling their monthly accounts, examines
the flow of expenditure under all the functions and objects, compare the progressive
figures with the limits in the budget and issues warning slips to the administrators where
the flow of expenditure is disproportional.

Cash Management: There are two levels of Cash Management in government - micro
level and macro level controls. The micro level controls intend providing sufficient cash
at all payments points in the country. The macro level is concerned with the total
operations of the cash in the country in the province, as the case may be. This control
ensures:
a) availability of sufficient cash resources on when-needed-basis;
b) minimal use of overdraft or 'ways and means advances'; and
c) that the bank balance tallies with that worked out in accounts
Internal Audit: Internal audit is regarded as an important and useful source of
information to the management. It operates ‘independent’ of the entity in the sense that it
is placed high - usually immediately below the executive head of a department. It
continuously reviews accounts and other records and reports to the departmental head.
In Pakistan, only a few departments of government, like Railways, Defence, and Ministry
of Foreign Affairs, use the internal audit services. In United States, the internal audit has
to be instituted along with internal controls by all heads of executive agencies.

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Ex post facto Review: As already discussed above, the ex post facto review has two
sub phases, External Audit and Legislative Review.

External Audit: The External Audit is done by the independent agency of the Auditor
General. His auditors move around to the field offices, making audit of accounts kept by
the DDO’s. On conclusion of audit, they issue an Audit & Inspection Report for action by
the DDO’s. Copies of the note are supplied to controlling offices and heads of
departments. The said audit reports bring to notice of the administration the irregularities
and lapses and suggest, where possible, ways and means for execution of plans and
projects with greater expedition, efficiency and economy. The administration is expected
to take prompt action on the reports in question by taking remedial measures to settle the
irregularities pointed by audit.

Legislative Review: The second sub phase is Legislative Review. The important
observations are taken out and compiled into an Audit Report. This is one of the several
year-end reports of the Auditor General, which are submitted to the President or in the
provincial sphere to the Governors for being laid before the House. After adoption of
necessary motions in the house, the reports are referred to the Standing Committee on
Public Accounts. The Committee reviews the reports, grant by grant, in successive
sittings, if necessary, with the help of the sub-committees and working groups constituted
to probe specific areas. The committee deliberations take place in presence of the
representatives of the administrative ministry/department, after memorandum of
important points, supplemented by a list of questions, have been provided by the Auditor
General. After hearing the departmental views, the committee records its
recommendations as a whole and not individually. The action on recommendations of the
committee is watched by the Action Taken Sub-Committee, Auditor General of Pakistan,
Ministry of Finance and the Secretariat of the Committee. Finally, the 'Action Taken
Report' is presented to the full house.
The committee during its deliberations reviews the report to satisfy itself that:
a) money shown in accounts, as having been disbursed, were legally available for,
and applicable to the purpose to which they have been applied and charged;
b) the expenditure conforms to the authority which governs it; and
c) every re-appropriation has been made in accordance with such rule as may be
prescribed by the Finance Ministry/Department.
The Committee also examines:
- statement of accounts of state corporations, trading and manufacturing
schemes, concerns and projects together with the balance sheets and profit
and loss accounts
- statement of accounts showing income and expenditures of autonomous and
semi-autonomous bodies which are audited by the Auditor General
- reports of the Auditor General on audit of receipts and the accounts of stores;
and
- cases of any expenditure in excess of that granted in appropriations.