An essential bipartisan approach for effective committee stage review of Budget 2013

An open letter to President and Minister of Finance Mahinda Rajapaksa, Deputy Minister of Finance and Secretary Finance Dr. P.B. Jayasundera, the Speaker, and Party Leaders in Parliament

President Mahinda Rajapaksa presenting the 2013 Budget in Parliament

It may be useful to reflect on the recent Friday Forum appeal, stating3 “As a collective outcome of the Budget debate, the legislature could agree to national priorities for key discretionary spending as well as issues of future foreign borrowing and Parliamentary oversight. The Friday Forum appeals to Members of Parliament on both sides to raise the level of debate, and given the gravity of the economic problems we face, to use the debate to place the difficult choices and challenges the nation faces, before the public in a bipartisan manner, rise above narrow party politics, and collectively set directions for sustainable and inclusive development, economic well-being and prosperity.”

As a first step towards the above-mentioned collective initiative, it would be essential that the legislature as the authority for public finance management, ensures that the committee stage reviews are strictly structured to support the justification of revenue proposals; resource allocations priorities are in line with public expectations; spends are aligned to realise positive outcomes that impact on citizens and benefit society; systems and processes assure fiscal discipline/transparency/economy/efficiency and effectiveness in implementation; effective risk management processes are in place and post audit validations with lessons for the future are also an accountability commitment.

The members of the Legislature, represented by both Government and Opposition members , must collectively accept their accountability to the people, who are sovereign and have elected them to effectively engage in managing public finances, and therefore take responsibility for the plans presented by the Government in regard to;

1.setting fiscal objectives in respect of revenue, expenditure, debt repayment and investment;

2.maintaining effective fiscal control and plan for the coming year and beyond;

3.allocating the available resources, consistent with the Government’s strategic objectives and priorities;

It is therefore an essential imperative that the Legislature during the committee stage of the Budget debate devotes time on a structured basis to address the undernoted key areas of collective review;

1.Validate fiscal and monetary outturns of 2012 Budget – Compare the estimated year end 2012 outturns with the estimates as presented in the last Budget and in the mid-year estimates , identifying key variances, justification of such variances, impact on citizens and the national economy as a consequence, lessons learnt and future action accountability. Here special attention needs to be paid in respect of fiscal discipline when recurrent Rs. 27 billion and capital Rs. 44 billion spends have been made via allocations provided by Treasury under Budgetary Support Services and Contingent Liability Project (during Jan-Sep 2012 )4 including allocations of Rs. 1 billion for the President, Treasury Operations Rs. 8.5 billion, Defence and Urban Development Rs. 1.5 billion, Rs. 12 billion on the Services and Police, Economic Development Rs. 1.3 billion, Transport Rs. 1.8 billion, Education Rs. 3 billion, and Port & Highways Rs. 4 billion.

2.Post review of outcomes of key resource allocations during 2012 – All key resource allocations and key revenue spends in excess of an agreed upper limit must be subjected to a qualitative and quantitative outcomes assessment, in terms of the contribution to growth on a sustainable basis and value addition to citizens, the economy and society, lessons learnt and future action accountability. Special attention needs to be paid in respect of the effectiveness of public investments in 20125 where January – August spends amount to Rs. 328 billion an increase of Rs. 80 billion over the previous year.

3.Benchmark rating of the Budget 2013 against national objectives and priorities – Benchmark the Budget proposals, key resource allocations and planned spends against a detailed list of national priorities, tracking the changes in such priorities and evaluating the justification and level of corresponding compensatory adjustments to those segments of society adversely impacted, especially the marginalised segments of society. This should be followed by a review of the justification and expected outcomes based return on national resource allocations in terms of the consequential contribution to growth, employment generation, poverty alleviation, equity and sustainability. 

4.Validation of the robustness of strategic management action plans and capability in realising medium term fiscal outturns – Validate the robustness of the strategic action plans, policy guidelines, capability, systems, processes, management information systems and accountability commitments to realise the medium-term fiscal policy framework envisaged “in phasing out the budget deficit gradually to encourage private sector participation in economic activities towards stable high economic growth with stability of around eight per cent, achieve a surplus in the revenue account over the medium term, reduce the budget deficit to below five per cent of GDP by 2015 without compromising public investment and reduce the outstanding Government debt to around 65 per cent of GDP by 2015 and lower it further thereafter whilst ensuring the welfare expenditure to protect vulnerable sectors in society”6. Debate the risks and challenges in implementation and identify risk mitigation options in realising the medium term macro fiscal framework 2012-2015 (as a percentage of GDP)7 and the major economic parameters in the domestic economy: 2012-20158 committed through the Budget. Here special attention will need to be paid in regard to measures in place to maintain inflation at 6-7%, exchange rate flexibility, key sectoral growth targets and their consequential sustainable value addition and unemployment numbers9, all of which could be impacted by the action plans. These validations must be made in the back drop of the predicted global environment10 and the expected local business environment. An issue of real concern is whether the support systems necessary to get the SME sector productive, quality compatible and competitive to meet export specifications and discerning upper market and industrial entity preferences and connectivity to supply chains, in order to make a meaningful and sustainable contribution to growth, employment generation and positively impact on trade account and balance of payments.

5.The validation of public investments and resource allocations – Validate that resource allocations for public investments are adequate and are targeted towards the assurance of equity, human development, poverty alleviation, sustainability and conflict resolution, whilst essential resources for infrastructure development, housing, power, water and sanitation are also made available, in order that growth targets, sustainability and employment generation objectives are realised. 

6.Effective management and risk mitigation of public/foreign debt – An in-depth review of planned management strategies, medium term funds flow statement estimates, risk mitigation process and management control and compliance processes, management information systems and early warning processes for effective management of public/external debt must receive close attention at the Committee stage. Here attention must be paid to the estimated movement in external reserves and total outstanding Government foreign debt of US$ 47 billion11, together with debt service capacity12 and contingency plans that necessarily should be in place.

7.Effective management of external trade, balance of payments and monetary stability – The strategies promoting trade in goods and services and managing balance of payment challenges and systems and control/compliance processes in place to assure monetary stability, including prevention of money laundering and managing the challenges of price stability and exchange rate stability must be validated. Special attention will need to be paid in regard to the expectation of improved performance of the export sector, reduced imports, and to the sensitivity of worker remittances estimated at 6.9 billion13 and oil prices14. The legislature must also debate the long-term value addition of trade agreements and the need for early satisfactory conclusion of trade and services deals with India (including the much delayed CEPA). The committee stage review must in addition ensure that the enhanced State sector borrowings do not crowd out the private sector or make private sector borrowing uncompetitive. The impact of and risks associated with allowing the private sector borrowing in foreign currency and any risks associated with the allowing access to large inward remittances and payment for goods and services in foreign currency must be reviewed and debated and allowed with necessary control and compliance processes in place.

8.The effectiveness of controlling the informal sector – Assess the urgent need to set up an independent Financial Services Authority and a Banking and Finance Commission with the objectives as set out in the submission to the Secretary Treasury dated 24 August 201215 in the light of emerging evidence of increased money laundering,16 informal and illegal pyramid schemes and mafia led loan shark operations. International research studies have indicated an annually growing shadow economy in Sri Lanka17 estimated at 30.4%, 35.3% and 43.7% of the official GDP in 1989/90, 1994/95 and in 2000/01 (will this trend if extrapolated now be over 50%?).

9.Sensitivity tests and associated contingency management plans Budget 2013 – Review the sensitivities associated with the Budget 201318 and validate the robustness of the contingency action plans developed.

10.Assess effectiveness of tax reforms and tax/revenue administration – With the stated objective of the growth-friendly revenue enhancing measures being implemented to strengthen the fiscal consolidation process19, assess whether the commitment to ongoing tax reforms and tax/revenue administration reforms are supported by effective and necessary capability, independence/integrity, organisational structure, systems support including the new IT/Information systems in the pipeline, and leadership commitment. The commitment here must be assess whether the revenue targets are realistic and can deepen and widen the tax net making revenue/tax administration truly professional and capable of bringing in to the tax net the growing informal sector and minimise the impact of leakages, and ill gotten earnings through corruption, narcotics traders and informal financial sector operations.

11.Assess effectiveness of expenditure rationalisation – With the stated objective of expenditure rationalisation measures being implemented to strengthen the fiscal consolidation process, assess whether the necessary capability, independence/integrity, organisational structure, systems support including the new IT/information systems in the pipeline with essential leadership commitment are in place. Especially assess, the role of the Legislature in supporting the process through which a Parliamentary Treasury Select Committee is made aware of any early warning signals via appraisal notes of justification, expected outcomes, time and cost commitments, measures assuring economy, efficiency and effectiveness of implementation, control/compliance measures, applicable limits of authority, transparency enhancing management information and critical path and project evaluation and review techniques in place along with risk management and accountability.

12.Commit to post audit validations of outcomes, cost and project management effectiveness/accountability of key public investments and significant spends – The Legislature to agree the limits of expenditure, where independent post audit of outcomes and performance will be tabled before the Parliamentary Treasury Committee and assessed. Such reports with due accountability discharge being placed for review after project completion, along with lessons for the future and other action steps where failures in accountability, compliance and/or control processes are observed.

13.Summary dashboard of Budget key outturns/outcomes, performance indicators and costs and benefits from public investments and key spends – Agree the management information systems support required to establish a colour coded summary dashboard of Budget linked key outturns/outcomes, performance indicators and costs and benefits of public investments and key spends, thus introducing a culture of improved transparency, accountability and commitment.

14.Review the likely impact of estimated key budget outturns on fiscal gap – How will the likely medium term budgetary outcomes impact on the fiscal gap, being the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years? Agree a process for the fiscal gap as at the end of the year 2012 to be assessed and tabled along with the Mid Year Report to be tabled in Parliament in 2013. What management action is essential in the interim pending such a determination?

15.Identify challenges and road blocks in realising growth targets sustainably and price stability – All growth, new investments and enhanced savings inhibiting policies, laws, regulations, practices and process, subsidies, non free cash flow generating state businesses and ministry operations of non performing/loss making State enterprises must be identified and a set of strategies to reform them must be tabled as a part of the fiscal management report and be reviewed during the committee stage, taking account of the significant share of such losses in relation to the GDP of around 2-3%.

16.Identify challenges and road blocks towards meeting the investment gap – With the investment gap being planned to be met though increased foreign direct investments, it is essential that the external operating environment linked soft factors such as property rights protection, rule of law, justice, policy consistency, and business friendly and clear labour laws with ease of doing business must be assured. In addition infrastructure led operating platform must yield no disincentives for enhancing quality, productivity and competitiveness. Any negative perceptions of heavy militarisation of the economic activities and the military presence in civilian administration and/or curbing democratic and human rights will also be a disincentive. The Legislature should play specific emphasis to assure an acceptable business environment with comparable to other destination package of incentives are in place.

17.Efficiency and effectiveness of the public service and sustainability/affordability of pension/superannuation schemes - With Government appearing to change its position on restraining the expansion of the public service, the Legislature has to pay attention to public sector cadre management20. In addition the productivity and effectiveness of public service delivery and options to enhance knowledge, skills, attitudes and value commitments of public servants and the longer term affordability and sustainability of all pay as you go unfunded pension schemes must also be assessed by the Parliament.

18.Risk assess likely impact of Treasury guarantees – The Parliament should review the Statement of Guarantees21 and assess risks of outstanding guarantees amounting to Rs. 289 billion in respect of state enterprises in the context of plans to increase the guarantee limit in the Fiscal Responsibility Management Act.

19.Audit of the Budget – The Legislature to agree the framework, scope and coverage, accountability, time table, reporting and materiality limits  of performance, management, and compliance audit on the National Budget and the post audits of key spends for 2013.

20. Assurance of transparency/waste control and anti corruption management strategies – The Legislature to agree systems, processes and procedures for assurance of transparency/waste control and anti corruption management of public sector operations and necessary laws, regulations, structures and powers with independence to support the implementation of the 2013 Budget.

21.Parliamentary Treasury Select Committee – Agree on the setting up of a permanent Parliamentary Treasury Select Committee, along with its scope, composition, terms of reference, etc., and timetable for 2013.

22.Review options in the medium term to improve the budgeting and budgetary control processes – Agree strategies that will within the medium term improve the timeliness and effectiveness of public consultations process and committee stage review of budget debate, with special emphasis on improved transparency, accountability and collective review initiatives with the support of academics and resource personnel. Agree options for the adoption of zero-based, activity-based costing and performance-based budgeting techniques. The critical outturns and outcomes expected from the new IT/information systems in progress to assist control over public finance and improve management of cash flows and resources of Government be reviewed and agreed.

23.Agree strategies to assure policy consistency and reduce country risks – Develop a system of compliance assurance certification notices to be laid before the Parliamentary Treasury Committee of all policy changes that may negatively impact on growth, budgetary outturns/outcomes and enhance risks. Similarly any policy, regulatory or rules/guideline changes and laws that may enhance country risks and rating risks of the banking and financial system must also be post validated before the Parliamentary Treasury Committee.

24.Avoidance of Constitutional conflicts of law – Agree on a process and a checklist to be in place to ensure the Appropriation Account, the Budget and management of state resources comply with the Constitutional provisions, especially stipulations in Section 148 and the 13th Amendment.

25.Agree on the timetable for 2013 – Agree on the timetable for key Budgetary control reviews, key milestone outturn reviews, mid-year reviews, post audits, etc and the timetable for agreement of national priorities for 2014 and the budget making processes. 

Through such a process of committee stage review in Parliament and effective public awareness building communications exercised with transparency and due accountability, the citizens will be made aware of the challenges facing the Government, the hard choices that need to be made now and the consequential likely future impact on citizens and the nation unless correct decisions are made in fiscal and monetary management and pursued within a disciplined framework with commitment by all.

I am sure the professionals, academics, businesses, trade chambers and society leaders will endorse the above and will collectively and in association with the media create a public debate on these issues, if the legislature fails to follow these essential and critical collective bipartisan approaches.

You will no doubt agree that the process as set out herein, if duly followed, will leave no room for historians to record that you closed your eyes, plugged your ears and shut your mouth, when the nation needed your leadership action most.

In addition, you will dispel the notion that you did not belong to those who failed this nation by following the saying: “If you don’t know where you are, and your state of health, nor know and adopt best options to use the vehicle and its accessories at your disposal, to drive the nation to sustainable prosperity, and you are unwilling to seek directions and collective support of those who can direct and facilitate your journey, and that you did not reach the destination on time having achieved the challenging goals set for this nation and its people through this 2013 Budget due to such unacceptable actions and leadership.”

(The writer is a former Chairman of the Ceylon Chamber of Commerce.)

Footnotes

1 Fiscal Management Report -2013 – Page 8

2 Fiscal Management Report -2013 –Page 8-Overview

3 http://www.ft.lk/2012/11/07/friday-forums-plea-for-a-bipartisan-budget-debate/

4 Fiscal Management Report Page 44

5 Fiscal Management Report Pages 45-57

6 Fiscal Management Report Page 8

7 Fiscal Management Report Page 9

8 Fiscal Management Report Page 10

9 Fiscal Management Report Page 89

10 Fiscal Management Report Page 30

11 Fiscal Management Report 2013 –Page 96

12 Fiscal Management Report 2013 –Page 62

13 Fiscal Management Report 2013 –Page 89

14 Fiscal Management Report 2013 –Page 86

15 http://www.ft.lk/2012/08/30/chandra-j-calls-for-financial-services-authority-and-banking-and-finance-commission/

16 www.infolanka.com/news/IL/dm619.htm

17 “The Size and Development of the Shadow Economies in the Asia-Pacific” http://www.econ.jku.at/members/Schneider/files/publications/ShadEcASIA2Bajadadraft1.pdf

18 Summary of the Budget 2011-13 Table 4 Budget Speech

19 Fiscal Management Report 2013 –Page 8

20 Fiscal Management Report 2013 –Page 21

21 The Statement of Guarantees Issued by the Treasury – Annex 3 of Fiscal Responsibility Management Act Report