report no. 39228-ar argentina country financial accountability … · 2016. 7. 11. · argentina...

March 2008

Report N

o. 39228-AR

A

rgentina C

ountry Financial Accountability A

ssessment

Report No. 39228-AR

ArgentinaCountry Financial Accountability Assessment

Document of the World Bank and the Inter-American Development Bank

Country Management Unit Institutional Capacity andArgentina, Chile, Paraguay and Uruguay Financial Sector ManagementFinancial Management, Operations Services Department Fiscal and Municipal Management Division Latin America and the Caribbean Region Inter-American Developmemt BankThe World Bank

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

.. Argentina Country Financial Accountability Assessment 11

- WB IDB Vice President: Pamela Cox Country Director: Pedro Alba Manager: Roberto Tarallo Task Manager: Alexandre Arrobbio

Vice PresideTSantiago Levy Manager: Mario Marcel Division Chief: Vicente Fretes Task Manager: Gerard0 Reyes-Tagle

Argentina Country Financial Accountabilitv Assessment iii

TABLE OF CONTENTS

M A I N ABBREVIATIONS AND ACRONYMS ......................................................................................... i

TABLE OF CONTENTS ........................................................................................................................... 111

PREFACE ..................................................................................................................................................... V

EXECUTIVE SUMMARY ........................................................................................................................ VI

1 . INTRODUCTION .................................................................................................................................... 1

COUNTRY BACKGROUND ............................................................................................................................ 1 THE FEDERAL NATURE OF PFM IN ARGENTINA .......................................................................................... 2 OVERVIEW OF NATIONAL LEVEL PUBLIC FINANCIAL MANAGEMENT ......................................................... 3 WB AND IDB COUNTRY STRATEGIES ......................................................................................................... 4 PFM RELEVANCE TO WB AND IDB COUNTRY STRATEGIES ....................................................................... 5 CFAA OBJECTIVES AND SCOPE .................................................................................................................. 6

2 . LEGAL & INSTITUTIONAL FRAMEWORK .................................................................................... 7

THE NATIONAL PUBLIC SECTOR ................................................................................................................. 7 LEGAL FRAMEWORK FOR PFM ................................................................................................................... 7

3 . BUDGET FORMULATION ................................................................................................................... 8

INSTITUTIONAL FRAMEWORK ...................................................................................................................... 8 BUDGET COVERAGE .................................................................................................................................... 8 BUDGET PREPARATION ............................................................................................................................... 9 POLICY-BASED BUDGETING: STRATEGIC PLANNING AND MEDIUM-TERM PERSPECTIVE .......................... 12

4 . BUDGET APPROVAL AND EXECUTION ....................................................................................... 15

BUDGET APPROVAL .................................................................................................................................. 15 BUDGET EXECUTION ................................................................................................................................. 15 NATIONAL BUDGET EXECUTION ............................................................................................................... 16

5 . ACCOUNTING & FINANCIAL REPORTING ................................................................................. 19

ACCOUNTING ............................................................................................................................................ 19 FINANCIAL REPORTING ............................................................................................................................. 20

6 . DEBT MANAGEMENT ........................................................................................................................ 21

INSTITUTIONAL FRAMEWORK .................................................................................................................... 21 DEBT MANAGEMENT: STRENGTHS AND WEAKNESSES .............................................................................. 23 RISK ANALYSIS AND CONTINGENT LIMILITIES ........................................................................................ 24

7 . CONTROL SYSTEM ............................................................................................................................. 26

INTERNAL CONTROL ................................................................................................................................. 26 EXTERNAL AUDIT ..................................................................................................................................... 28 CONGRESSIONAL BUDGET OVERSIGHT ..................................................................................................... 31 CONTROL ENVIRONMENT .......................................................................................................................... 32 RISK ASSESSMENT .................................................................................................................................... 34 TRANSPARENCY ........................................................................................................................................ 35

8 . MULTILATERAL LENDING MANAGEMENT .............................................................................. 37

MULTILATERAL LENDING TO ARGENTINA ................................................................................................ 37 INSTITUTIONAL ARRANGEMENTS .............................................................................................................. 39 RECENT TRENDS IN IFIS INVESTMENT OPERATIONS IN ARGENTINA ........................................................... 41 IDB SUPPORT TO RESULT-ORIENTED MANAGEMENT ................................................................................ 42

Argent ina Country Financial Accountabil itv Assessment iv

IDB FIDUCIARY ACTIVITIES ...................................................................................................................... 43

9 . CONCLUSION ....................................................................................................................................... 44

GOVERNMENT ACTION PLAN FOR THE IMPROVEMENT OF PUBLIC FINANCIAL MANAGEMENT ......................................................................................................................................... 45

ANNEX 1.1: ARGENTINA’S MACRO-ECONOMIC INDICATORS, 2001-2006 .............................. 51

ANNEX 1.2: FISCAL RESPONSIBILITY LAW: SUMMARY OF MAIN MEASURES ................... 52

ANNEX 1.3: WORLD BANK FIDUCIARY ACTION PLAN ................................................................ 53

ANNEX 2.1: COMPREHENSIVENESS OF ARGENTINA’S PFM LEGAL FRAMEWORK .......... 55

ANNEX 3.1: 2006 BUDGET COVERAGE ............................................................................................... 56

ANNEX 3.2: 2006 FIDUCIARY FUNDS .................................................................................................. 57

ANNEX 3.3: BUDGET CREDIBILITY .................................................................................................... 58

ANNEX 3.4: OVERVIEW OF PERFORMANCE BUDGETING .......................................................... 61

ANNEX 6.1 : ONCP ORGANIZATION CHART ..................................................................................... 65

ANNEX 6.2: MULTILATERAL DEBT: BUDGETED VS . ACTUAL, 2003-2005 ............................... 66

ANNEX 7.1 : COS0 FRAMEWORK ........................................................................................................ 67

ANNEX 7.2: PERFORMANCE OF SUPREME AUDIT INSTITUTION REFORMS IN EASTERN EUROPEAN COUNTRIES ........................................................................................................................ 68

ANNEX 7.3: SEMINAR ON CONTROL ENVIRONMENT .................................................................. 69

BIBLIOGRAPHICAL REFERENCES ..................................................................................................... 71

LIST OF PERSONS INTERVIEWED ...................................................................................................... 75

Argentina Country Financial Accountabilitv Assessment V

PREFACE

This Country Financial Accountability Assessment (CFAA) was prepared jointly by the World Bank (WB) and the Inter-American Development Bank (IDB) on the basis o f information timely collected during two missions that visited Argentina in December 2005 and April 2006. The CFAA Team was led by Alexandre Arrobbio (WB) and Gerardo Reyes-Tagle (IDB). Core team members were: Federico Guala (Consultant); Gerardo Ufia (Consultant); and Marcel0 Barg (Consultant).

Also contributing to the report were Linn A. Hammergren (WB); Adriana Arrollave (IDB); Guillermo Shweinheim (Consultant); Alfred0 L e Pera (Consultant); Jose Rezk (Consultant); Antonio Blasco (WB); Juan Pablo Tabilo (IDB); N e i l Quintero (IDB); Milagros Freyre (IDB); Suzanne Snell (Consultant); Gilma Unda Zamora (WB); Natalia Bavio (WB); and Eliana Dam (WB).

Quality assurance was provided through internal meetings at both Institutions and by the peer reviewers: James Parks, Lead Economist WB (LCSPR); Francois-Roger Cazala, Supreme Audit and Financial Control Advisor, SIGMA-OECD; Pascale N. Kervyn De Lettenhove, Sr. Financial Management Specialist WB (ECSPS); Fernando Rojas, Lead Public Sector Management Specialist WB (LCSPS); and the IDB Management Review Committee.

The preparation o f the CFAA also benefited from the support o f WB Lead Country Officer Felipe Saez (LCC7), WB Sector Leader Jesko S. Hentschel (LCSHD), WB Operation Officer Gaston Blanco (LCSHS), Sergio Espaiia (Consultant), and WB Advisor to the LCR Financial Management unit Jamil Sopher.

Acknowledgements

The CFAA Team would like to thank the Secretariat o f Political Economy through Mr. Hita, National Director o f DNPOIC, who coordinated the CFAA on behalf o f the Government o f Argentina; Mr. Rigo, Undersecretary o f Budget; Mr. Despouy, President o f AGN; and Mr. Lamberto, President o f Congress’ Mixed Public Account Committee. The team gratefully acknowledges all the support received.

Argentina Country Financial Accountabilitv Assessment v i

EXECUTIVE SUMMARY

i. The objective o f this Country Financial Accountability Assessment for Argentina (CFAA) i s to provide (i) a diagnosis o f national-level Public Financial Management (PFM) systems and practices; and (ii) an analysis o f major issues that affect national-level PFM core processes, such as budgeting, accounting & financial reporting, debt management and the control system. In addition, this C F A A provides an analysis o f PFM arrangements for World Bank (WB) and Inter-American Development Bank (IDB) funded operations.

ii. The CFAA also assesses progress and points to further steps leading to better PFM, identifies the effect o f the country’s last economic crisis on that trajectory, describes the strengths and challenges o f the system as it currently works and the obstacles impeding further progress, and recommends short and long run corrective measures.

M a i n findings

iii. Argentina’s national P F M systems and practices show a m i x o f strengths and opportunities for improvement. On the one hand, the administration systems are well designed, and endowed with an important legal support and human resources with technical ski l ls exceeding regional standards. This helped in maintaining fiscal discipline during the aftermath o f the 2001-02 crisis. Moreover, the reforms adopted in Argentina in the decade preceding the crisis brought in modern instruments and international standards that other middle income countries with highly performing P F M are still implementing. On the other hand, despite these achievements, PFM performance in Argentina is s t i l l operating below expectations.

Legal Framework

iv. The legal framework for PFM is comprehensive and covers each relevant area o f budget management and the distribution o f fiscal functions throughout the National Non-Financial Public Sector (NFPS). The Constitution, the National Public Sector Financial Administration and Control Systems L a w (LAF), and related regulations define the general principles governing budget formulation and execution, the management o f the National Treasury, accounting, debt issuance, and the control system. The Fiscal Solvency Law o f 1999 and the Fiscal Responsibility Law (FRL) o f 2004 complement the legal framework and define main fiscal objectives.

Budget formulation

v. Budget Coverage. According to 2006 data, Argentina maintained 87% o f total expenditures o f NFPS under the same legal regime. The remaining 13% consisted on (i) public entities outside the National Public Administration (NPA) (9%); and

Argentina Country Financial Accountabilitv Assessment v i i

(ii) “fiduciary funds” (4%). In this sense, i t would be important to standardize all systems providing information about budget execution for 100% o f the expenditure. This would imply a better accountability on resource management, an improvement in the decision-making process and a better access to information for external stakeholders.

vi. Budget preparation. Budget preparation i s undertaken by the Ministry of Economy and Production (MECON) in coordination with the Chief o f Cabinet Office, and integrates all current and capital expenditures. A budget process calendar exists, and i s generally adhered to, beginning with the timely issuance of a clear budget circular to the spending units. Two additional features characterizing the budget preparation process in Argentina are: a) decision- making on budget ceilings i s undertaken with a strong prevalence on the aggregate fiscal discipline -this logic, due to the absence o f a rigorous use o f a preliminary budget and other instruments that strengthen the strategic planning capacity, may sometimes affect a more strategic allocation o f resources; and b) macroeconomic projections used in recent years have not been realized.

vii. Budget Presentation and Classification. The information contained in the budget i s comprehensive and detailed regarding fiscal forecasts, the budget proposal, and financial balances from former fiscal years. Budget classification i s coherent with the standards defined by the IMF International Financial Statistics, and includes administrative, economic, functional and geographic categories, types o f expenditure, and corresponding programs and sources o f financing. However, the information reports prevent from counting with consolidated information on public expenditures, since they do not include the fiduciary funds nor decentralized organisms outside the NPA.

viii. Policy-based budgeting. It i s necessary to establish a clearer link between strategic planning and budgeting, as well as to prioritize policies and policy objectives, in order to achieve a more strategic allocation o f resources. Throughout the last decade, the Budget Evaluation Directorate (DEP) has developed instruments associated to the elaboration and follow-up o f physical indicators, and nowadays most ministries prepare their own strategic plans. However, these plans are rarely used as a significant tool for the formulation o f their budget claims. There are opportunities for improvement on the effectiveness o f instruments developed by the Under-secretariat o f Budget from MECON, such as preliminary budget and result-oriented budget, which provide an adequate framework for budget planning and the linking between strategic planning and budget practices.

ix. Result-oriented budgeting. The Under-secretariat o f Budget from MECON i s currently working on strengthening planning and policy-based budgeting through the introduction o f a result-oriented budgeting system. For this, it expects to introduce the use o f performance indicators, combine them with existing instruments such as the preliminary and the multi-annual budget, and

... Argentina Country Financial Accountability Assessment V l l l

strengthening monitoring and evaluation. This initiative i s also expected to be strengthened with the set up o f web-SIDIF. During the preparation o f the 2007 budget draft, five spending units, in cooperation with the National Budget Office (NBO), initiated the use o f performance indicators for specific programs.

Budget Approval & Execution

X.

xi,

xii.

Budget Approval. The role o f Congress in the review and approval o f the budget i s properly delineated in the Constitution and the LAF. In practice, although the Congress adequately complies with the programmed budget calendar, i t s actual participation in the budget approval process has been declining over the last years, due, on the one hand, to the adoption o f emergency decrees by the Executive derived from the crisis, and on the other, to the approval or modification o f Laws (by the Congress itself). The Congress budget review i s also limited by the lack o f the technical support for developing i t s duties.

Budget Execution. As compared to other middle-income countries from Latin America and even other regions o f the world, Argentina ranks in a good position in terms o f i t s PFM systems, in particular through the existence o f an efficient and effective integrated financial information system, which integrates the functions o f budget, accountancy, and treasury, and through the use o f a Single Treasury Account (CUT).

Argentina’s national NFPS budget i s executed through different systems. Even though it i s possible to obtain information o f approximately 87% o f total expenditures from the SIDIF, it would be important to built up an aggregate information system o f NFPS funds with the same frequency as for the SIDIF. Also, the C U T covers 64% o f Nation41 Budget treasury management. The remaining 36%, which includes social security expenditures, i s managed by their own treasury systems. Lastly, i t is worth to notice that the recent delegation o f faculties f rom the Congress to the Executive implied an increase in the degree o f autonomy o f the latter with respect to its capacity o f modifying i t s original previsions, without the intervention o f the former.

Accounting & Financial Reporting

... xiii. The National Government’s accounting system is single, unique, uniform and applicable to the national NFPS. The LAF provides its legal basis in terms o f norms, pol icy reporting and definition o f responsibilities; and the General Accounting Office (GAO) operates as i t s regulatory authority, being responsible for implementing and maintaining the accounting system throughout the national NFPS. Two areas that deserve attention for future improvement o f the accuracy o f the accounting system are the consolidation o f financial statements from decentralized administrations and the inventory o f fixed assets.

Argentina Country Financial Accountability Assessment ix

xiv. Financial reporting for the National Budget is well articulated, timely and comprehensive. Each spending unit f i om the N P A provides G A O each month with the confirmation on whether data loaded into the SIDIF match with their own reports. In addition, G A O currently undertakes a comparison between their own registries and the ones reported by each unit. Reported information includes the execution o f the budget, the balance o f current expenditures and revenues, a statement on the source and use o f financial resources, a cash-flow balance and the stock o f national public debt outstanding. External reporting includes the quarterly Fiscal Bulletin and the annual Public Investment Account (PIA).

Debt Management

xv. After the 2001 crisis, Argentina started a process o f debt restructuring, achieving an acceptance rate o f more than 75% o f bondholders, and reached a debt-GDP ratio slightly over 50% by the end o f 2007 (excluding those bondholders that rejected the government’s debt exchange proposal ‘holdouts’). Also, Argentina cancelled i t s sovereign debt outstanding with the International Monetary Fund (IMF) and restructured i t s debt with the Banco de la Nacibn Argentina.

xvi. Although al l national government debt commitments are properly registered by using a well known and standardized system (SIGADE), the country does not count with a registry o f consolidated public indebtedness. O n the other hand, due in part to the effects from the last crisis, the analysis has shown the discrepancy existing between budgeted and actual debt financing figures, and the need to reinforce debt policy targets, as well as to assess fiscal risks, including the treatment o f public sector contingent liabilities.

Control

xvii. Internal Control. NFPS internal control relies on a LAF’s well-defined system and consists o f a financial management and control system, embedded in the budget process, and o f an ex-post internal audit carried out by the Internal Audit Unit (IAU) o f each ministry, under the technical oversight o f a central internal audit agency reporting to the Presidency, the Sindicatura General de la Nacion (SIGEN). The scope o f control o f the SIGEN involves the entire public sector, including public financial entities. However, the financial management and control system i s fragmented. On the one hand, it appropriately covers those NFPS expenditures and revenues included in the C U T and in the SIDIF; on the other hand it i s less rigorous for other special regimes, such as fiduciary funds. Transfers, which represent a major category (over 34 percent o f the national budget as o f 2006), should count with a clearer legal framework. In general, the IAUs require strengthening o f their internal control rules and o f the capacity o f their human resources.

xviii. External Audit. The Constitution and the LAF grant the Auditoria General de la Nacion (AGN) the responsibility for external control o f the national (financial and

Argentina Country Financial Accountabilitv Assessment X

xix.

xx .

xxi.

non-financial) public sector. AGN audits are ex-post only, which is in line with international standards. In recent years, the AGN made substantial progress regarding the timely submission o f audit reports, which are published on i t s website, and has increased, on average, the proportion o f their long-term staff employees. However, there i s s t i l l room for improvement, such as introducing a risk-adjusted audit approach as a tool for audit planning, and deepening the control over the efficiency and effectiveness o f the public sector management throughout performance audits. Being a collegial supreme audit institution, the AGN could be subject to factors affecting i t s independence. The strategic planning and an increased international cooperation with other external audit institutions have been successful tools for the implementation o f improvements in other countries.

Congressional Budget Oversight. The role o f Congress in the on-going and ex- post control o f the budget execution i s limited. The Congress does not undertake quarterly reviews o f on-going budget execution, as required by current legislation. In contrast to LAF provisions, the Congress’ annual approval o f the Public Investment Account has been pending for several years. However, important progresses have been made, such as the approval o f the Public Investment Account corresponding to 1997 and 1998 -by Law 26,098 o f June 2006- and the recent approval -by L a w 26,328 o f December 2007- o f those corresponding to the 1999-2004 period.

Control environment. Basic control environment deficiencies within Argentina’s national NFPS relate to compliance with legislative and audit requirements, the tendency to adopt exceptional rules in place o f already established standards, the distortion o f some P F M systems through formal and mechanistic compliance, the lack o f definition o f administrative responsibility beyond the level o f General Director, and the system o f incentives and sanctions that governs c iv i l service behavior. Improving the control environment would have a significant impact upon the effectiveness and efficiency o f existing control systems and processes.

Transparency. Argentina has taken several initiatives over the last decade to promote transparency and prevent corruption o f public sector-related activities. In 1999, a Public Ethics L a w was passed, and decrees regulating its application were approved. Also, an Ant i -compt ion Office (AO) was created within the national Executive branch, and some progress has been made in taking preventive actions such as the dissemination o f assets declarations from public functionaries. However, a number o f issues are s t i l l to be addressed, l ike for example, the 2,000 AO’s judicial claims reported. I t should also be mentioned that the A 0 could benefit from more independence, for which i t would be necessary to evaluate different institutional options. At the same time, the strengthening o f human resources would be a key element for the consolidation o f this Office. Detecting conflicts o f interest among those serving on committees evaluating and those awarding public contracts remains a difficult issue. On the other hand,

Argentina Country Financial Accountabilitv Assessment x i

information on procurement procedures remains scarce, although it i s worth to mention that the A 0 has undertaken a Transparency Map o f Public Procurement.

Multilateral Lending Management

xxii. The World Bank and the IDB currently represent nearly 99 percent o f the Argentina’s total multilateral debt. In 2003, their combined annual disbursements amounted to US$ 4.6 billion, which represents roughly 22 percent o f National budgeted expenditures. Over 80 percent o f disbursements consisted o f “adjustment” and emergency loans designed to support the country’s macroeconomic stability. During the period 2004-05, the size o f annual gross disbursements by the World Bank and the IDB declined sharply, representing only 3.6 percent o f National Budget expenditures in 2005. There was also a major change in the composition o f multilateral lending, which began to shift almost entirely to investment operations -accounting for 84.4 percent o f total disbursements in 2005.

xxiii. Current execution o f World Bank and IDB funded operations in Argentina relies significantly on ring-fenced processes, particularly through the use o f specific project implementation units; alternative systems to the one provided by the Secretariat o f Hacienda for over half o f the operations being executed; and payments executed outside o f the CUT. Although this situation has been originated under several circumstances, efforts should be made to continue with the utilization o f common tools that enable the use o f a single registry for the compliance o f dispositions, not only of the lending institutions but also o f those regulating the execution o f the national expenditure.

Argentina Countrv Financial Accountability Assessment 1

1. INTRODUCTION

Country Background

1. Argentina’s recovery from the economic and social crisis o f 2001-2002 has been impressive. After registering i ts largest sovereign debt default in history, which followed a strong devaluation o f the local currency, the country embarked on a four-year path o f continuous economic growth.

2. An average o f 9 percent growth in real terms during 2003-2006 helped Argentina recover i t s pre-crisis level (1998) GDP in 2005 and per capita GDP output in 2006.’ A more favorable external and internal environment, combined with a more competitive sector o f tradables and a mix o f higher tax burden and prudent fiscal policies have played a crucial role in obtaining these results. Fiscal and external current accounts have been in surplus since 2003, foreign reserves are nearly US$45 billion; and the national government has restructured some 76 percent o f i t s defaulted bonded debt3 The nominal exchange rate has been held at a steady level around (AR) Pesos 3.1 per US$. However, inflation4, which increased from 3.7 percent in 2003 to 12.3 percent in 2005 and 9.8 percent in 2006, remains a major concern.

3. Progress has also been made in the social area. Poverty has been cut markedly, but remains high and above pre-crisis levels. The share o f people living in poverty throughout the country fel l from 54.0 percent in the first semester o f 2003 to 27 percent by the second semester o f 2006.’ Unemployment has also fallen; and although the informal sector was the first to recover, formal employment i s also now rebounding. Formal sector j ob creation i s beginning to outpace that in the informal sector by two to one. However, GDP per capita as measured in US$ i s s t i l l about 40 percent lower than in 1998, whereas income inequality has worsened with the crisis and has not yet responded significantly to the economic recovery.

4. The current challenge for Argentina is to establish the foundation for sustainable and more equitably shared economic growth. Such an accomplishment would represent a significant break with the history o f slow growth, severe volatility, and recurring periods o f crisis that characterized the country during recent times. Some reform processes that go in that direction have been implemented, l ike the Federal Fiscal Responsibility Law (FRL), but it i s necessary to tackle head-on a range o f difficult structural and governance reforms that were put on hold prior to or during the crisis. A sound Public Financial Management (PFM) i s a key element in this process. Sound budget performance and public expenditure management help sustain sound policies and support the efficient and effective delivery o f public services.6 The link between governance and P F M i s very important with respect to the

’ According to the National Institute o f Statistics (INDEC) GDP measured in constant pesos was 15 percent higher in 2006 than 1998. For more information, see Annex 1.1.

Figures as at December 2007. The amount claimed by so-called “hold-outs”, Le., investors who did not accept restructuring conditions

offered by the Government represented about US$25 billion (principal plus accrued interest) by the end o f September 2006, according to data reported by the National Secretariat o f Finance.

Annual Inflation based on Consumer Price Index (CPI) INDEC estimates. PFM i s directly linked with governance, since a State acquires public goods and services and applies i t s

authority to provide and manage them. See Institutional Governance Review, WB (Campos and Ryterman), 2003, p. 5.

5

6

Argentina Country Financial Accountabilitv Assessment 2

main P F M outcomes- aggregate fiscal discipline, allocation o f resources in accordance with strategic priorities and efficient and effective use o f resources in the implementation o f those priorities-and in relation to i t s principles- legitimacy, predictability, transparency, and accountability.

The Federal Nature o f PFM in Argentina

5. Argentina’s P F M reflects the quasi ‘confederal’ nature o f i t s Constitution. There are three levels o f government: national, provincial and municipal. The national level corresponds to the central government and accounts for 46% o f consolidated Non-Financial Public Sector (NFPS) expenditures. The 23 provinces and the City o f Buenos Aires account for 44 percent o f this t0ta1,~’~ and enjoy a strong level o f autonomy in their budgetary processes, both approved and monitored by their own legislative and oversight structures. The National Directorate o f Fiscal Coordination with the Provinces (DNCFP), within the National Ministry o f Economy and Production (MECON), i s responsible for the public finance relations with provinces.

6. National-provincial tax revenue sharing system. Argentina’s federal system is a good example o f public expenditure decentralization and resource centralization. National transfers represent a substantial share o f provincial resources. In 2005, around 61 percent o f the consolidated provincial fiscal tax resources were received via transfers f rom the national level.’ Law 23.548 o f 1988 defines the current Tax-Sharing Agreement (TSA, known as Coparticipacidn Federal de Impuestos), which i s a general legal framework for intergovernmental fiscal relations between the national and provincial governments- according to pre-established, coefficient-based rules. However, in practice, transferred resources have followed a more complex route, due to many laws, federal pacts, and bilateral agreements that have constantly modified the effective amount assigned to each jurisdiction. In addition, over the last years there have been several failed attempts to pass a new Ley de Coparticipacidn, as mandated by the National Constitution. lo

7. The Fiscal Responsibility Law”. Provincial fiscal discipline targets and criteria are currently regulated through bilateral financial agreements between the national government and the provinces that were sanctioned during the crisis,12 and by the Fiscal Responsibility L a w (FRL) o f 2004, which rules on aspects related to P F M transparency, accountability, and sound fiscal performance. The text o f the FRL introduced key improvements compared to past arrangements, under which fiscal relationships between the national government and the provinces were determined on a bilateral basis.

8. However, concerns were raised regarding the FRL’s enforceability at the time o f i t s approval. In particular, while the FRL i s an important milestone in comparison to the

The City o f Buenos Aires i s considered as a province from a PFM point o f view. Municipalities account for the remaining 10% o f consolidated public sector expenditures. Includes 2005 tax revenues shared under Law 23.548 (updated with modifications) and other specific regimes. The National Constitution o f 1994, article 75, 2nd paragraph, requires the approval o f a new tax-sharing

8

9

10

agreement by the end o f 1996. The constitutional mandate remains yet unfulfilled. ‘I See Annex 1.2. l2 In a context characterized by severe credit constraints, the national government assisted some provinces through Orderly Financing Programs, in exchange for a commitment by the provinces not to seek any other sort o f financing.

Argentina Country Financial Accountability Assessment 3

previously existing normative framework, additional steps would be needed to address (i) the establishment o f hard constraints on provincial spending and borrowing, (ii) specify the circumstances under which the national government could finance the provinces, (iii) the establishment o f mechanisms to ensure provincial budgets are consistent with aggregate fiscal objectives and (iv) the establishment o f a limit to the capacity o f provinces to pledge their co-participation revenues against future debt service. l3 Recent data suggest that FRL requirements are not being fully implemented. l4

Overview o f National Level Public Financial Management

9. P F M at the national level i s regulated by a solid and coherent normative framework in line with the 1992 National Public Sector Financial Administration and Control Systems Law 24,156 (LAF), which played an important role in the reforms initiated during the 1990s. Rules, systems and procedures have been adopted and developed to comply with LAF’s legal framework. Public accounting rules are in l ine with international standards. The central financial management framework integrates budgeting, treasury and accounting, and consolidates cash management through a Treasury Single Account (CUT). l5

10. Budget process. It i s evident the necessity o f achieving a stronger linkage between the budget formulation process and the institutional processes o f strategic planning in order to define the results and criteria to establish priorities. The modifications operated over the budget during the execution phase that resulted from the pressure o f “urgent needs” during the crisis encouraged enabling exceptions to the Law that fostered the creation o f fiduciary funds and decentralized organisms not included under the regulations o f the LAF. Over the last few years, a lack o f emphasis on providing incentives to improve the strategic planning o f the institutions that comprise the NPA, generated a bias o f the budgetary process towards the aggregate fiscal discipline over other objectives that contribute to a balanced budgetary system, such as the strategic resource allocation and the technical expenditure efficiency. O n the other hand, the budget approved by Congress has frequently been modified during its execution by the Executive, which was granted authority to reallocate budget resources via extraordinary powers included in the budget law, or v ia the issuance o f emergency decrees.I6

11. Control system and’ environment. A strengthening o f the overall control environment would definitely improve P F M at the national level in Argentina.17 Prior to the crisis, reforms o f the control framework had been launched to increase the effectiveness o f the internal and external audit institutions, including reconfiguration o f the framework to reinforce reliance on ex-post controls. However, the changes required were not fully implemented. The introduction o f exceptional rules and practices during the crisis also had an impact on the control environment.

l3 WB Country Assistance Strategy 2006-2009. l4 Several provinces surpassed the debt and expenditure limits established by the Law in 2005. Also, several provinces did not timely report information on 2006 budget execution. Is Account or set of linked accounts through which Government transacts al l payments.

The recent amendment (July 2006) to Article 37 of the Financial Administration Law, which allows what i s known as superpoderes, further impaired budget credibility and transparency by institutionalizing the Executive’s discretionary power to modify the composition of the budget without Congressional approval.

The control environment i s the attitude, awareness and actions of management and staff regarding the control fiamework.

16

12. Debt and revenue management. By the beginning o f 2006, the national government had achieved: a) the reduction o f i ts debt/GDP ratio to around 75 percent,18 compared with a ratio o f 135 percent in December 2002; b) the regularization o f much o f i t s defaulted debt o f US$82 billion, plus accrued interest; and c) the payment o f about US$17 billion to international financial institutions in net terms between December 2001 and January 2007.’’ During the years that followed the crisis, the management o f the national government’s public debt has been centered less on the usual task o f choosing between different instruments to achieve an optimal financing scheme, and more, understandably, on finding a way out o f the crisis. Overall, debt management has been constrained to the development o f activities related to the application o f emergency measures and administrative and accounting tasks. As a result, well-defined debt policy targets and an adequate fiscal risk assessment are needed, including the treatment o f contingent liabilities.

13. On the revenue side, increases in tax collection at the national level have been impressive since 2002. Public sector consolidated tax revenues grew even faster than the economy (tax burden shifted from 19.5 percent o f GDP in 2002 to 25.7 percent in 2006).20 Since Argentina’s tax structure depends heavily on VAT and income taxes, which are very responsive to changes in the economic cycle, part o f this performance was linked to robust economic activity. New taxes on financial transactions (2001) and on foreign trade (2002) introduced in response to the crisis, also increased national government revenue.21 Also, there were improvements in tax administration and the legal framework designed to crack down on tax evasion.22 Due to the strong performance o f the national government in tax collection during the post-crisis period, tax management issues are not covered in the core analysis provided by this CFAA.

14. In summary, the current situation i s a combination o f good systems and norms and a control environment that could be improved. The main current challenges o f national-level PFM are related to strategic planning and budget coverage, debt management, and control environment. These issues, as well as their impact on WB and IDB operations, are the focus o f this CFAA.

WB and IDB Country Strategies

15. The WB’s Country Assistance Strategy (CAS) for FY06-FY09 remains focused on the pillars identified in the 2004 CAS: sustained growth with equity, social inclusion, and

’* Including debt restructuring hold outs (if excluded, this ratio decreases to 60 percent). Includes US$ lO billion from Central Bank’s foreign exchange reserves used for early cancellation o f IMF

debt in January 2006. 2o According to figures published by MECON’s Boletin Fiscal, the national government realized an average primary surplus o f 3.8 percent o f GDP during the 2004-2005 period. Fiscal savings were also pushed up due to the lag in growth o f public salaries and pensions vis-a-vis main price indicators (nominal exchange rate, Consumer Price Index).

According to official data (Under-secretariat of Public Revenue) the share obtained by the national

” New legislation included extensions to the Anti-Evasion Law 25345 o f 2000 (decree 363/2002, resolution 154712003), and in 2005, the approval o f a new Law (26044/2005), also called Anti-Evasion Package 11, which modified previous legislation (Law 11683/1998) by increasing the power o f the Federal Revenue Agency (AFIP) to conduct inspections and seize goods. Similarly significant were the issuance o f communications to taxpayers in electronic format and the introduction o f higher penalties for tax violations.

21

overnment on these two taxes only, represented 3.8 percent o f GDP in 2005.


governance. I t includes an investment-led lending program and key non-lending interventions to support infrastructure development, the health sector, education, social protection, and public sector management. Recent studies include the Institutional Governance Review, a study on Growth with Equity, and a Programmatic Evaluation o f Poverty. The CAS addresses the fiduciary aspects o f WB-supported operations through a Fiduciary Action Plan currently under imp le rnen ta t i~n .~~ The CAS also includes a provision for subsequent assessment o f PFM systems and practices.

16. Regarding the IDB, the Country Strategy for Argentina 2004-2008 was approved in November 2004. Given the macroeconomic and sectorial uncertainties prevailing at that moment as a consequence o f the crisis and the beginning o f a new government, the Country Strategy for Argentina focused on three pillars to guide the Bank until 2008: institutional strengthening for better governance and fiscal sustainability; a more favorable climate for investment and productivity growth; and poverty reduction through rebuilding the human resource base and promoting sustainable and inclusive social development. The lending program was limited to the 2004-2005 period. In 2006, a mid-term review confirmed the strategic orientations defined in 2004 and -based upon the improvements in macroeconomic stability, investment programs and the performance o f IBD p o r t f o l i e recommended focusing IDB program towards the social sector (education, health and improvement o f urban districts) and the support to productive development (infrastructure, technological development, competitiveness, agricultural development and tourism). This review also highlighted the important challenges to progress in institutional and governance aspects, and proposed alternative intervention instruments through technical assistance for the consolidation o f a public result-oriented management (PRODEV24), as well as studies o f the country’s fiduciary capacity.

PFM Relevance to WB and IDB Country Strategies

17. Design and implementation o f public sector and governance operations supported by the WB and IDB and synergy with other analytical work. Improving governance and public sector management i s one o f Argentina’s development challenges. Since transparent and accountable P F M i s a critical element o f good governance and efficient use o f public resources, the highlights resulting from this diagnosis o f PFM will contribute to lending operations o f the World Bank and IDB that support the modernization o f the state. In addition, they will serve to sustain the selection o f lending instruments that support the development objectives o f the country, and will have direct links to non-lending assistance and studies such as the WB’s Institutional Governance Review and the BID‘S PRODEV.

18. Management of the lending portfolios of the World Bank and IDB. Operations funded by the WB-IDB in Argentina st i l l rely substantially on ring-fencing, with separate financial management arrangements such as project-related f low o f funds, bank accounts, and implementation units outside mainstream government systems.

19. Implementation of the WB Fiduciary Action Plan. The analysis o f Argentina’s financial management arrangements for WB funded operations will directly contribute to the goals o f the Fiduciary Action Plan and to the medium-term goals o f starting to reduce the s t i l l

23 See Annex 1.3: World Bank Fiduciary Action Plan - Country Assistance Strategy 2006-2009. 24 Implementation Program of the External Pillar for Medium Term Action for Effective Development.


high level o f ring-fenced financial management arrangements and o f reinforcing reliance on country systems.

CFAA Objectives and Scope

20. The overall objectives o f the CFAA are to provide (i) a diagnosis o f national-level P F M systems and practices; (ii) an analysis o f major issues that affect national-level PFM core processes such as budgeting, accounting 8z financial reporting, debt management and the control system; and (iii) an analysis o f P F M arrangements for World Bank and Inter- American Development Bank funded operations.

21. The CFAA covers P F M at the national level only.25 In each o f the three areas covered, the C F A A assesses progress and points to further steps leading to better PFM, identifies the effect o f the crisis on that trajectory, describes the strengths and weaknesses of the system as it is currently working, and identifies which obstacles impede further progress. The CFAA has been designed to be focused on the analytical aspects and to promote dialogue with country authorities on public policy options, which resulted on the joint elaboration o f the Action Plan.

25 Provincial PFM systems and practices will be analyzed in a forthcoming study jointly issued by the World Bank and the Inter-American Development Bank.


2. LEGAL & INSTITUTIONAL FRAMEWORK

The National Public Sector

22. The NFPS consists o f (i) The National Public Administration (NPA); (ii) The Federal Revenue Agency (AFIP) and the National Institute o f Health Care Provision for Pensioners (PAMI); and (iii) state-owned enterprises. The NPA includes the Central Administration, decentralized agencies, and institutions o f social security. The Fiscal Solvency Law provides the legal framework for the inclusion o f Fiduciary Funds and Decentralized Organisms. Each decentralized agency i s supervised by a Central Administration entity, although these entities have a substantial degree o f autonomy for decision-making based upon their own legal status.26

Legal Framework for PFM

23. The legal framework for PFM i s comprehensive2’ and covers each relevant area o f budget management and the distribution o f fiscal functions throughout the NFPS. The National Constitution, the Financial Administration and Control Systems Law (LAF), and other related regulations define the general principles governing budget formulation and execution, accounting, debt issuance, and the control system. Specifically, the LAF establishes the integration o f budget, accounting, treasury and debt management functions. This Law and the Complementary Permanent Budget Law (No 11672) define the budget process and the adoption o f the annual budget law. The Law o f Fiscal Solvency o f 1999 and the FRL o f 2004 complement the legal framework and define fiscal targets.28

For example, the Auditor General’s Office (AGN) i s a decentralized agency under the supervision o f the national legislature (Congress). ’’ See Annex 2.1, based on the main provisions o f budget legislation as stated in “Managing Public Expenditure”. OCDE, Allen and Tommasi, 200 1. The legal fiamework complies with OCDE-benchmark criteria used by this source. 28 Annex 2.1 presents a more detailed analysis o f the PFM legal fiamework.


3. BUDGET FORMULATION

Institutional Framework

24. As stipulated in the National Constitution and the LAF, the Executive Power, through the Ministry o f Economy (MECON), is responsible for budget formulation and execution. The Under-secretariat o f Budget, which reports to the Secretariat o f Hacienda29 i s MECON’s key institution for aspects related to the budget process. This Under-secretariat in turn i s made up o f five units, including the National Budget Office the National Treasury (TGN), and the General Accounting Office (GAO). The two other u n i t s are in charge o f public sector payroll and information technology.

Budget Coverage

25. In 2006, the national budget coverage, i.e. the treatment o f expenditures following the general procedures o f the LAF and the execution norms dictated by the application authority, encompassed 87 percent o f NFPS total expenditures. The remaining 13% consisted basically of: (i) public entities outside the N P A (9%); and (ii) “fiduciary funds” (4%).31 Measures should be implemented to have the information reports about expenditures gathered in a unified manner in order to improve its mechanisms and facilitate i t s control, as well as to achieve a clearer and better access to the information about the execution o f total expenditures.

26. The creation o f decentralized organisms and fiduciary funds proliferated in size and number after 2001, in response to cash-rationing mechanisms imposed during the crisis, and rigidities stemming from the need for the budget execution to fal l within demanding fiscal- discipline targets associated with overcoming the crisis (see Chart 3.1).

Chart 3.1: Evolution of extra-budgetary funds 2000-2006.

I 2000 2001 2002 2003 2004 2005 2006

Public Institutions excluded form the NPA Fiduciary Funds

Q National Budget

Source: Annual National Budget Laws.

29 Main tasks from the Secretariat o f Hacienda include: tax policy, coordination o f budget process, and fiscal relationships with provinces. 30 This office focuses on budget formulation and execution. 31 For more details, see Annex 3.1, Budget Coverage in year 2006.


27. Decentralized agencies not included in the NPA. There are six public entities not included in the NPA, which formulate and execute their budgets autonomously and then submit them to the N B O for review and approval without Congressional intervention. Three o f these entities were excluded from the N P A by Executive decree,32 and the other three were created directly by specific l e g i ~ l a t i o n . ~ ~

28. Fiduciary funds. Currently, there are 16 fiduciary funds, established and regulated by specific legislation and managed by designated ministries o f the Executive34. During the period 2000-06, fiduciary finds increased in number3’ and size36, bypassing intergovernmental revenue-sharing m e c h a n i ~ r n s . ~ ~ It i s worth to mention that the FRL o f 2004 contemplates the incorporation to the National Budget o f the totality o f expenditures and resources corresponding to fiduciary funds since fiscal year 2007.38

Budget Preparation

29. The National Budget preparation process is undertaken under the coordination o f MECON, and integrates current and capital expenditures. There is a clear budget calendar that is generally adhered to, and allows ministries and other direct spending units to complete their detailed estimates on time. The process starts with the timely issuance o f a budget circular to the spending units. The budget reparation process is also characterized by a strong focus on aggregated fiscal discipline! Due to the availability o f adequate processes and mechanisms, the effectiveness on the preparation o f the National Budget could be improved by an extension o f i t s current scope.

30. Actors and institutional mechanisms. Through the issuing o f an annual circular from MECON, an inter-institutional task force called Budget Formulation Coordination Group (GAEP) i s established to monitor and coordinate the calendar o f budget formulation. The GAEP, coordinated by the Budget Under-Secretariat, involves four M E C O N Under- secretariats (Public Revenue, Fiscal Relations with Provinces, Public Debt, and Economic Programming), the Coordination and Evaluation Under-Secretariat from the Chief o f Cabinet Office, and the Social Security Secretariat from the Ministry o f Labor. The GAEP works as an efficient institutional tool to ensure effective and timely preparation o f the budget, according to the timetable set out in Table 3.1.

32 The AFIP, which was given the status o f a state owned enterprise in 2001; the System o f Pensions and Health (INSSJyP); and the National Film Institute (INCAA). 33 The Superintendency o f the private pension system (SAFJP), the National Institute o f Yerba Mate, and a Special Unit for Yacireta Hydropower plant. 34 See Annex 3.2, Fiduciary Funds in year 2006. 35 From one in 1994, to seven in 2000, and to 16 in 2006. 36 Capital expenditures o f fiduciary funds represent 17.2% of total budgeted capital expenditures (See Annex 3.2). 37 “Who decides on Public Expenditures,” Abuelafia, Berensztein, Braun & Di Gresia, CIPPEC (2005). 38 Article 3 o f the FRL.

The three broadly-accepted budgetary outcomes are: aggregate fiscal discipline; strategic resource allocation; and efficient and effective of programs and service delivery. For more details, see World Bank Public Expenditure Management Handbook, 1998.

39


March April

June

July- Aug.

Sept

- Circular of MECON to establish annual budget calendar and GAEP. - Preparation of projections for (i) Macroeconomic variables, (ii) Investment needs and (iii) Debt service requirements. - Analysis of sector policies and request fiom spending units to modify existing programs. - Estimate of civil service labor cost by Budget Under-Secretariat - Formulation and distribution of the budget preparation manual by Budget Under-Secretariat - Preparation of the first version o f budget ceilings by Budget Under-Secretariat - Preparation of the preliminary budget by spending units - Dissemination of budget ceilings to spending units by Budget Under-Secretariat - Drafting of the annual budget law by Budget Under-Secretariat - Transmission by MECON and the Chief of Cabinet Office of a joint status report to the Congress. - Finalization of the annual budget law with updated projections and ceilings - Negotiation for additional funds allocation: (i) between spending units and MECON and (ii) between MECON and the Chief of Cabinet Office. - Budget Under-Secretariat initiates the consolidation o f the draft budget law. - By 15 September, MECON submits the draft budget law to the Chief o f Cabinet Office for transmission to the National Congress for revision of the draft budget. - Within three weeks, MECON submits the multi-year budget to Congress.

31. Macroeconomic projections. The Under-Secretariat o f Economic Programming and the National Directorate for the Coordination o f Macroeconomic Policies are responsible for calculating the expected level o f next year’s main macroeconomic variables (GDP growth rate, nominal exchange rate, inflation, etc.) and then, accordingly, estimate revenues, debt service, and borrowing requirements for the incoming fiscal year. In part due to high volatility generated during the crisis, macroeconomic projections used for budget preparation have not been realized. Deviations between actual and projected figures have been significant in recent years, and there i s a tendency to underestimate economic growth and (therefore) fiscal revenue^.^' Certain analysts consider this underestimation o f revenues as a strategic practice by the Executive to increase its margin o f discretion in the use o f public resources. However, the government argues that this i s related to an attempt o f privileging the principle o f prudence to improve fiscal solvency. Table 3.2 shows that the deviation between actual and projected figures for revenues is not only found in Argentina (See Table 3.2). However, Chile’s revenue-deviation, although higher than Argentina’s, does not alter significantly the execution o f i t s budgeted expenditures.

4 1,42.

For example, comparing data fiom the 2004 and 2005 Budget Law Messages to the Congress with those obtained by INDEC, it can be noticed that the average 2004-05 real GDP growth estimated for budget projections was only 4%, whereas the economy grew 9% on average during this period. 4 1 Stein et al. (1999); Abuelafia et al. (2005); and Bertello (2006). This practice results in significant discrepancies: the 2007 budget draft estimates real GDP growth at 6 percent for year 2006, while INDEC, the Central Bank, private sector think tanks, and other sources anticipated that actual growth would stand at 8.5 percent. The budget draft also estimates 4% GDP growth for year 2007, which would be possible only under the event of a sudden contractive cycle. 42 The issue of inaccurate macroeconomic projections for budgeting i s also considered in Annex 3.3: Budget Credibility.

40


2005 2006

Selected Countries

Argentina Brazil Chile

Sources: Argentina: Annual Budget Laws and MECON’s Fiscal Bulletin. Chile: Annual Budget Laws and Budget Directorate (DIPRES).

I Brazil: Annual Budget Laws and http://www,tesouro.fazenda,gov.br

32. Determination o f global expenditure limits. In May, the Under-Secretariat o f Budget fixes global expenditure limits according to revenue estimates, the evolution o f the current budget, and the level o f execution o f the previous budget. In the meantime, central government administrations provide information to the Under-Secretariat o f Budget on changes in their programmatic budgets.

Primary Expenditure Total Revenue Expenditure Primary Total Revenue Deviation (%) Deviation (%) Deviation (%) Deviation (%)

12.7% 8.2% 14.8% 12.9% 2.2% 1.7% 2.0% 3.2% 2.9% 13.1% 0.5% 28.2%

33. Formulation o f sector budget proposals. In July, the expenditures ceilings are determined. For that purpose, The Under-Secretariat o f Budget determines for each sector a total expenditure ceiling and a ceiling for each type o f expense, and communicates them to the appropriate ministry or entity through the National Integrated Financial Management Information System (SIDIF). The SIDIF does not allow ceilings to be overridden by direct spending units, who allocate autonomously the resources by program and indirect budget beneficiary.

34. Budget consolidation. In August, the Under-Secretariat o f Budget consolidates submitted sectoral budgets. During this phase, negotiations usually take place between line ministries, MECON, and the Executive’s Chief o f Cabinet Office, in order to obtain additional funds.

3 5. Budget classification. The budget classification system i s consistent with IMF Government Financial Statistics (GFS) standards, and allows the tracking o f spending by administrative, economic, functional and geographical classifications, as wel l as by type o f expense, program and sources o f funding. Program classification i s extensive and consists o f five levels o f detail (program, sub-program, activity, project and public work) that is used for budget formulation, execution and reporting o f the central government’s budget.

36. Budget documentation. The budget documentation submitted to Congress i s comprehensive and detailed with regard to fiscal forecast, budget proposal and outturn o f previous years. Budget documentation includes:

0

0

0

0 Debt stock and servicing. 0 Prior year’s budget outturn. 0

Macro-economic assumptions including estimates o f aggregate growth, inflation and exchange rates. Budget policies (tax policies, tax revenue estimates, priorities o f public expenditure). Deficit financing requirements, anticipating sources o f financing.

Current year’s budget (estimated outturn).


0

0 Multi-annual projections.

Summarized budget data for both revenue and expenditure according to the main classifications used.

37. However, the information on public debt i s confined to tables o f debt stock and debt service, and there i s no detailed information on the use o f credit, as required by the LAF43. Neither the fiduciary funds nor the decentralized entities outside the N P A are included in the classification systems.

Policy-Based Budgeting: Strategic Planning and Medium-Term Perspective

3 8. Linkages between policy, planning and budgeting. Budget elaboration and policy planning are not sufficiently linked, especially at sectoral/ministerial levels. There are also chances to speed up the institutional mechanisms to solve legitimate conflicts among policy actors involved in the resource allocation process.44 During the last decade, some instruments related to the elaboration and follow-up o f physical indicators have been developed by the Budget Evaluation Directorate (DEP), and most ministries currently prepare their strategic plans. However, such plans are rarely used as a significant tool for the formulation o f budget requests.

39. Despite efforts made by the Under-Secretariat o f Budget, the issue o f the strategic allocation o f resources was not properly addressed during P F M reforms undertaken during the last decade.45 This de-linkage between budget and policy planning hinders the solution o f the existing tension between “needs” (policies) and “availabilities” (budget constraint^),^^ keeps budget formulation focused on the short term, and represents an obstacle to strategic allocation o f resources, formulation o f a medium-term budget perspective, and effective evaluation. All this is compounded by frequent budget modifications during execution, which generate difficulties for the effective use o f instruments such as the preliminary budget and the multi-annual budget.

40. Program-based budgeting and monitoring system of physical targets. Following the requirements imposed by the LAF, the Budget o f the N P A i s prepared following program-based budgeting, adopted since 1994. The LAF contemplated also the strenghtening o f the budget execution evaluation, in order to complete the budget cycle and to enable information feedback for the decision making process. Consequentely, the N B O has been working since 1994, through the DEP, on the implementation and fine-tuning o f a quarterly information system comprising data and physical indicators o f the programs, in coordination with program executing units.

See chapter 6 on debt management for more details. 43

44 World Bank Public Investment Strengthening Technical Assistance Project (No. 3958). 2004. Hacia una mayor integracidn del Plan Estratkgico del Gobierno y el Presupuesto Nacional por medio del Fortalecimiento del Presupuesto Plurianual, el Presupuesto Preliminary el Sistema de Indicadores. By Martirene, Roberto A. Buenos Aires, Argentina.

For example, the introduction of the new PFM system through the adoption o f the Law o f Financial Administration (1 992), the attempts to introduce result-oriented budgeting by the State Modernization Secretariat (2000-200 1) and the introduction o f macro-fiscal laws, for instance, through the adoption of the Fiscal Solvency Law (1 999). 46 World Bank Public Expenditure Handbook, 1998.

45

4 1. Activities assigned to the Budget Evaluation Directorate. Among the activities assigned to the DEP are: (i) analysis and evaluation o f the descriptions o f budget programs and sub-programs requesting financial aid to the NBO; (ii) forecast o f budget year estimates for physical targets and ongoing outputs; (iii) forecast o f the total cost o f investment projects, including foreseen schedules as wel l as degree o f achievement reached and estimated for each project; (iv) collection o f physical-financial indicators that allows in several cases to establish per unit expenditure for each output; (v) evaluation supporting tasks, such as training oriented to c iv i l servants in expenditure execution units and technical assistance to different programs.

42. Evaluation Reports. Physical-financial monitoring reports are elaborated quarterly, with information organized by jurisdiction, including explanations referred to the most significant observed deviations between programmed and effectively executed expenditures from main programs. By the end o f the fiscal year, each expenditure unit must submit data to the N B O on physical goals corresponding to that year. This is used as a basis for the elaboration o f a “Evaluation Report on the Results o f Management”, which i s incorporated to the Investment Account submitted to the National Congress before June 30th o f the next fiscal year.

43. Preliminary budget and sectoral planning. The preliminary budget was designed in 1996 by the National Budget Office as an optional instrument to promote planning and strategic allocation o f resources in line ministries and administrations. Prior to the dissemination o f budget ceilings, the ministries prepare budget proposals following three alternate scenarios o f resource availability. When properly implemented, the preliminary budget contributes to (i) institutionalization o f the budget debate within ministries, (ii) better definition o f priorities and corresponding allocation o f resources; (iii) rationalization o f the decision-making process; and (iv) empowerment o f the line ministries in the negotiation o f budget modification^.^' However, it i s s t i l l necessary to strengthen i t s application in each institution, as well as to redesign some mechanisms to meet the original objective o f this planning and administration tool. The Under-secretariat o f Budget i s currently analyzing these issues for the updating o f i t s legal framework.

44. In practice, ministries prepare the scenarios or resource availability as an administrative procedure, focusing more on inputs than on managerial and output considerations, which could raise doubts on the relevance and the effectiveness o f the preliminary budget.48 The lack o f ownership o f this tool by the ministries i s compounded by cash-rationing practices and financial and political volatility o f the crisis period. Following the recovery from the crisis, the preliminary budget should gradually become a more effective and frequently used tool.

45. Multi-annual budget. Similarly, the implementation o f the multi-annual budget has focused on formal administrative considerations and does not support in a proper way i t s medium-term planning objective. The 1999 Fiscal Solvency L a w introduced the multi-annual budget, which has been prepared annually since 2000. The multi-annual budget i s indicative

World Bank Public Investment Strengthening Technical Assistance Project (No. 3958). 2004. Hacia una mayor integracidn del Plan Estratkgico del Gobierno y el Presupuesto Nacional por medio del Fortalecimiento del Presupuesto Plurianual, el Presupuesto Preliminar y el Sistema de Indicadores. By Martirene, Roberto A. Buenos Aires, Argentina. 48 Sotelo Maciel, Jorge A. (2003).

41


and non-binding; it covers a three-year period and provides an explanatory note on budget policies and forecasted estimates for revenues, expenditures (with emphasis on investment plans), and debt financing and servicing. I t s formulation follows the same process as the annual budget, with a higher level o f aggregation for the second and third years.

46. In practice, neither Congress nor individual spending units have taken ownership o f this instrument at the political or technical level. Preparation by spending un i t s does not benefit from adequate monitoring or regular updating. Similarly, Congress does not exercise a significant role in the revision o f the multi-annual budget. Also, the link between multi- annual budgeting and the public investment system i s not sufficiently strong in terms o f the size and degree o f progress o f investment projects. The crisis period, with its legitimate focus on fiscal discipline and the difficulty to operate over medium and long-term objectives, affected the efficacy and effectiveness o f this tool.

47. Result-oriented budgeting. The Budget Under-Secretariat o f M E C O N plans to reactivate planning and policy-based budgeting through the introduction o f a result-oriented budgeting system. For this, it expects to introduce the use o f performance indicators in combination with existing instruments such as the preliminary and the multi-annual budget, and strengthen monitoring and evaluation. This initiative is expected to be accompanied by several supporting measures, including expansion and upgrading o f SIDIF; institutional strengthening o f the NBO’s administrative and advisory role; intensive training; public sector-wide dissemination o f knowledge on result-oriented budgeting and management. During the preparation o f the 2007 budget draft, five spending un i t s -the Ministr ies o f Health, Education, Social Development, Labor, and Economy- in cooperation with the NBO, initiated the use o f performance indicators for specific programs. 49

48. The experience o f OECD countries shows that successfully implementing result- oriented budgeting requires ‘fundamental changes’, such as a high level o f political support; the existence o f right incentives; adequate timing and important financial resources; the involvement o f control institutions through the execution o f performance audits; and preferably embedding budget reforms into broader public service reforms.50

49 According to information provided by the NBO, four additional expenditure units have started using performance indicators for some of its specific programs during the preparation o f the 2008 Budget (whose analysis exceeds the scope of this CFAA). These expenditure-units are: “Ministerio del Interior ’I, “Instituto Nacional de Tecnologia Agropecuaria ”, “Instituto Nacional de Teatro ”, y “Secretaria de Cultura de la Presidencia de la Nacidn”. 50 See Annex 3.4 on Performance Budgeting, based on papers fiom “OECD Working Party o f Senior Budget Officials.”


4. BUDGET APPROVAL AND EXECUTION

Budget Approval

49. The Congress’ role to review and approve the budget i s established b the Constitution and the LAF. The congressional review period takes almost three months.’ The Executive’s Chief o f Cabinet presents the budget proposal to the Congress by September 15. Afterwards, a budget commission o f the Chamber o f Deputies reviews the proposal and reports its comments and recommendations to initiate the debate and approval process by the Congress.52 Once the Chamber o f Deputies approves the budget, it sends it to the Senate Commission for a similar review-debate-approval process.53 The Budget Law, once approved by Congress, i s sent back to the Executive. In cases where the Executive vetoes changes introduced along the approval process, the Law returns to Congress, and in this circumstance, a majority o f two-thirds o f each chamber will be needed to reject the Executive veto.

50. Since the creation o f the LAF in 1992, which re-established the P F M system, the budget proposal i s presented to the Congress in a timely fashion, and the Budget Commissions o f each Chamber agree on and approve their respective rulings. However, it is noticeable that the crisis faced by the country demanded quick measures and delegations o f power from the Congress to the Executive, which implied a reduction in the participation o f the former with respect to the budget process.54 Currently, for example, budget modifications introduced during execution only require the congressional approval in cases o f proposed increases o f total budgeted expenditures.

5 1. Also, Congressional review and changes prior to budget approval are not significant (less than 1 percent o f budgeted resources on average).55 The revision o f the budget by the Congress i s also limited by i t s institutional and technical capabilities. Considerations o f strategic PFM issues (fiscal discipline or strategic allocation o f resources) are crowded out by a focus on specific details or political aspects considered by Congress members.56 Although Article 15 o f the LAF requires full indication o f a disbursement schedule and progress o f multi-annual public investment projects whose implementation goes beyond the annual budget horizon, sometimes public investment outlays are budgeted without corresponding funding, being the decision o f whether to provide funding during the corresponding fiscal year in hands o f the Executive.57

Budget Execution

5 1 From September 15 to December 10, with possible extension to December 31 and approval granted at an extraordinary session. 52 The legal framework also authorizes the Congress to increase the budget amount, provided additional sources of funding can be justified. 53 If Congress rejects the Executive’s budget proposal, the current budget applies for the next fiscal year until the eventual approval of a new one. Should this happen, adjustments are made in accordance with actual execution. 54 Recently passed legislation (July 2006) introduces an amendment to Art ic le 37 o f the LAF authorizing the Executive to modify budget allocation without Congress approval (‘superpoderes 9.

Source: Drafted and approved Budget Laws. “E l rol del congreso en el Presupuesto Nacional de la Argentina,” CIPPEC (2006).

55

56

57 This i s so-called ‘planilla de la felicidad’. Rodriguez & Bonvecchi (2004).


52. In 2006, 87% o f the expenditures corresponding to the NFPS were executed through the system o f Financial Administration. The execution o f the National Budget is integrated to the SIDIF and payments are made through the Treasury Single Account (CUT), with the exception o f social security institutions and other specific categories, such as judicial and legislative institutions, where the division o f powers rules. In contrast, the expenditures o f decentralized entities not included in the NPA, as well as those corresponding to fiduciary funds, are executed by using their own systems.

T Institutions

.(

National Budget Central Administration Decentralized Organizations

National Budget Institution o f Social Security

Fiduciary Funds (FF)

Organizations not included in the National Public Administration

State-Owned Enterprises

Budget Execution: Financial Management Information System (SIDIF) Financial Planning and Cash Management: Treasury Single Account Budget Execution: Financial Management Information System (SIDIF) Financial Planning & Cash Management: Own system Own system. There exist norms that establish the scope o f information that must be sent to the National Budget Office (NBO) on formulation and budgetary execution o f FFs. Own automated system. There exist norms that establish the scope information that must be sent

formulation and budgetary execution o f these organizations.

56%

32%

4 ?‘o

to the National Budget Office (NBO) on 7 yo

Enterprise financial administration system 2 Yo

National Budget Execution

53. Quotas mechanism. Execution o f the National Budget begins with the publication o f an administrative ru le establishing the distribution o f expenditures, issued by the Chief o f Cabinet Office, which specifies the amounts allocated to each spending unit. This decision i s followed by the definition o f quarterly quotas and monthly limits on the payments that may be processed through the Treasury. The quotas are determined by both the NBO and the Treasury, taking into account expected revenue collection, the Government’s cash position, and spending units’ commitment request^.^' Although designed for the specific purpose o f limiting commitments and accruals that spending units may incur, the scope o f the quota system is limited, since it is logically applied to discretionary expenditures, which represent a small proportion o f total expenditure (less than 10 percent o f total budgeted expenditures for year 2006). Quarterly accrual quotas are adjusted monthly and can be transferred from one month to another within the same quarter. At the end o f the quarter, spending units lose unused accrued quotas.

54. Although it becomes critical in periods o f unfavorable tax collection, the quotas mechanism may generate a series o f adverse effects by reducing the degree o f certainty on resource availability on originally predicted budget allocations. O n the other hand, it may

Each direct spending unit allocates allotments among i t s indirect spending units and budget programs. 58


also boost the cost o f goods and services purchased by spending units due to the risk o f payment delays to suppliers, as well as induce an inappropriate management o f the purchases processes and their link with the quotas allocation process to fulfill them, which may generate in this case undesirable behavior, such as concealing liabilities or building up arrears. In this sense, it i s important to reinforce the operative programming capabilities o f the expenditure units through a training process related to the definition o f the annual operative plans.

55. National Integrated Financial Management System (SIDIF). The introduction o f SIDIF and the associated expenditure execution systems represented a significant accomplishment for the public administration. It greatly improved the reliability and transparency o f public finances and reduced the cost o f processing transactions. SIDIF integrates budget accounting and treasury functions and is also linked to the Debt Management and Information System (SIGADE). MECON's Secretariat o f Hacienda, which manages SIDIF , controls and verifies budget execution, which is decentralized to spending units. Each spending unit manages the expenditure process within the control framework established by LAF and SIDIF. Until 2004, spending units used different local SIDIF versions or their own systems for budget execution. To improve system efficiency and harmonization o f the systems, the Government, with the support o f the World Bank, has been implementing a unified local system (SLU) since 2004. According to recent information provided by the government, this system wquld be currently in use in 87% o f the administrative systems o f the institution^.^^

56. SIDIF would benefit from upgrading to improve internal control and efficiency by incorporating Internet-based technology and increasing i t s functional scope through the integration o f subsystems and expansion o f i t s coverage. The government i s currently developing the new web-based version o f SIDIF with the financial support o f the World Bank and the IDB. This new version o f SIDIF i s expected to integrate current SIDIF with the National Public Investment Management System (BAPIN) and that it will also continue improving current SIDIF l i n k s with the management systems for: human resources (SIRHU); public assets; social security institutions; state-owned enterprises and other decentralized entities not included in the NPA; fiduciary funds, and multilateral lending institutions (UEPEX).60 It is important to note that the conversion o f the current SIDIF into the web- SIDIF (under development at the moment) has the goal o f supporting the implementation o f result-oriented budgeting.

57. National Treasury. Treasury aspects o f budget execution include financial planning, cash management, and management o f short-term assets and liabilities. Once the budget has been approved, the Treasury prepares, in coordination the NBO, an annual financial plan with monthly estimated allocations. The financial plan i s adjusted on a monthly basis, according to cash balances (actual revenue collected net o f actual expenditures and payment o f arrears), and serves as a basis for the determination o f monthly payment allotments.

58. Cash balances are managed by the National Treasury and centralized through the CUT. The Treasury also keeps a virtual account for each spending unit and manages all flows

As of December o f 2007, out o f 108 Financial Administrative Systems (SAF), 91 implemented the SLU 59

s stem, 8 were using their own system, 6 were using the CONPRE system, and 3 the SIDIF OD. 6'See chapter 8 on multilateral lending.


o f funds through a single account located at the Banco Nacidn. Through this account, the National Treasury collects public revenues and makes payments for its coverage o f the National Budget, which excludes those corresponding to social security and other specific expenditure categories (see Table 4.1). The management o f payments is centralized; requests for payments are sent to the National Treasury, which controls and executes them.

59. Payment arrears that are reported by the Treasury are calculated using reliable data. However, i t s coverage remains limited and scarce (averaging 1 percent o f total expenditures during 2003 -05)? Calculation o f these arrears i s based only on CUT-processed outstanding payment orders and excludes delayed payments associated with (i) potentially accrued expenditures whose payment orders have not been yet submitted to the TreasuryY6* and (ii) expenditures not processed through the CUT.

60. Treasury Function and Cash Management o f Social Security Institutions. Social security institutions are legally excluded from C U T (Article 38 o f L a w 24447) and perform cash management activities by means o f their own systems. For example, the cash management o f the National Administration o f Social Security (ANSES) -the largest institution o f the consolidated social security system, representing two thirds o f the system’s total expenditures in year 2006- involves 213 different banking accounts, o f which 197 are associated with the payment o f operational expenses made by i t s local offices. Out o f the remaining sixteen banking accounts, there are two o f special relevance, because one registers the collection o f social security contributions, and the other records the payment o f pensions (98.5% o f total ANSES expenditures). Although excluded from CUT, the cash management for these two special accounts is made in close coordination with the National Treasury, since: (i) a significant share o f ANSES collections are transferred from the Treasury (about 15% o f total tax revenues shared by Coparticipacidn Federal); (ii) ANSES expenditures represent about 40% o f total N P A expenditures; and (iii) if the ANSES runs a deficit (surplus), the National Treasury finances its borrowing needs (regulates the use o f available funds).

61. Relative to other Middle Income Countries in Latin America and even other regions o f the world, Argentina i s well positioned with regard to P F M systems. The existence o f effective and efficient Financial Management Integrated Systems integrating budget, accounting and treasury functions, and covering a high proportion o f budgeted expenditures, as well as the use o f a treasury single account (CUT), are attributes not met yet by most Middle Income Countries.

6’ 0.74 percent in 2003,2.08 percent in 2004, and 0.3 1 percent in 2005. 62 As reported in “Reforming Policies and Institutions for Eflciency and Equity of Public Expenditures.”, World Bank, 2003.


5. ACCOUNTING & FINANCIAL REPORTING

Accounting

62. Accounting framework. The LAF provides the legal basis for a sound accounting system in terms o f norms, policy reporting and allocation o f responsibilities. The National Government’s accounting system i s unique, uniform and applicable to the National NFPS. I t systematically: (i) records al l transactions; (ii) processes and produce financial information; and (iii) integrates budgetary, treasury and equity information for those entities. The Law also prescribes that the accounting system must be based upon generally accepted public sector accounting standards.

63. General Accounting Office (GAO) and accounting responsibilities. The General Accounting Office (GAO) i s the regulatory authority o f the national government accounting system. It i s responsible for implementing and maintaining the system throughout the NFPS. G A O maintains the chart o f accounts updated; coordinates the design o f database systems; ensures the validity o f the data entered by the primary recording units; issues public sector accounting standards; and approves the accounting systems o f decentralized agencies. The preparation o f financial statements i s the responsibility o f each decentralized entity and organization benefiting f rom subsidies or other financial support from the government.

64. Accounting policies and classification. The national government public accounting system utilizes the accrual basis for expenditures and cash basis for revenues. Based on the budget classification, the chart o f accounts o f the accounting system sorts expenditures by programs, functions, and economic classification. The use o f accrual basis combined with the adopted types o f classification provides the necessary information for the detailed costing o f al l activities.

65. Accounting standards. The accounting standards o f the national public sector, adopted in 1995 under the LAF, are in line with the International Public Standards o f Accounting (IPSA). In particular, the national presentation standards for financial statements comply with the IPSA N o 1 (on presentation o f financial statements). However, there are s t i l l possibilities for improvement. In particular, the consolidation o f financial statements o f decentralized administrations, including the National Administration o f Social Security and the decentralized entities, is currently done by aggregating the respective entities’ net assets. This approach does not provide information on the assets and liabilities o f each institution, and consequently reduces the overall transparency o f the consolidated financial statements. The national standards are currently under revision, with a view to harmonize them further with the international standards. Related to this, the government has recently carried out a gap analysis vis-a-vis the international standards.

66. Fixed assets registration and evaluation. The inventory o f fixed assets i s incomplete and the evaluation o f assets i s not systematically updated. This shortcoming affects the accuracy o f the financial statements and represents an obstacle for their efficient and effective review by control institutions.

Argentina Countrv Financial Accountabilitv Assessment 20

Financial Reporting

67. Financial reporting. Financial reporting i s timely and comprehensive. Each entity o f the N P A submits each month to the GAO a confirmation on whether data available at SIDIF match with and data reported by each entity. Additionally, the G A O currently performs a cross checking between i t s own registries and the information sent by each unit. Information reported includes the budget execution, the statement o f current income and expenditure, the statement o f sources and use o f financial resources, a cash f low statement, and the national level debt balance.

68. Annual Public Investment Account (PIA). The GAO prepares the financial statements for the Central Administration and collects those pertaining to other public entities under the Central Administration, including public enterprises, Fiduciary Funds and decentralized entities, which have to submit their financial statements to the G A O within two months after the end o f the fiscal year. The G A O consolidates the financial statements for the national public administration for presentation to the Congress before June 30 o f each year, as stipulated by Article 95 o f the LAF. However, important progress has been made on this matter, such as the approval o f the P I A corresponding to 1997 and 1998 -Law 26098 o f June o f 2 0 0 6 , and the recent approval -Law 26328 o f December o f 2007- o f those corresponding to the six years between 1999 and 2004.

69. Fiscal Bulletin. The Secretariat o f “Hacienda ” publishes quarterly statements, available on the M E C O N webpage, providing information including budget execution, execution o f the extra-budgetary funds, tax sharing and other transfers to provinces, and Central Administration outstanding stock o f debt. The Fiscal Bulletin is frequently used and consulted by the public sector as wel l as c iv i l society.

ArPentina Country Financial Accountability Assessment 21

Rating Agency: Fitch COUNTRY 2002 2003 2004 2005 2006

Argentina DD DD DD D B

Brazil B B+ BB- BB- BB

Mexico BBB- BBB- BBB- BBB BBB

6. DEBT MANAGEMENT

Rating Agency: SBP Rating Agency: Moody’s 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006

SD SD SD B- B+ Ca Caa l Caa l 83 8 3

B+ B+ BB- BB- BB B2 82 B1 Ba3 Ba2

BBB- BBB- BBB- BBB BBB Baa2 Baa2 Baa2 Baal Baal

70. Over the last decade, public debt has been a crucial topic o f political and economic debates in Argentina. Between 1995 and 2000, the national nonfinancial public sector debt grew spectacularly with respect to the payment capacity o f the country, unleashing in late 2001 one o f the worst economic, social and political crises Argentina had ever experienced. In the midst o f this crisis, the Government declared a state o f emergency, implementing economic measures that included devaluating the Argentine Peso and suspending the servicing o f sovereign debt. Due to these circumstances, the debt management policy followed by the authorities during the period o f analysis considered by this CFAA focused on achieving a payment agreement with creditors that would in turn assure the sustainability o f domestic fiscal targets.

71. The complexity o f the debt management process in the years fol lowing the crisis was accentuated by the size and composition o f Argentina’s indebtedness and the financial emergency plan implemented by the Government during 2001 -02, which included suspending payments on bonds issued prior to December 200 1 , structuring financial aid plans for compensating banks and depositors for the effect o f the devaluation, and rescuing several provinces. In January 2005 after three years o f debt default, the Government launched a formal bonded-debt exchange offer. The total amount o f bonds tendered in the exchange was US$62 billion, implying an acceptance rate o f some 76 percent o f eligible principal -without considering accrued interests. The operation resulted in a reduction in public debt from US$191 bi l l ion at end 2004 to US$ l50 bi l l ion at end 2005.63 Box 6.1 shows how these changes impacted on long-term foreign currency denominated bonded debt international ratings.

Box 6.1: International Bond Ratings for Selected Countries’ Long f Foreign Currency -Denominated Debt (2002-2006, end-year ratings)

Institutional Framework

72. National Congress. According to Articles 4 and 75 o f the Constitution, the Congress i s empowered to authorize the national government to subscribe loans and credit operations. In addition, Article 60 o f the LAF establishes a legal framework that restricts Public Administration entities from formalizing any loan or credit operation that has not been

Including debt restructuring hold outs. Excluding hold outs, the figure decreases to around US$129 billion. 63


included in advance in the General Budget Law or some other specific law. The only exception to this ru le i s loan operations subscribed with the multilateral organizations, where the Executive Power formalizes the operation directly.

73. National Office o f Public Debt. The leading agency responsible for the financing policy o f the national government i s the National Office o f Public Debt (ONCP), created also by LAF (Article 68), which i s part o f MECON’s Secretariat o f Finance. I t s responsibilities encompass managing all stages o f the borrowing process, from programming, use, control and authorization o f financial resources obtained by loans and credit operations, through debt servicing. Article 69 o f the LAF and linked decrees establish the following responsibilities for the ONCP:

participate in formulating financing policies; organize an information system on capital markets; coordinate financial offers received; authorize requests to initiate public credit operations; standardize procedures for the national public sector on matters such as issuing, positioning and rescue o f loans, as well as negotiation, contracting and amortization o f loans; support negotiations undertaken to issue debt or to contract loans and participate in the negotiation process; ensure that financing obtained through public credit operations i s applied for i t s designated purposes; maintain an up-to-date registry on public indebtedness, properly integrated within the public sector accounting system; prepare estimates and budgetary projections for servicing the national government’s debt and supervise i t s fulfillment.

The ONCP i s comprised o f four offices and four units. The Public Debt Administration Directorate is- responsible for debt registration and has two units. Two other offices are in charge o f internal and external financing; the External Financing Directorate includes a Financial Evaluation Unit. There i s also a Financial Information Directorate, and a unit dealing specifically with financial risk analysis.64

75. Despite the provisions o f LAF, the functions o f public debt management were not unified under the ONCP until the end o f 1996 (Decree No. 1450/96), when the Ministry o f Economy was restructured and it was decided that the ONCP would operate entirely as part o f the Under-secretariat o f Financing. In 2006, the ONCP organization structure has a staffing table o f 93 employees (including 45 professionals): 32 permanent staff, 35 service contractors and 26 interns. The Public Debt Administration Directorate, responsible for “back office” functions, accounts for more than a half o f total staff employed (a total o f 51 persons, o f which 18 are professional^).^^

76. Central Bank o f Argentina (BCRA). The Central Bank i s also an institution closely involved in public debt management. It i s responsible for making debt service payments to foreign creditors on behalf o f the National Treasury. Also, since it receives foreign exchange

ONCP’s organizational chart i s provided in Annex 6.1, 64

65 In 2007, through LAF regulating Decree No. 1344/07, the scope o f the Secretariat o f Finance and the Secretariat o f Hacienda was specified.

denominated external financing funds, i t s operations are synchronized with SIGADE. I t issues i t s own debt instruments, in particular short-term notes and letters o f credit, depending on the priorities o f monetary and exchange-rate policy and elaborates its own macroeconomic projections. Since 2002, it has become one o f the central Government’s main sources o f short-term financing.

77. The ONCP data registry i s maintained by using a well-known computerized system o f debt management and analysis (SIGADE). This software, developed by the United Nations Conference on Trade and Development (UNCTAD), and which has been found useful for debt recording and management in several middle-income and low-income countries, i s on- line and is integrated to the the National Financial Management Information System (SIDIF). Government borrowing procedures and negotiations are initiated centrally since prior authorization i s required from the Secretariat o f Finance (Article 59 o f LAF). If the initial procedures culminate in a specific operation, it must be included in the Budget Law or in a specific law before being formalized (except in the case o f loans from multilateral lending institutions). The law should indicate the type o f debt, maximum amount authorized, amortization period, and the purpose o f the financing. Operations involving endorsements or guarantees from the national administration require the same treatment. The ONCP (using SIGADE) makes estimates and projections concerning financing and debt-servicing needs that are incorporated in the draft budget law submitted each year by the Executive to the Congress for approval. Expenditure (debt servicing) and resource (authorized borrowing) items are entered into SIDIF after the Congress’ approval o f the Budget. Once debt financing previously authorized by the budget or other specific law i s duly authorized and provided, the ONCP i s responsible for establishing the rules and guidelines for the follow-up, reporting and monitoring o f the use o f borrowed funds, and presenting the corresponding reports. The ONCP i s also responsible for ensuring that debt servicing payments are made in a timely manner.

Debt Management: Strengths and Weaknesses

78. Information systems. The ONCP information systems for recording and monitoring o f public debt have worked in an efficient, timely and transparent manner. All national government debt commitments are recorded using SIGADE. Basic information is then processed for the compilation o f debt indicators, which are published periodically and posted on the Internet.66 Since no payments on the bulk o f bonded debt were made between the end o f 2001 and the first quarter o f 2005, the recording method respected the or i inal contractual terms, recording as liabilities the total principal due and the interest accrued.’ Law 25.917 o f Fiscal Responsibility establish new obligations with respect to public debt management, regarding in particular with detailed information about the situation and perspectives o f the debt in multi-year budgets, including balances, expiration profile and borrowing criteria by financing source.

79. The enactment o f L a w 25917 and the adherence o f the provincial governments and the City o f Buenos Aires, provided the country with a fundamental change in terms o f public

66 http://www.mecon.gov.ar/finanzas/sfmanl 67 The exception i s the share corresponding to investors and individuals not accepting the 2005 debt exchange offer (US$26.2 billion as reported by MECON in June 06). Since 2005, this liability has been treated separately and has not been included in gross debt figures published by the ONCP.

debt management, since it implied an enlargement o f the universe o f entities processing and reporting public debt information. This enlargement requires the adaptation o f systems and procedures for registration and management o f public debt information at al l government levels. Currently, the debt o f the provinces i s partially reflected on federal-level gross debt registries, since part o f the debt incurred by the provinces has the endorsement (explicit guarantee) o f the national government. The Under-Secretariat o f Finance publishes information on these provincial securities (BOGAR) and other assets o f the national government, such as provincial obligations with international financial institutions already assumed by the national government, but pending for reimbursement. Until a consensus i s achieved for managing information on both national and provincial public debt, the only entity from a federal source currently providing a registry o f provincial debt data resulting from Orderly Financing Agreements (PFOs) i s the DNCFP, which depends upon the Secretariat o f Hacienda.

80. ONCP debt estimates for the budget. Article 69 o f LAF assigns to the ONCP the responsibility to “establish budget estimates and projections for the servicing o f public debt and to monitor their fulfillment.” In practice, during the last years, the projections about the use o f public borrowing have not been reflected in reality, in part due to the exceptional measures taken during the 2001-2002 crisis, and to the great uncertainty that prevailed during the period under analysis. For example, in the in the case o f the multilateral (non-defaulted) debt, the discrepancy between actual financing figures has been significant during 2003- 2005.68

81. Debt policy. Partly because o f the uncertainty prevailing during the crisis and debt restructuring, Argentina did not have a debt policy formulated by the ONCP with clearly defined objectives that could be used to monitor trends, -i.e., targets related to the evolution o f medium-term standard indicators (debt stock to GDP, exports or tax revenues) or to the composition o f the debt portfolio (share o f instruments denominated in foreign currencies, overall debt portfolio’s average maturity). In fact, empowered by the umbrella o f emergency legislation, the Executive Power has managed debt decisions mostly through the issuance o f emergency decrees. The Emergency Law 25561 o f 2002 i s s t i l l in effect, due to the postponing o f i t s expiration date.69

Risk Analysis and Contingent Liabilities

82. Even though the ONCP’s structure includes a specific unit for financial risk analysis, no information i s currently available from it on this subject. On one hand, although in practice the government takes into account different stages affecting in different ways the indebtedness cost, there are no publicly disclosed assessments o f market risks, typically measured in terms o f potential increases in debt servicing costs arising from changes in interest rates (for example, based on evaluating the impact o f a significant increase o f the inflation rate, given the large share o f national and provincial peso-denominated and inflation-indexed debt).

68 See Annex 6.2, Multilateral Debt: Budgeted vs Actual, 2003-05. 69 National government debt issuing related to the crisis in the financial sector was managed through Executive Decrees 905 and 1836 o f 2002, and Decree 793 o f 2003; for financial assistance offered to provincial governments, Decree 1597 o f 2002 (BOGAR) and Decree 743 o f 2003 (rescue o f quasi-moneys); for the federal debt exchange operation, Decrees 1735 and 191 1 o f 2004.


83. On the other hand, there is no information regarding the likelihood o f contingent liabilities being incurred, even though there i s ample evidence from both previous practices and current perspectives that such contingent liabilities may become a significant fiscal burden in the future. Such current evidence includes:

0 the currently high level o f the national government’s “fiscal c~rnrn i t rnents”~~ as a result o f the realization o f former contingent liabilities (e.g., compensation o f banks for asymmetric ‘pesoification’); legally-supported adjustments to social security benefits; explicit contingent liabilities o f the national government, given the partial coverage o f the debt restructuring process; the explicit national guarantee on provincial peso-denominated debt and indexed by inflation; and the numerous lawsuits and compensation claims brought before the International Center for the Settlement o f Investment Disputes (ICSID), following the 2002 crisis.

0

0

0

0

84. The government, with the support o f IDB, i s undertaking a study to evaluate the causes and the fiscal impact o f contingent liabilities from the past, explicitly recognized by the national government through the issuing o f debt consolidation bonds.’l

Obligations that do not show up as debts on the Government’s balance sheet and extend beyond the current budget horizon. See World Bank Report No. 2599 1 -AR: “Argentina: Reforming Policies and Institutions for E rciency and Equity of Public Expenditures.” Gowever, this study i s based on a sample that includes only ‘consolidation bonds’ and ‘social security

consolidation bonds’ issued before the 200 1 crisis.

70

7


7. CONTROL SYSTEM

85. The ensuing analysis o f the NFPS control system follows the main principles o f the COS072 approach, where control issues crosscut and interact with NFPS objectives, activities and results, and also takes into account broader aspects o f public sector g~ve rnance .~~ The analysis o f the control system covers five major areas: internal control activities, external audit activities and Congressional oversight, the control environment, risk assessment, and transparency.

Internal Control

86. NFPS internal control relies on LAF’s well-defined system that focuses the responsibility o f control issues at the head o f each spending unit/line ministry, mirroring decentralized budget execution at the spending unit level. Internal control i s a two-stage process consisting of: a financial mana ement and control system, embedded in the budget process, and the ex-post internal auditq7’The internal audit function for the national NFPS is carried out by the internal audit unit (IAU) o f each ministry, under the technical oversight o f a central internal audit agency reporting to the Presidency, Sindicatura General de la Nacion (S IGEN) . Financial management and control system

87. A wide range o f financial management controls are embedded in PFM rules and systems that have for the most part been described in the budget execution and accounting chapters (4 and 5). Such controls, which are integrated by SIDIF-SLU include budget execution audit trails to enhance consistency; processing controls that ensure that only properly authorized transactions are taken; proper accounting and reporting systems classified by functions, in particular for payments processed through the Treasury Single Account (CUT).

88. As in the case o f budgeting, financial management and control system are done under different systems: while these controls are undertaken effectively during the budget execution through the SIDIF-SLU and the CUT, the decentralized entities not included in the NPA, as well as the fiduciary funds, have their own control systems.

89. Information and reporting procedures for transfers. Expenditure transfers represent a major category76, and are made by a wide number o f ministries. Their

72 Committee o f Sponsoring Organizations o f the Treadway Commission. 73 See Annex 7.1, COS0 Framework and www.coso.org. 74 Internal control may be defined as the organization, policies and procedures used to help ensure that government programs achieve their intended results; that resources used to deliver these programs are coherent with the stated objectives o f the organization concerned; that programs are protected fiom waste, fraud and mismanagement; and that reliable and timely information i s obtained, maintained, reported and used for decision-making. Managing Public Expenditure, OECD 200 1. 75 The Institute o f Internal Auditors defines internal audit as follows: “Internal auditing i s an independent, objective, assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish i t s objectives by bringing a systematic, disciplined approach to evaluate and improve o f risk management, control and governance processes.’’ Managing Public Expenditure - OECD, 200 1.

Over 34 percent o f the national budget and 30 percent o f the national NFPS as o f 2006. 76


main recipients are public sector institutions outside from the National NFPS (58 percent o f total transfers in 2005), and private sector enterprises and individuals (41

Budget data dissagregation follows the standard expenditure functional classification, which makes it difficult to determine the amounts actually transferred to each category o f recipients, due to the large number o f ministries managing transfers and the variety o f recipients. Transfers also lack a standardized and adequate legal framework, particularly with regard to financial reporting and contr01.~' The Federal Network o f Public Control -pres ided by the SIGEN- which integrates al l the sub-national control entities since 2005, i s contributing to the improvement o f this situation, through the strengthenin o f the control o f the sub-national transfers for the implementation o f social policies. 7%;

Internal Audit

90. SIGEN. The SIGEN i s responsible for the definition and harmonization o f internal control norms, the supervision o f compliance with these norms, and the supervision and coordination o f the internal audit o f the national NFPS under the requirements o f the Executive branch. The head o f SIGEN i s appointed by the Executive and reports directly to the President.80 Since 2002, important progress has been made in terms o f development o f standards" , including measures oriented to optimize the coordination between SIGEN and the Internal Audit Units (IAU) corresponding to ministries and other public entities.82 In 2006, risk-approach planning was introduced in the guidelines for internal audit units covering the identification o f a risk map and the definition o f audit priority targets such as fiduciary funds, universities, and expenditure transfers.

91, Commitment for compliance with audit recommendations. This initiative is a good example o f SIGEN's intent to address control environment and accountability issues. In year 2004, SIGEN launched a program aimed at improving the control environment within the Executive, which included commitment letters from audited institutions to strengthen receptivity and response to audit recommendation^.^^ According to the information provided by SIGEN, commitments signed until the third quarter o f 2007 involved 25% o f the central administration and decentralized entities, which manage 52% o f the National Public Administration budget. The number o f signed commitments and the relevance o f the adhered entities indicate the good acceptance o f the program. After the f i rs t years since their implementation, good results were observed by means o f the achievement o f concrete improvements in the

" According to what was foreseen by the 2005 Budget Law. Comments by SIGEN. Transfers were included in 2006 SIGEN priority list. See paragra h 116. Article 108 of LAF. Internal audit norms; automated system for recommendations follow up (SISER); publication o f internal audit

reports on its website; design and implementation of a specific program to address control environment issues related to Executive Power's institutions.

The Guidelines for Planning o f the SIGEN and the IAUs were issued as a guide for planning activities tending to the fblfillment o f strategic objectives, and to achieve a better coordination between the SIGEN, the IAUs and the Federal Network of Public Control (see http://www.sigen.gov,ar/plananual.asp) 83 Resolution No 114/04-SIGEN.

78

79

P


corresponding internal control systems.84 Provided these results, the government i s considering broadening the use o f this tool, by ruling mandatory agreements between SIGEN and corresponding audited entities to address gradually audit observations.

92. Internal audit units. Internal Audit Units (IAU) are under the authority o f the head o f each ministry or institution, which appoint the internal auditors and are responsible for organizing and endowing i t s un i t s with the necessary financial and human resources. The IAUs are directly responsible for internal audit as well as the follow- up o f audit recommendations, within their respective jurisdictions. The IAUs are units integrated to the organization where the internal audit service i s provided. In order to optimize the internal audit activities and the coordination between the SIGEN and the IAUs, the SIGEN stipulated the implementation o f transversal and horizontal audits, which combine the staffs o f the SIGEN and the IAUs.

93. Independence o f the IAUs. With the exception o f the Head Internal Auditor, major responsible for the internal control,85 whose position i s not categorized and hence can be freely appointed and removed, the IAUs personnel i s composed mainly by permanent staff. The personnel working in entities regulated by Law 25 164 -Regulatory Framework for National Public Employment- count with stability regarding their positions, category levels and grades, as well as their salaries.

External Audit

94. The Constitution and the LAF grant the Auditoria General de la Nacion (AGN) the responsibility for external audit o f the national public sector. AGN was created in 1993, as part o f the PFM reform accompanying the adoption o f the LAF, replaced the former ‘Court o f Accounts’, and received constitutional range with the sanction o f the 1994 reform.86 In virtue o f the Law ruling i t s creation and operation, the AGN i s a collegial type o f Supreme Audit I n ~ t i t u t i o n , ~ ~ governed by a College o f seven members - s i x Auditors-General headed by a President- all o f them appointed by the Congress for a term (renewable) o f eight years. For the appointment o f College members, each Chamber o f the Congress nominates three ‘Auditors General’ on a proportional basis, while the President i s appointed by the Congress through a joint resolution o f both Chambers. The AGN i s a decentralized organization, with both functional and financial autonomy. The Congressional Joint Public Accounts Committee (JPAC) i s the supervisory body o f AGN, in charge o f approving i t s annual work-plans -jointly with the Budget Commissions o f both Chamber-, analyzing

The follow-up reports corresponding to the commitments mentioned above are available on the website of the 84

SIGEN hm://www.sigen. gov. ar/informes.asp. 85 According with what i s stipulated by article 10 1 of the LAF.

Article 85 of the National Constitution defines the AGN as a technical assistance entity for the Legislative Power with functional autonomy; establishes that it wil l be integrated according to the Law ruling its creation and operation, which should be approved by the absolute majority of members of each Chamber; and that its president will be appointed by proposal of the political party of the opposition with broader representation within the Congress. Until that Law i s sanctioned, the LAF i s applied for al l issues not contradicting the constitutional text.

Supreme Audit Institutions are classified as one of three main models: the Audit Office or Westminster model, the JudicialMapoleonic model (Court of Accounts) and the Board or Collegiate model. See “Characteristic o f different external audit systems,” UK Department for International Development (DFID). 2005.

86

i t s annual budget draft, and requesting to the AGN the realization o f studies, investigations and special rulings.

95. Independence. As stated in the 2005 policy paper by the UK Department for International Development (DFID)88, the collegial nature o f AGN’s internal governance system may affect i t s independence through the te rm o f appointment and the arrangements for appointing and removing College members, although these risks are partially mitigated by the eight-year tenure o f AGN College members. AGN’s independence has been the subject o f several papers such as Berensztein et al. (2000); Rodriguez and Bonbechi (2006); and CIPPEC (2006).

96. Human resources and capacity building. The nature o f the external audit activities makes it advisable to avoid as much as possible the hiring o f short-term contract staff. Otherwise, this may adversely affect institutional operational capacity, generating potential delays in audit work. Consequently, the AGN has started working on the extension o f contracting periods by the conversion o f some temporarily contracted staff into permanent c iv i l servants. Under this framework, it would be possible to introduce explicit training human resource programs, such as a professional staff career plan, a training system that deepen activities undertaken recently with success, and individualized development follow-up, based upon a strategic plan.

97. Audit coverage and scope. The AGN exerts control over economic, budgetary, equity, legal and management issues throughout the national public sector, as it i s defined by article 8 o f the LAF. I t s scope comprises the Central and decentralized Administrations; the AFIP; the national public entities not included in the NPA; state- owned enterprises; fiduciary funds; main public sector financial institutions such as Banco Nacidn and the Central Bank; projects financed by international financial institutions; and the external debt. The constitutional mandate o f the AGN contemplates financial audits -with the objective o f issuing an audit ruling about accounting and financial statements o f public entities and the PIA-; performance audits -consider ing the efficiency and effectiveness with which resources are being use+, and compliance audits -focusing on verifying the legal status o f transactions. These audits are ex-post only8’ and in line with international standards.

98. Risk approach. The AGN undertakes audits o f different State entities on the basis o f an Annual Action Plan that establishes the commitment to be met once competent Congress commissions a prove it. However, the AGN does not undertake a risk- adjusted audit approach.” As a consequence, the level o f financial, compliance and performance risk i s not a critical factor for determining the planning and allocation o f resources across institutions subject to be audited. Also, the follow-up o f recommendations i s not systematic, and audited public sector agencies where r isks have been identified remain subject to the same audit selection criteria as the rest.

88 DFID, 2005. “Characteristics o f different external audit systems”, page 13. They do not include accounting or ex-ante controls that are sometimes carried out by Supreme Audit

Institutions in other Latin American countries. 90 For example, activities such as those related to the financial management o f the Fiduciary Funds, given the potential risk that they represent, deserve special attention, in order to surpass the 2004 auditing mark, in which 20% o f the total amount assigned to them were audited (for detailed information, see Fiduciary Funds Section in chapter three).

89


99. Timeliness of submission o f audit reports. Audit effectiveness requires timely submission o f reports to avoid context changes that make observations or recommendations less relevant. AGN has made substantial progress in the timely submission o f audit reports. For example, the PIAs for years 2002 and 2003 were approved in 2005, and the one corresponding to year 2004 was approved in 2006. Similarly, the timely fulfil lment o f audits related to WB funded operations went from 35% in 2003 to 81% en 2006. However, there i s s t i l l room for improving audit report timeliness, as well as for reducing delays o f the submission to Congress o f the audited PIA.

100. Transparency and communication. AGN’s publication o f audit reports on i t s website i s an achievement that contributes to public sector transparency.

Supreme Audit Institutions Reform: Lessons from Eastern European Countries

101. High Performance Reforms. In less than a decade, eight Supreme Audit Institutions (SAIs) were successfully established or deeply reformed in Eastern Europe.” Although at the beginning o f the nineties SAIs o f Candidate Countries to the European Union (EU) did not exist, or were operating following communist regime practices, reforms were implemented successfully by 2003 to address issues including independence and institutional strengthening; audit coverage o f public finds; scope o f audit work compliant with INTOSAI standards (regularity, as well as performance audit); and adoption o f internationally recognized audit standards. On average, 84 percent o f the criteria assessed in 2003 by SIGMA92 were rated as ‘achieved’ or ‘substantially achieved’. The scoring per criteria i s given below in table 7.2 and detailed scoring per country is provided in Annex 7.2.

102. Common Factors o f Success. Although each case i s influenced by country- specific characteristics, there are common features that explain the high performance o f these eight SA1 reforms: Strong incentive materialized by the priorities o f the Partnership for Accession to the EU93; Independence, institutional strengthening and compliance with international standards clearly spelled out and prioritized; Organizational and human resources development aspects strongly addressed. SA1 multi-annual strategies systematically developed to define the objectives, mission, values and priority actions. In 88 percent o f analyzed cases, the strategy i s available on the SA1 website, showing an effort towards assuring transparency. Most o f them prioritize human resources development, training and institutional aspects. In the case o f Latvia, a diagnostic clearly stating the institution’s weaknesses i s included

Supreme Audit Institutions o f Czech Republic; Estonia; Hungary; Latvia; Lithuania; Poland; Slovak Republic; and Slovenia.

SIGMA i s a joint initiative from the OECD and the EU to assist Eastern Europe Countries in their Public Administration Reform. In the frame o f the monitoring of the Partnership for Accession, SIGMA carried out assessments of SA1 reforms in 2003 prior to the 2004 accession phase. SIGMA Assessment Reports of SAIs are available on the website www.sigmaweb.org. 93 The Partnership Agreements for Accession, established between each candidate country and the EU included as priority the development of SAIs and the improvement of financial control.

91

92


within the strategy. Hungary’s SA1 strategy presents interesting communication development objectives, in particular with regards to media. International cooperation took often the form o f ‘twinning projects’94 with EU Member States’ SAIs, complemented by peer reviews and S IGMA advices. Technical assistance was provided periodically by professionals from other SAIs and was recognized useful to the reform process by beneficiary institution^.'^

0

requirements and how far have they been

Source: 2003 SIGMA Assessment Reports of SA1 reform progresses in the EU Candidate Countries. Note: The table refers to six out o f seven assessed criteria (the last one being related to the understanding of EU accession process).

103. Although these reforms were undertaken in the specific context o f EU accession, the focus put on strategic planning; human resources and institutional aspects; and the cooperation with peer institutions could be considered for replication in other countries97.

Congressional Budget Oversight

104. Budget approval and control of ongoing budget execution. The limitations o f the role o f the Congress in budget approval are the result o f legal measures (emergency decrees, provisions in annual budget law, ‘superpoderes ’ given to the Executive), and o f apparently systematic underestimation o f revenues that the Executive may allocate then outside the formal budget approval process (see chapter

Agreement o f Cooperation between similar institutions from an EU country and a beneficiary country and

SIGMA, SA1 o f Candidate and Potential Candidate Countries, ECA. Making Supreme Audit Institution

94

funded by the EU.

Twinning Successful: A good Practice Guide. November 2006. 96 Detailed scoring per Country i s provided in Annex 7.2. 97 Another good example i s given by Turkey. Supported by WB development policy operations and EU funded twinning project, Turkish SA1 policies are prioritizing human resources development, institutional independence and harmonization with international audit principles, as spelled out in i ts website. Besides, a new draft law was submitted to the Parliament in 2006, in order to bring external audit in l ine with internationally accepted audit principles.

95

3). In terms o f control o f ongoing budget execution, the Congress does not undertake quarterly reviews, as required by current legislationYg8 although this i s sometimes due to non-timely submission o f quarterly reports from the Executive.

1 05. Ex-post audit & control of budget execution. According to the Constitution and LAF, the Congress i s responsible for reviewing and controlling the executed budget law through the Mixed Public Account Committee (MPAC)", which approves or rejects the PIA on the basis o f AGN's opinion. In practice, the Congress has been breaching this legal requirement for several years. As o f 2005, the PIA had not been approved since 1993. Currently, the MPAC i s making a significant effort to catch up, as verified by the approval o f the PIAs corresponding to 1997 and 1998 -by Law 26,098 o f June 2006- and the recent approval - b y Law 26,328 o f December 2007- o f those corresponding to the 1999-2004 period.

106. Congressional Public Financial Management (PFM) capacities. The budget process would benefit from greater congressional involvement. In general terms, the Congress has an important constitutional role in ensuring that the Government complies fully with all legislation, including this referred to public financial management. However, capacity for PFM analysis i s not widespread within the Congress, in part due to the scarcity o f legislators with significant PFM experience and the limited capacity o f the Congressional Budget Commissions from both Chambers, with fewer than five members, and o f the MPAC, with fewer than ten.

Control Environment

107. Control environment weaknesses"' within Argentina's national NFPS relate to compliance with, and attitudes toward, legislative requirements, the tendency to adopt exceptional rules while skipping standard ones, and the system o f incentives and sanctions that governs civil service behavior."' A serious attempt to improve the efficiency and effectiveness o f the control system would hinge on steps to address control environment issues, which would entail a sustained medium- to long-term effort.

108. Compliance with and attitude towards the LAF. During the main period under analysis for the CFAA (2003-2006) the most significant shortcoming for implementing the LAF was related to delays by the Congress to approve the PIA. However, important progresses have been made, such as the approval o f the Public Investment Account corresponding to 1997 and 1998 - b y Law 26,098 o f June 2006- and the recent approval -by Law 26,328 o f December 2007- o f those

98 Complementary Norms for National Budget Execution - Law 24.629 o f 1996. 99 This Committee includes representatives fiom the Senate and the Parliament.

See also Annex 7.3, which summarizes the main comments and conclusions obtained in a Seminar organized by the WB, as part o f the activities o f this CFAA, on Control Environment within Argentina's National Public Sector.

Control environment refers to the overall attitude, awareness and actions o f management regarding ru le compliance, control and accountability. Factors o f the environment are the organizational structure, means o f distributing authority and responsibilities and management's control system including control and personnel policies.

IO0

101


corresponding to the 1999-2004 period. Also, in some cases norms overlapping with LAF’s mandate were adopted. I O 2

109. Attitude towards audits. Public institutions often show a l o w level o f receptiveness to audits conducted by SIGEN and AGN, according to their reports.Io3 The reports o f control institutions indeed show repetition o f recommendations from year to year and the lack o f corrective actions, particularly in the areas o f compliance with rules related to internal control and procurement.Io4 AGN estimates that audited institutions implement less than 25 percent o f i t s observation^.'^^ Matters such as these affect the effectiveness o f audits, and pose obstacles to addressing the underlying causes o f findings from those audits.

110. Formal compliance with financial management systems. As mentioned in chapter three, partial compliance with systems such as the preliminary budget and the multi-annual budget has frustrated the spirit and intended purpose o f these instruments. Also, control and transparency in the use o f public funds have been affected by outsourcing the financial management processes, particularly in the case o f public investments financed by multilateral lending, thus bypassing standard accounting and control systems (such as CUT). These exceptions are usually justified on the grounds o f “rigidities or inefficiencies o f the system.”

111. Human resources. The civ i l service i s fragmented into a wide range o f systems showing an uneven stage o f development in terms o f staff selection, career development, training, and performance evaluation.Io6 A significant share o f public sector personnel i s currently hired under short-term contracts, which has not been accompanied by the creation o f adequate standards and criteria for human resource management. These issues may negatively affect the independence, professional capacity and sustainability o f c iv i l service human resources and create disincentives for accountability.

1 12. Responsibility and sanction. Although expenditure decisions are concentrated among high-level authorities (Ministers, Secretaries and Under- secretaries) the current legal regime defining disciplinary and administrative responsibilities i s not established for authorities beyond the level o f General Director.lo7 In addition, it should be mentioned that, beyond the inexistence o f an administrative-disciplinary regime for high-level authorities, the L a w No. 25,188

lo* See footnote # 54 and paragraph 104. IO3 Particularly developed in SIGEN internal control reports of NFPS institutions. I O 4 However, it should be stressed in some cases the recent progress registered with respect to corrective measures. For example, the 2006 report of the SIGEN on the Social Security National Administration (ANSES) which informs about a 50% decrease o f cases with no corrective measures as found by audits, with respect to what was observed on the same report for 2005.

OECD-WB Questionnaire on Audit. Based on the findings of the WB Institutional Governance Review (IGR), 2005.

105

106

lo’ According to Administrative Decision No. 215 of 1999, the authorization of expenditures above AR $ 250,000 per year (Director level) i s made by Ministers, Secretaries, and Under-Secretaries.


establishes a set o f obligations with respect to public ethics that holds to al l public servants, without distinction. lo*

1 13. Coordination among control institutions. Better coordination among control institutions, with due respect to their respective competences and faculties, would provide for greater transparency, a greater focus on strategic information and issues, make better use o f the various institutions' comparative advantages, and improve timeliness and e f f i c i e n ~ y . ' ~ ~

114. In this sense, it i s important to mention the interesting example o f the Federal Network o f Public Control, which i s presided by the SIGEN and integrates (since 2005) external control entities from the 23 provinces, the Autonomous City o f Buenos Aires, and 11 municipalities o f the country. This network constitutes an organizational endeavor that integrates and complements the public structures o f control and audit from the three levels o f government. The network started i t s activities in 2002, during the emergency period, with the objective o f evaluating the behavior o f different social programs executed by different levels o f government, which required the optimization o f the intergovernmental cooperation and communication among control and audit entities. The main contributions o f the Federal Network have been the reduction o f control costs; the shortening o f audit cycles, the strengthening o f the control environment o f social programs; and the generation o f a new culture o f control that contributes to the improvement o f the management in general. The programmed activity by this initiative during 2007 contemplated the execution o f 197 audits. Given the success o f the Federal Network o f Public Control regarding the control o f transfers for social programs, i t s extension for all national transfers to subnational governments could be considered.

Risk Assessment

115. P F M risk consists on the probability o f public funds being used for unintended and unauthorized purposes, and involves two dimensions: inherent risk arising from control environment factors; and control risk, which i s related to the adequacy o f control systems to ensure that funds are used for their intended purposes. The findings o f this CFAA -in particular those from budget coverage and execution, accounting, and internal control- are summarized in table 7.2., which provides a P F M risk classification o f NFPS funds on a scale from lower to higher risk. 'lo

In this sense, it important to note that the infringement o f the ethic obligations have specific sanctions, such as the removal from position in case o f a violation o f this nature by a public servant not reached by the disciplinary systems. log It i s appropriate to point out that, although it i s common to assign relevance to coordination between control institutions, from the internal control perspective the idea o f setting the agenda around the notion o f "anticorruption" i s not shared; among other reasons, because the role differentiation between an entity o f mainly preventive character -like the SIGEN-and organs o f repressive character, constitutes the prerequisite for an adequate auditodauditee ratio. According to the Argentinean control model, the specific entity in charge o f the repressive control activity i s the Public Ministry, created by article 120 o f the National Constitution, which includes in its structure the Fiscalia Nacional de Investigaciones Administrativas. Also, The Anticorruption Office acts concurrently with the Public Ministry, inside the structure o f the Ministry o f Justice. ' l o This classification o f risk i s based on the methodology used by the World Bank (which includes the dimensions o f inherent risk and control risk) As it was mentioned in the section on internal audit, SIGEN has


Table 7.2: National-Government PFM Risk Level Assessment

Lo\\ cr risk

1 Share o f NFPS:26% I Share of NFPS: 309'0 1 Share of'NFPS: 32% Budget data Source: 2006 Budget Law.

counts with an adequate internal control system. The Federal Revenue Administration (AFIP), despite being an entity not included in the NPA, represents an exception in this case, since it

Transparency

116. Argentina has taken several initiatives over the last ten years to prevent corruption and promote the transparency o f public sector-related activities. In 1999, a Public Ethics Law (25 188) and decrees regulating i t s application were enacted and an Anti-corruption Office (AO) was created (Law 25233) to enforce the provisions o f the 1996 Inter-American Convention against Corruption (CICC) (Law 24759) within the national Executive branch."' The A 0 operates under the scope o f the national Ministry o f Justice and Human Rights (MJDH) and cooperates on joint tasks with the Fiscalia Nacional de Investigaciones Administrativas. I t has a staff o f nearly 90, with nearly half o f them working in the area o f investigations,'12 and the other half i s devoted to preventive tasks.'13 However, the A 0 has no authority to conduct investigations within the legislative or judicial branches. Neither it has a legal mandate for investigating subnational governments, even though it has been working for several years in coo eration with provincial jurisdictions on the implementation o f transparency policies. 1 74

117. The public perception o f corruption and immunity o f public servants has not declined over the last years. For example, in the case o f investigations, despite some 2,000 judicial claims made by the AO, there has not been a case where sanctions were applied. Although some progress has been made in terms o f preventive action, such as dissemination o f assets declarations o f public functionaries, a number o f issues have yet to be addressed. Some o f these issues are o f structural nature, such as the fact that the A0 reports directly to a ministry o f the Executive (MJRH), the selection criteria for hiring, and the training o f human resource^;"^ some other issues are

developed a more detailed and complete risk map. However, the results o f both dimensions are consistent (see httr,:llwww.sigen.aov.ar).

The Decree 46612007 recently extend that competence by including among the objectives o f AO, the compliance with all International Conventions against corruption, for example, the United Nations Convention Against Corruption, which has a significantly larger scope than the CICC.

Detection and investigation o f presumed cases o f corruption. Under the scope o f the Directorate o f Transparency Policies. These efforts should be reinforced and extended by identifying strategic partners in the provinces. Only a minority o f the human resources o f the A 0 obtained their positions by open competition, and it i s

needed to reinforce selection processes to spread out this practice to a l l positions. There are important pending

115


operational, such as the difficulty o f detecting conflicts o f interest among those serving on committees evaluating and awarding public contracts; the lack o f restrictions on activities undertaken after leaving public sector employment or serving as a supplier to the State; and the scarcity o f information on procurement procedures. * l6

issues related to training that would require the attention of the Government, in order to endow the A 0 with the best capacities for the accomplishment of its missions.

See Wl3 Institutional Governance Review, 2006.


8. MULTILATERAL LENDING MANAGEMENT

Multilateral Lending to Argentina

1 18. With the exception o f the crisis period, when gross combined disbursements from the World Bank and the Inter-American Development Bank amounted to US$ 4.6 billion (2003), equivalent to 22% o f budgeted National expenditure, multilateral financing represents a relatively low fraction o f the Argentinean budget. Figures illustrate that World Bank gross disbursements represented about 10% o f budgeted expenditures and almost two times capital budgeted expenditures in 2003, but declined sharply over the next two years, to 1.4% and 1 1.5% o f total and capital budgeted expenditures, respectively. IDB gross disbursements, although somewhat higher, showed a similar evolution, shifting from 12.7% and 257.8% o f total and capital budgeted expenditures in 2003 to just 2.3% and 19.1% in 2005. These figures are more consistent with the registered levels during the pre-crisis period.

119. As shown in Table 8.1, despite o f unusually large disbursements in 2003 from both institutions, net transfers from both Institutions were negative. This pattern continued in subsequent years, accompanied by a significant reduction in both the absolute and relative size o f annual gross disbursements, which i s consistent with the ending o f the emergency financing to Argentina from these two institutions, the concomitant strong recovery o f the economy and the stated policy o f the government to reduce i t s indebtedness. There was also a major change in lending composition toward investment lending over the period 2003-2005. This was expressed in the country assistance strategies o f both institutions. World Bank gross disbursements in 2005 were exclusively o f this kind, something that i s also reflected in the current World Bank Country Assistance Strategy (CAS) covering the period 2006-2009, by proposing a portfolio consisting o f investment loans only. IDB disbursements also increased their share o f investment loans significantly, from about 10% in 2003 to 75% in 2005, as planned by the 2004-2008 Country Strategy.

Table 8.1: Annual Net Transfers from the World Bank and IDB (in million of U S $)

Gross Disbursements 1,963 770 3 62 Amortizations (2,977) (860) (934) Net Disbursements (1,014) (90) (572) Interest Paid (934) (664) (735) Annual Net Transfers (1,948) (753) (1,308)

Relative size (in YO)

9.3% 3.8% 1.4% Gross Disbursements / National Budget Total Expenditures

190.3% 50.2% 1 1.5% Grbss Disbursements / National Budget Capital Expenditures

Average composition (in 'YO)

Gross Disbursements 2,660 345 598 Amortizations (2,368) (505) (536)

Interest Paid (571) (423) (453) Net Disbursements 292 (160) 62

Annual Net Transfers (279) (583) (391)

Gross Disbursements / National Budget Total Expenditures

Relative size (in %)

12.7% 1.7% 2.3%

257.8% 22.5% 19.1% Grbss Disbursements / National Budget Capital Expenditures

Average composition (in YO)

89.8% 0.0% 25.1% Share o f Disbursements from Adjustment- Emergency Loans Sources: National Budget Laws, Secretariat of Finance (MECON), and World Bank and IDB data.

120. With respect to the evolution o f the debt balance, Table 8.2 shows changes and trends o f Argentina's debt with the World Bank and the IDB. Despite substantial changes in disbursements, the stock o f lending from the two Banks did not suffer major changes as measured in US$ throughout the 2003-2005 period. Notice thought that the World Bank reduced its exposure over time (by almost US$2 billion), while the IDB increased it (by over US$ 1 billion). In relative terms, figures from the Table show: i) the World Bank kept i t s share in terms o f total multilateral lending practically unchanged throughout the period, and the IDB increased it; ii) the stock o f financing from the Word Bank has assumed an increasingly limited role in public expenditures, and something similar occurred with financing from the IDB in year 2005; iii) the stock o f financing from the two Banks increased as a share o f total national public debt, but marginally in the case o f the World Bank (from 5.0 to 5.4 percent) and more significantly in the case o f IDB (from 4.3 to 6.8 per~en t ) . "~

These ratios are "shifted up" by the effect o f the debt restructuring process from March 2005. 117


Table 8.2: Stock of World Bank and I D B Lending to Argentina

Stock o f Lending (in million o f U S $) 8,946 7,592 7,000

Stock o f Lending/ Total Multilateral Lending (in %) Stock o f Lending /National Budget Total Expenditures (in YO)

27.9%

42.6%

24.8%

37.4%

27.7%

26.5%

5 .O% 4.0% 5.4% Stock o f Lending/ Total National Debt Stock (in %)

Stock o f Lending (in million o f U S $) 7,683 8,896 8,729

Stock of Lending Total Multilateral Lending (in %) 23.9% 29.1% 34.5%

36.6% 43.8% 33.0%

4.3% 4.7% 6.8%

Stock o f Lending / National Budget Total Expenditures (in %) Stock o f Lending/ Total National Debt Stock (in %) Sources: National Budget Laws, Secretariat o f Finance (MECON), and World Bank and IDB data.

Institutional Arrangements

121. The National Directorate o f Projects financed by International Financial Institutions (DNPOIC), which i s part o f the Secretariat o f Political Economy o f MECON, i s responsible’ for: i) programming loans with International Financial Institutions (IFIs, mostly WB-IDB) according to Government priorities; and ii) helping the negotiation and administration processes, and monitoring the execution o f loans at both national and subnational levels. Although closely related, activities from the DNPOIC , the National Budget Office (NBO) and the National Debt Office (ONCP) are not sufficiently coordinated.

122. One identified problem stemming from this lack o f coordination originates during the DNPOIC programming phase and i t s interaction with the NBO during the budgetary process. Each year, during budget preparation (March-September), the DNPOIC presents to the Budget Under-Secretariat a proposal o f projects considered eligible to be financed by IFIs. However, this proposal, which results from DNPOIC programmatic activities, i s rarely approved in full. This discrepancy arises from differences between DNPOIC’s programming and NBO’s determination o f what amount o f IFIs’ funding should be introduced in the annual budget, based on the expenditure ceilings established as part o f the budget preparation process;’ l9 from estimated overall national government’s borrowing needs; and from expected financial market conditions.

‘I8 According to Decree 1450/96 creating the DNPOIC. A similar situation i s explained in Chapter 3, paragraph 33. “Formulation o f sector budget proposals”. 119

Lending Execution

123. Country PFM Systems, defined as those used for the management o f public finances, are only partially used for the process o f implementation o f IFIs funded operations. Table 8.3 presents a step-by-step description o f the financial aspects o f this process and the degree o f use o f Country P F M Systems. The implementation o f IFIs funded operations i s usually carried out by specific Project Implementation Units, which are in charge o f managing their own finances.

Table 8.3: Financial Imdementation o f IFIs Funded Onerations

124. UEPEX system. The functions o f UEPEX, the legally mandated information- systemI2' for the execution o f IFIS funded operations, are in line with SIDIF/SLU standards, and comply with World Bank and IDB respective financial management requirements. Within a sound internal control framework, UEPEX records each o f the National Budget execution procedural steps. Data are transmitted to the central SIDIF and consolidated with the financial data o f the line ministry or spending unit in charge o f the operation. However, data transmission i s not automated, and the project implementation units do not comply systematically within the required weekly time frame for transferring data. Besides, UEPEX coverage i s limited, as a significant proportion o f operations are executed through ad-hoc systems developed or purchased by project implementation units. Only 32 percent o f WB and 48 percent o f IDB funded operations comply with the legal requirement to use UEPEX system which adversely affects the country's internal control systems.

125. Ring-fencing. Overall, the execution o f WB-IDB funded operations relies significantly on ring-fencing measures, such as specific project implementation units; parallel accountancy systems for over 50 percent o f operations; and payments executed outside o f the CUT. Control for these operations relies mainly on WB-IDB fiduciary rules and country ex- post control.

126. Implementation contracts with international organizations. Occasionally, international organizations hire project implementation un i t s to assist with the

I 2 O Ruling 120/01.

implementation o f IFIs funded operations.121 In some cases, these practices further divert financial flows from national controls, rules and procedures; they also (i) bring additional inefficiencies such as the absence o f individual operation’s cash balances for each operation; and (ii) generate transactional costs that could otherwise be saved and used for reinforcing internal capacity. The Government i s working to increase reliance on the country’s own implementation mechanisms. At present, however, 20 percent o f IDB and 24 percent o f WB operations under execution s t i l l rely o n implementation contracts with international organizations.

Brazil I 100% I 98% I 98% 1 98% I 0% I 49% I 39%

Chile 100% 100% 100% 100% 0% 93% 7%

Colombia 100% 88% 100% 47% 88% 59% 6%

Mexico 93% 93% 100% 32% 7% 0% 0%

Source: World Bank Note: Project Special Accounts are not considered as country systems for the treasury function.

127. Relative to other selected Latin American countries, Argentina’s use o f country systems in implementing WB funded operations is high in terms o f audit and budget formulation, and modest in terms o f budget execution’22 and treasury. Also, Argentina’s use o f international organizations in the implementation o f WB funded operations is relatively high, as compared to regional standards.

Recent trends in IFIs investment operations in Argentina

128. Investment operations under execution or in the pipeline, particularly those related to social sectors, have incorporated innovative measures to address the inherent complexity and fiduciary risk related o f their development objectives, including cash transfers to a large number o f beneficiaries and country-wide geographic coverage. The aim o f these operations i s to promote efficiency and encourage incentives, and to simplify financial management processes while improving the control o f fiduciary risk. Operations under execution

There are two types o f contracts between project implementation units and those organizations: (i) ‘partial administration contracts’ where the international organization manages the procurement and financial management processes; and (ii) ‘full administration’ contracts, where the project implementation unit manages those processes, but the international organization executes payments and manages contracts on behalf o f the project implementation unit. 122 The relatively modest percentage in budget execution i s due to UEPEX limited coverage.

121


WB Operations

involving innovative measures: (i) support existing Government’s sector policies; (ii) disburse in l ine with output-oriented delivery o f services; (iii) share responsibilities between the project executing agency and corresponding levels o f government; and (iv) combine components related to the delivery o f social services with those o f institutional development.

Amount Support to Ioelusion of Coordination Planning & Concurrent (Million of Country sector output & between Conditional Performance Audit

US) policies result- ’ Nationaland Cash Agreements

129. The result-oriented approach i s based on instruments such as: (i) performance agreements between the national ministries and other parties involved in the implementation process; and (ii) conditioning o f disbursements based on the delivery o f services, for which standard costing has been predetermined. When combined with an adequate system of control focusing on the eligibility o f beneficiaries, reliable database systems, and concurrent technical and financial audits, the result-oriented approach reduces both fiduciary transaction costs and risks. In addition, the implementation o f operations aligned with country sector policies and using the result-oriented approach i s in l ine with the introduction o f result- oriented budgeting (see Chapter 3). Table 8.4 provides details on the main recent WB operations o f this type.

oriented financing

Table 8.5: WB funded Social Sector Investment Operations Using a Result-Oriented Approach

Sub-nat!onal Transfers Govemmenb ’

Provincial Maternal- Child Health Investment Rural Education Improvement Project Heads of Household Transition Project

Essential Public Health Functions

435 J J J J J

150 J 4 J

350 J J J J J

220 J J J J J

b 5 0 1 I J I I I J I J I Life long learning and training Droiect Source: based on WB Project Appraisal Documents.

130. Over recent years, an increasing proportion o f IFIs funds have been channeled to subnational governments, either through operations contracted by the National Government for the benefit o f sub-national government activities, or through operations directly contracted with the provinces. Currently, four WB and eight IDB operations currently under execution or in the pipeline, representing respectively U S $ 462 mi l l ion and US$ 1,110 mi l l ion fal l within this latter category.

IDB Support to Result-oriented Management

13 1. The IDB is working on the strengthening o f result-oriented management at the level o f the national government. This i s the case o f actions contemplated in the Financial Admin i~t ra t ion”~ sectoral loan, and the PRODEV. 124 Concurrently, this process has been

The loan i s built upon three components: i) strengthening o f the public investment system; ii) result-oriented budgeting; y iii) strengthening o f the debt management system. 124 The main objective o f this Program i s to support countries by the introduction or the strengthening o f result- oriented management fundamentals through non reimbursable technical cooperation. The Program finances the

123


stimulated by the recent use o f result-oriented investment loans, in particular in the area o f technology.

132. The Financial Administration sector loan financed by the IDB comprises US$ 500 million, and it contemplates among i t s components the consolidation o f the result-oriented management through the strengthening o f the programming and evaluation system o f budget execution, medium term budget programming (multi-annual budgeting); and the preparation o f jurisdictional budget drafts (preliminary budget).

133. In turn, PRODEV supports strengthening the consolidation o f a result-oriented management through two components: (i) diagnostic o f key issues related to result-oriented management and -based on surveyed information- elaboration o f an action plan'25 for its implementation; and (ii) public sector outreach and capacity building aimed to promote institutional and cultural changes needed for the implementation o f result-oriented management.

WB Fiduciary Action Plan

134. The objective o f the WB Fiduciary Action Plan, designed in consultation with the Argentine Government during the preparation o f 2006-2009 Country Assistance Strategy, i s to ensure effective management o f the fiduciary risks o f WB funded operations by: (i) increasing publicly available information on projects; (ii) enhancing the strategic focus and coverage o f supervision tools; and (iii) ensuring increased transparency and competitive practices in public procurement through the implementation o f price-monitoring mechanisms.

135. The main components o f the Fiduciary Action Plan are described in Annex 1.3. Although initiated in mid-2006, the Fiduciary Action Plan already met the main targets for i ts f i rst year o f implementation. Several components have already been successfully launched, in particular:

SEPA, an information system disclosing project-procurement information to the public.

0 Improved External Audit Compliance, surpassing the strategy target for year 2006. (75 percent reached against 60 percent planned).

IDB Fiduciary Activities

136. In the case o f the IDB, the 2004-2008 Country Strategy considers crosscutting activities to address fiduciary problems and improve result-oriented management. Several instruments have been used to achieve this, in particular policy and technical assistance loans such as the Financial Administration sector Loan and PRODEV.

elaboration o f diagnostics o f key issues related to result-oriented management and elaboration o f an action plan for i t s implementation.

The diagnostic and the action plan w i l l be addressed in sector studies applied to the following areas: strategic and operational planning; public sector procurement; human resource management; result-oriented budgeting and related internal and external control aspects; information systems, and monitoring and evaluation.

125


9. CONCLUSION

137. Argentina’s national P F M i s characterized by a particular blend o f strengths and opportunities for improvement. I t s management systems are endowed with well-designed and legally supported management systems, and human resources with technical ski l ls and capacities exceeding regional standards, which helped in maintaining fiscal discipline during the aftermath o f the 2001 -02 crisis. Reforms adopted in Argentina before the crisis brought in modern instruments and international standards that other middle income countries with highly performing P F M are st i l l implementing. However, despite these achievements, P F M performance in Argentina i s operating below expectations. For instance, despite the existence o f several relevant budgetary instruments, public resources can be more strategically allocated. Additionally, the effectiveness o f the control system is limited by the lack o f a solid institutional capacity.

138. Public sector governance practices are the common denominator o f most o f the weaknesses identified by this C F A A across different areas o f PFM. These practices interact with managerial ownership and incentives; c iv i l servants’ lack o f identification with the goals o f public service. In turn, these practices go beyond P F M technical issues and even beyond the direct responsibility o f P F M policy makers. Thus, addressing governance practices i s the main challenge for P F M policymakers, and one that extends beyond their responsibility. The solution i s only partially under their control, because it depends on two major reinforcing pillars: i) the need o f achieving consensus with other public sector stakeholders, within a global and closely articulated effort to undertake measures related to c iv i l service, strategic planning, and the reinforcement o f inter-institutional cooperation; ii) time-dimension constraints and related sustained efforts required for a long-term change processes.

139. The way to proceed should be pragmatic and realistic. Unprepared shock-therapies and inopportune changes may lead to unexpected adverse effects on planned improvements. A progressive and opportunistic approach should be adopted instead, with a strong focus on dialogue. Short-term measures should consist o f feasible actions based on self-assessment, dissemination and training. Medium- to long-term goals should be articulated around budget (unified budget framework, strategic planning, and result-oriented budgeting), control (control environment, accountability, and checks and balances), and underlying governance aspects. The main challenge will be to find a way to ensure that PFM policymakers’ objectives become Government’s priority.


GOVERNMENT ACTION PLAN FOR THE IMPROVEMENT OF PUBLIC FINANCIAL MANAGEMENT

0

1 P. ru 0

.r( a

X

X

0 . 0 .

X

Argentina Country Financial Accountabilitv Assessment 5 1

ANNEX 1.1 : ARGENTINA’S MACRO-ECONOMIC INDICATORS, 2001-2006

2001 2002 2003 2004 2005 2006 National Accounts GDP real growth (%) -4.4 -10.9 8.8 9.0 9.2 8.5 InvesmentlGDP (%) 14.2 12.0 15.1 19.1 21.5 23.5 Prices

Consolidated Public Sector Comsumer price inflation (e.0.p.) (%) -1.5 41 .O 3.7 6.1 12.3 9.8

Primary Balance/GDP ’ (%) -2.0 1.8 4.0 5.2 3.7 3.7 of which Federal Government ’ (%) 0.5 0.7 2.3 3.9 3.0 3.5 Public DebUGDP (%) 53.7 149.9 137.9 125.0 73.3 75.0 Balance of Payments Current AccountlGDP (%) -1.2 8.5 5.9 2.2 3.2 3.8 International Reserves (U$S billions) 14.6 10.5 14.2 18.9 28.1 32.0 Social Indicators

Real wage index I -23.7 8.1 3.0 7.1 8.2

1 - As reported by MECON 2 - Public debt includes debt restructuring holdouts. 3 - Beneficiaries of Head of Househlod Program counted as employed; Fourth Quarter Figures.

Source: MECON and World Bank staff estimates.

Unemployment 17.4 19.7 14.5 12.1 10.1 8.7

There has been two methodological changes since 2003.


( *:

ANNEX 1.2: FISCAL RESPONSIBILITY LAW: SUMMARY OF MAIN MEASURES Field

PFM Transparency and Accountability

Fiscal Performance

his clause i s in contradiction wi

Description -The National Government must oresent each vear. before the Federal Council o f Fiscal Responsibility (FCFR) created by this Law, a macrofiscal framework for the following year, including: i) forecasted fiscal balances (primary and financial) for each level of government, calculated on an accrual basis; ii) debt limits imposed on the national government, each of the provinces, and the city of Buenos Aires; iii) national revenue forecast, indicating tax-sharing criteria for each regime and province; iv) tax and wage policies to be implemented, and forecasted values for GDP growth, nominal exchange rate, and inflation.

- Budget laws from both federal and subnational jurisdictions will comprehend the authorization of all expenditures and provision of all resources, independently of their nature.

- To assure homogeneity, provinces must adequate their budget methodology to the format used by the national government.

-Each year, the provinces and the city of Buenos Aires must prepare and present to the Legislative multi-annual budgets (contemplating the following 3 years).

- Once a new (provincial or national) budget law i s approved, or the former i s extended, it must be officially published on the Internet (including multi-annual projections). Also, with a lag no longer than four months, current budget execution (both in accrual and cash basis) must be posted together on a website. Web-disclosed information should also contain updated figures on main debt indicators (stock; servicing; main creditors; floating debt and bilateral financial assistance from the Nation to some provinces, etc.)

- While the budget i s executed, national and provincial executive powers (EP) will be able to allocate higher than budgeted expenditures only in cases when new sources o f financing are confirmed. At the same time, the EP will not be allowed to approve increases in current expenditures at expenses of budgeted capital expenditures or expenditures assigned to meet debt obligations. (9

-Subnational Public Debt: the provinces and the city of Buenos Aires will take necessary measures to avoid debt-servicing payments from being higher than 15% o f their current revenues, net of transfers to municipalities. -National Public Debt: once the process of debt restructuring i s achieved, the debt issued on market operations should decrease (as a share of GDP) in subsequent fiscal periods.

-Expenditure Growth: the nominal rate of primary expenditures from national or provincial levels o f government must not increase beyond the rate of increase of nominal GDP defined by the pre-announced macrofiscal framework.

-Expenditure Allocation: (for both national and provincial levels o f government) funds obtained by debt issuing or by the selling o f public assets will not be allocated to finance current expenditures or to generate future current obligations, except for those originated in debt restructuring operations resulting in favorable conditions for the government.

-Fiscal Balance: national and provincial levels of government must execute their budgets preserving the rule of “financial balance”, which i s defined as the difference resulting by subtracting from realized total revenues: i) accrued current expenditures (deducing those financed by Multilateral Institutions), and ii) accrued capital expenditures (deducing those allocated to the financing of basic social infrastructure).

-Anticiclycal Funds: both national and provincial levels of government will constitute anticiclycal fiscal funds since moment of implementation of the Law, with the purpose of improving the chances of fulfilling i t s requirements.

Law 26122/2006 that allows the National Executive Power to reassign budgeted expenditures, independently of their nature, without the consent of the Congress.


ANNEX 1.3: WORLD BANK FIDUCIARY ACTION PLAN Country Assistance Strategy 2006-2009

The objective of the Plan i s to ensure effective management o f the increased risk in Argentina’s fiduciary performance by increasing public information on Bank fmanced projects, promoting civil society participation in the monitoring and evaluation of the Bank’s portfolio, enhancing the strategic focus and coverage o f Bank supervision tools geared toward evaluating fiduciary risks in operations, and ensuring increased transparency and competition practices in public procurement. The Fiduciary Action Plan wil l consist of the following main components:

Raising Public Awareness 0 Disclosure offiduciary information of projects to the public via the Bank’s external web site: All

contracts financed by the Bank for each project will be included in a data base including: (i) Contract objectives and procurement method; (ii) estimated and actual cost of contracts and level of execution; (iii) estimated and actual date of contract award; (iv) bidders and contractor; and (v) main contract changes. The information will be presented in a user friendly manner for general public use. Outreach to civil society with regard to implementatiodimpact analysis of World Bank portfolio: This component wil l seek to elicit more involvement by civil society organizations dealing with transparency, public goods and related areas in the monitoring andor evaluation of the Bank’s portfolio. Stimulate civil society and development partners ’ involvement on fiduciary matters: (i) Make public aware of the existence o f ‘whistle-blowers’ mechanisms such as the Bank international hotline to report incidents o f corruption; (ii) Intensify relations with NGO dealing with transparency matters; (iii) Enhance the fiduciary coordination and harmonization effort with IDB.

0

0

Bank’s auxiliary monitoring tools: 0 Improve timeliness of external audit compliance for Bank supported operations with on-time

compliance targets of 60 percent in FY 2006, 75 percent in F Y 2007 and 80 percent in F Y 2008. Meeting this target wil l require: (i) continued engagement with the Supreme Audit Authority reflected in Audit Plans for each fiscal year completed by end November in each year containing timetable for audit completion of Bank financed operations, level of private sector support and budget requirements; and (ii) continued support to AGN efforts to enhance its capacity to ensure timely and quality audit performance and effective follow up on audit recommendations. Increase strategic focus and coverage of supervision tools assessing fiduciary risk in operations: (i) Undertake integrated fiduciary risk assessments for each project in the portfolio with a target to cover 75 percent o f portfolio in CY06 and 100 percent in CY07; (ii) Establish a traffic light rating system reflecting the fiduciary risk of each project in the portfolio and publish the relevant information on the Bank’s external web; (iii) Produce and publish an annual report on fiduciary risk of the Bank portfolio to be disseminated to the Government, as well as to key actors in the control community and civil society groups; and (iv) Continue to share with the Integrity Department the fiduciary assessments, and seek their participation in high risk cases where irregularities are identified. Further complementary actions: (i) Deliver training by the end of FY 2006 to al l relevant Bank staff on procurement and financial management matters related to the current fiduciary risks faced by the Argentina portfolio, and familiarize staff with the fiduciary challenges faced across the portfolio; (ii) Support strengthening o f oversight institutions through grant assistance and knowledge sharing; (iii) Support streamlining and harmonization o f fiduciary processes and reliance on country systems when these meet adequate fiduciary standards.

0

Increase Transparency and Competition Practices in Public Procurement 0 Establish a proactive dialogue with the Government and relevant agencies to improve transparency

and procurement practices in public procurement, including: (i) implement (by end CY06) a price monitoring mechanism and alert system based on reliable and up to date cost-estimates; (ii) reach understandings with the Government on contract aggregation strategies that wil l improve competition and innovation. This will include analytical work to have a better grasp of current market and competition conditions; (iii) promote the use o f transparency instruments such as integrity pacts, public


hearings and comparative prices; and (iv) continue to apply a zero tolerance policy in the investigation o f perceived irregular practices and application o f al l available remedies.


ANNEX 2.1: COMPREHENSIVENESS OF ARGENTINA’S PFM LEGAL FRAMEWORK Legal Framework

Law 24 156 - Financial Management and Control System o f Public Sector (‘The Financial Administration Law’, LAF)

Law 25 152 - Fiscal Solvency

Law 259 17 - Federal Regimen of Fiscal Responsibility

Not included in the budgetary legal framework:

Coverage Concept and definitions Scope of budget Role and responsibilities of budget institutions

0 Relationship with other public finance laws Powers o f ministry of finance to regulate budget system Budget timetable Accounting and classification issues

0 Integrated procedure for current and capital expenditure Analysis of budget request Preparation o f draft budget law Submission to Congress Content of budget document Rules for supplementary budget Treasurykash management

0 In-year cash limits Internal control and internal audit End of year budget execution report External audit procedures

Principles of good budgeting (fiscal discipline, strategic allocation, cost effectiveness) Multi-year framework Appropriation and cash limits

Fiscal rules for extra budgetary funds and Sub national Level Management of government debt, fiscal risks and contingent liabilities

Penalties and procedures for non-compliance Fiscal impact analysis


ANNEX 3.1: 2006 BUDGET COVERAGE


Social Capital 4

I Expenditures- Source: Budget Law 2006.

“Fnnanvme ’’ 2


ANNEX 3.3: BUDGET CREDIBILITY

One indicator o f budget credibility i s the deviation between the approved budget and expenditure 0~tturn. l~~ The ability to execute expenditures as budgeted gives an indication o f the Government's capacity to deliver public services as expressed in policy statements. Over the last three years, primary expenditure out-turns deviated from original budgeted primary expenditures by an average o f 9 percent'27 (see Table 1). As a comparison, Brazil and Chile deviations between actual and budgeted primary expenditure were below 3 percent for the period 2005-2006, while, Argentina's was above 12 percent (see Table 3).

A second indicator o f budget credibility i s given by the deviation between projected and actual revenues. From the mid-1 990s until 2003, official revenue projections were regularly overstated; thereafter the trend was reversed. During 2003-2005, total revenue out-turns deviated from original budgeted revenues by an average o f 11 percent12* (see Table 1). These distortions are mostly due to the lack o f precision o f the macroeconomic projections used to determine planned budget revenues. Apparent systematic underestimation o f revenue has been considered by certain analysts as a strategic practice b the Executive to increase i t s margin o f discretion in the use o f public financial resource^.^^ Over the period 2005-2006, Argentina scores better than Chile for this indicator, but i t s deviation i s substantially higher than Brazil's.

A third indicator o f budget credibility i s measured by the comparison between expenditure outturn composition and budgeted expenditure composition, which shows whether the budget works a usefu l tool for implementing policy intent. In Argentina, the variance in expenditure composition exceeded overall deviation in primary expenditure by 10 percent.13' (See Table 2) To some extent, expenditure composition has been affected by the power frequently granted to the Executive's Chief o f Cabinet Office to reallocate budget resources during execution, without Congressional approval. In fact, these reallocations represented significant proportions o f the budget, reaching almost 16 percent o f total budgeted expenditures in 2004 and about 20 percent in 2005. This authority has become legally institutionalized since July 2006 through Congressional approval o f special executive powers (superpoderes).

126 Public Financial Management Performance Measurement Framework, by Public Expenditure Working Group, available at httr,://pefa.ordDocuments.htm. 12' An accrual-basis i s used for calculating out-turn, because figures on a cash basis include forwarded cash flows from previous years (see Table 1). 12' Accrual-basis only. See previous footnote.

Stein et a1 (1999); Abuelafia et a1 (2005); and Bertello (2006). This practice results in substantial discrepancies: the 2007 budget draft estimates real GDP growth at 6 percent for year 2006, while there i s clear evidence provided by INDEC, BCRA, private sector think tanks, and other sources that the economy wi l l grow by 8.5 percent. 130 Only accrual-basis disaggregated figures are available.

129


Table 1 : Primary Expenditure and Revenue Deviations Out-turn: Accrual basis IrJ National Public Administration - 2003 - 2005. In million of AR Pesos

(1) Source Investment Account GAO (2) Sowce. Fiscal Bulletin- Minisreno de Haclenda - MECOk. Published cash basis out-turns include fowarded cash flows from previous years.

Table 2: Primary Expenditure Composition Deviation Out-turn: Accrual basis ‘11

(1) See Table 1 (2) Source Fiscal Bulletin - Mmsteno de Hanenda - MECON

Argentina Country Financial Accountabil ity Assessment 60

Table 3: Deviation between Actual and Budgeted Primary Expenditures and Total Revenues in

Primary Expenditure Deviation Selected Latin American Countries - 2005 and 2006

Year 2005 Budgeted Primary Actual Primary % Deviation Expenditures Expenditures (ActuallBudgeted -1 )*I 00

Argentina 67,971.5 76,612.0 12.7%

Chile 12,100,527 12,452,191 2.9% Brazil 361,120.6 369,052.5 2.2%

Year 2006 Budgeted Primary Actual Primary % Deviation Expenditures Expenditures (ActuallBudgeted -1)*100

Argentina 83,308.5 95,653.8 14.8%

Chile 13,632,826 13,698,058 0.5% Brazil 392,797.6 400,669.0 2.0%

Total Revenue Deviation Year 2005 Budgeted Total Revenues Actual Total Revenues % Deviation -

(ActuallBudgeted -1)*100 Argentina 82,105.7 88,878.6 8.2% Brazil 482,454.3 490,736.8 1.7% Chile 13,111,126 14,832,795 13.1%

Year 2006 Budgeted Total Revenues Actual Total Revenues % Deviation - (ActuallBudgeted -1)*100

Argentina 101,161.9 114,183.2 12.9% Brazil 526,219.2 543,252.0 3.2% Chile 15,435,098 19,790,100 28.2% Notes: - Budgeted and actual figures are not comparable across countries since they are expressed in different currencies (see below ‘Sources & References’). - Actual Figures used for Chile are estimates available in September o f corresponding year. - Brazil ’s primary expenditures exclude salaries, social security expenditures and interest payments. Sources & References: ARGENTINA: Currency Unit = M i l l i o n o f (AR) Pesos. Sources: Budget Laws and MECON’s Fiscal Bulletin CHILE: Currency Unit -= M i l l i o n o f Chilean’Pesos. Sources: Budged Laws and Direcci6n de Presupuesto (DIPRES) BRASIL : Currency Unit = M i l l i o n o f Reales. Sources: Budget Laws and http://www,tesouro.fazenda,gov.br


ANNEX 3.4: OVERVIEW OF PERFORMANCE BUDGETING

This Annex i s based upon the OECD papers ‘Public Sector modernization: governing for performance ’, 2004 and ‘ Using performance information for managing and budgeting: challenges, lessons and opportunities ’, 2005 as well as from the OECD/World Bank Budget Practices and Procedures Database, 2003.

LPerformance - improving it and measuring it - has been a central issue for governments for at least ha l f a century. Over the past two decades, improving public sector performance has taken on a new urgency in OECD member countries as governments face economic recession, mounting demands on public expenditure, calls for higher quality services, and in some countries a public increasingly unwilling to pay taxes. These pressures have been accompanied by calls for more government accountability. This annex provides an overview on performance budgeting and its trends in OECD countries. It also focuses on lessons learned and implementing challenges most relevant for the implementation o f result-oriented budgeting in Argentina National PFM.

1I.The focus has changed from output to outcome, the latter being significantly more complex to implement and available output information being o f limited use in some cases.

1II.Implementing performance information requires fundamental changes, not primarily o f technical order but rather linked to ‘cultural aspects’ and the way public sector i s managed. I t also requires at least four to five years o f consistent efforts and it i s costly - if these dimensions are not realistically taken into consideration, progress is slow and not lasting.

Definitions

1V.Performance budgeting can be broadly defined as any budget that presents information on what agencies have done or expect to do with the money provided.131 It represents a shift from budgeting based on expenditure control to budgeting based upon results. In this case it can simply refer to performance information presented as part o f the budget documentation or to a budget classification in which appropriations are divided by groups o f outputs or outcomes. A strict definition o f performance based budgeting, however, i s a form o f budgeting that relates funds allocated to measurable results.

13’ Allen Schick, The Performing State, GOVPUMMSBO(2003) 17


V.Results are measured in the form o f outputs and/or outcomes. Outputs refer to direct goods and services produced by government. Outcomes are wider and refer to benefit achieved as a result o f those goods and services.

VI.Resources can be related to results either in a direct or indirect manner. Indirect linkage means targets being actively used to inform budget decisions, along with other information. Performance information is very important in the decision-making process but it does not necessary determine the amount resources to allocate. Direct linkage involves the allocation o f resources directly and explicitly linked to units o f Performance. Appropriations can thus be based on a formuldcontract with specific performance or activity indicators.

OECD countries’ approaches to implementation and current trends

VII.The phasing, the level o f implementation, the objectives and the approaches vary from

Phasing: W h i l e countries such N e w Zealand and Australia began implementing performance management and budgeting in the late 1 9 8 0 ~ ~ Austria, Switzerland or Germany introduced versions o f these reforms in the early 2000s. The approach i s also evolving within the same countries: Australia, Netherlands and N e w Zealand began by concentrating o n outputs and are now moving to an outcome approach. Objectives: Countries have adopted the formalization o f targets and measures in the government management process essentially for four broad objectives: managing the efficiency and effectiveness o f agencies; improving decision-making in the budget process; improving external transparency to Parliament and the public and to enhance the clarity o f the roles and responsibilities o f politicians and c iv i l servants; and achieving savings. Approaches: Performance targets can be introduced through the development o f strategic and performance plans, such as in the United States, or through performance agreements such as in N e w Zealand or Australia. Some countries have adopted slow incremental implementation, with pi lot agencies and allowing agencies to voluntarily participate, while others went for a total system approach to implementation in place o f a top-down method, such as Australia or the Netherlands.

country to country. 0

Different approaches to performance in OECD Countries

What mechanisms are used to assess the efficiency, effectiveness, and value of money of public activities?

Revievn by outside organisetions (e.g. the\l\brld Bmk. peer SupremeAudi Inotilutlon)

~ ~ o r m ~ a g ~ ~ s specnyinge+qeciedoutprts

Adhocgovemment evaiuetlonof cost effectlveness/valuelornwney

A d h o c w v m m a evaluetlonof effbiency.effecihl(~~s.andeconomy

Syotmallc w v e m m a evaluation of efficiency, e f f e c i h l ( ~ ~ s and ganorny

Ad hoc sectoral or pmgrrmme revlevn

Reviewof the success of major p m g m e s in achievingtheirmnounced objeciives

Source: OECDNorld Bank Budget Practices and Procedures Database, 2003.

VIII.Current trends in OECD countries. There i s a strong trend to introduce performance indicators into management and budgeting; and a systematic approach to performance management. While many countries have reached the stage o f introducing performance targets into their budget document, fewer countries have integrated this information into their budgetary decision-making process and even less used it in allocation o f resources. There i s also a strong trend o f reporting this information to the public and the legislature, although the tendency is for legislatures not to make much use o f this information. So far the performance budgeting movement i s stronger on process than results.

Source: OECDNorld Bank Budget Practices and Procedures Database, 2003.

Implementation of Performance Budgeting: lessons learned and challenges

1X.Considerable progress has been made in OECD countries and it is widely accepted that performance information should be part o f public management and budgeting. However progress remains slow. Lessons have been learned from OECD countries’ experience in implementing performance budgeting: (i) The focus has changed from output to outcome, the latter being significantly more complex to implement and available output information being o f limited use in some cases; (ii) Implementing performance information require fundamental changes, not primarily o f technical order but rather


Institutional and Organizational challenges Fostering a climate for performance information (the right incentives; ownership; developing a learning culture) Setting realistic expectations for performance information (modesty; developing realistic demand; educating users) The long-term development required; maintaining the momentum (commitment o f time and $) Setting outcome performance expectations

Avoiding distorting behavior (reviewing measures; focus on outcomes) Accountability for outcomes (meaning of accountability; shared outcomes)

linked to ‘cultural aspects’ and the way public sector is managed; (iii) It requires at least four to five years o f consistent efforts and it i s costly - if these dimensions are not realistically taken into consideration, progress i s slow and not lasting.

Technical challenges Measurement (measuring; getting the right measures; SMART; developing needed skills; shared measures; building in evaluation) Selectivity in measurement; overload problems

Attributing outcomes to actions

Linking financial and performance management: ‘costing’ outcomes Quality assurance of data and information

Credibly reporting performance

X.Based on the recent literature and the results from the 2005 OECD Performance Information Questionnaire, twelve key implementation challenges have been identified. Two o f these challenges should be particularly considered for the current implementation o f result-oriented budgeting in Argentina: the need to foster the right climate for performance information and the required long-term commitment.

XI.The need to foster the right climate for performance information covers many aspects: the need for strong and the right incentives; embedding performance information as part o f the broader public service reform; the need for strong leadership; the importance o f a learning culture and the capacity to adapt; and gaining support and developing demand from the legislature.

XII.The required long term commitment should also be carefully considered for the case of Argentina. Implementing performance measurement is a long term process, which requires focusing on continuity, and maintaining momentum and incentives over the long-term.


ANNEX 6.1: ONCP ORGANIZATION CHART

I I I


ANNEX 6.2: MULTILATERAL DEBT: BUDGETED VS. ACTUAL, 2003-2005

Multilateral Debt: Budgeted vs Actual Figures (in million of US$)

concept 2003 2004 2005

Actual BlKigeted Actual (2) &dgeteci Mual (Law25.725) (Law25.827) (Law25 567)

Disbursements 16,845 10,238 9,152 4,578 7 907 51 3

Amortiions plus interests paid(*) 16,833 12,647 8,530 8,083 6,421 3,417

M W M 12 -2,409 623 -3,505 1,486 -2,904


ANNEX 7.1: COSO FRAMEWORK

Controls Guide: COSO's Control Framework and the Bank (Source: www.worldbank.org )

The COSO internal control model consists o f five inter-related components, which are inherent in the way management runs the organization. The five COSO components described below, are linked, and serve as criteria for determining whether the system i s effective.

Control Environment Sets the tone of an organization, influencing the control consciousness o f i t s people. I t i s the foundation for all other components. Control environment factors include: the integrity, ethical values and competence o f the people; management's philosophy and operating sty le (often referred to as 'tone at the top'); the way management assigns authority and responsibility and the way it organizes and develops i t s people; and the attention and direction provided by the board of directors.

Risk Assessment Risk i s defined as anything which hinders the ethical achievement o f sustainable business objectives and results, including failure to exploit opportunities and to maintain organizational relevance. Risk assessment requires that business objectives be internally consistent and aligned, and represents the identification and analysis o f risks that could potentially jeopardize the achievement o f these objectives.

Control Activities Control activities are the policies and procedures that help ensure that management directives are carried out. They help ensure that necessary actions are taken to address risks to achievement o f the objectives. Control activities occur throughout the organization, at all levels and in all functions. They include a range o f activities such as approvals, authorizations, verifications, reconciliation, reviews o f operating performance, security o f assets and segregation o f duties.

Monitoring Internal control systems need to be monitored - a process that assesses the quality o f the system's performance over time. This i s accomplished through ongoing monitoring activities and separate evaluations. Ongoing monitoring occurs in the course o f operations. It includes regular management and supervisory activities and other actions personnel take in performing their duties. The scope and ftequency o f separate evaluations wi l l depend primarily on an assessment o f risks and the effectiveness o f ongoing monitoring procedures. Internal control deficiencies should be reported upstream, with serious matters reported to senior management and the board o f directors.

Information and Communication Pertinent information must be identified, captured and communicated in a form and timeframe that enables everyone to carry out their individual responsibilities. Effective communication must occur in a broad sense, flowing down, across, and from the bottom upward. In a healthy control environment communication i s open and when a business objective i s in jeopardy 'bad news' flows rapidly so that corrective action can be taken in a timely manner. A l l staff must understand their own role in the internal control system, as well as how individual activities relate to the work o f others. They must have a means o f communicating important information upstream. There also needs to be effective communication with external parties such as clients, suppliers, regulators and stakeholders.

I (P

e .-

z

B $ 3 Q

I

U a - 2

I

B W

U 3

t

13


ANNEX 7.3: SEMINAR ON CONTROL ENVIRONMENT

Control Environment within Argentina’s National Public Sector Summary o f Participants’ Main Comments

In November 27‘h 2006, as part o f the programmed activities for the CFAA, a Seminar was organized on “Control Environment within Argentina’s National Public Sector”. The Seminar, offered at the World Bank Country Office in Buenos Aires, was attended by control experts, academics and members o f NGOs active in monitoring transparency in the use o f public resources in Argentina. The main comments and issues identified by Seminar’s participants as related to the control environment within Argentina’s Public Sector at the national level are listed below. Comments and assessments result from their professional work, observations, researches and analytical works.

- Overall Assessment. Control environment and framework within Argentina’s National Public Sector present opportunities for improvement related to: attitude towards norm and legislation; human resources and incentives; level o f independence o f institutions; lack o f timeliness o f control (“historical rather than concomitant”); checks and balances and Legislative capacity to exert control on the Executive; better dissemination o f the available information; insufficiency o f standardization norms across national level public institutions and for the national government’s subsidy processes; excessive focus o f control activities on compliance with norms to the detriment o f management and result. The control system i s currently unable to introduce improvements to the PFM.

- Coordination. National Control Institutions are insufficiently coordinating their activities; coordination should also be reinforced between national-level and sub-national level control institutions (particularly regarding the management o f resource transferred to subnational governments). The link between planning and control i s essential for strengthening the control system and as such, Government’s strategic planning and control activities should also be coordinated.

- Human Resources. Human resources from National Public Sector (including control institutions) are insufficiently motivated and lack o f adequate incentives to fully perform their tasks.

- Independence. It i s necessary to reinforce the independence o f the control institutions.

- Suggestions. (i) Define clearly the responsibility o f c iv i l servants managing public resources and create the right incentives and context to promote accountability; (ii) Strengthen legislative controls over the National Budget; (iii) Reinforce timeliness o f ex- post control; (v) Increase the proportion o f external performance audit, and develop a strategic plan for AGN; (vi) Fol low up properly the evolution regarding control reports’ identified deficiencies.


List of Participants

Rodriguez, HCctor

Rejtman Farah, Mario

Lerner, Emilia

Lietti, Graciela

Staffa, Damian

Rosenberg, Gaston

Biau, Daniel

Manfroni, Carlos

Torres, Natalia

Director o f Postgraduate Studies in Public Finances - Universidad de la Matanza

Consultant in Procurement and Transparency

Director - Audit o f the City o f Buenos Aires

Co-Director o f Postgraduate Studies- ASAPWBA Governmental Control

Coordinator o f Fiduciary Funds Studies - CEPP

Poder Ciudadano

Academic - Postgraduate Studies in Gubernamental Auditing - Universidad Nacional de San Martin.

President - Fundacion Etica P6blica

Coordinator - Transparency Area - CIPPEC


BIBLIOGRAPHICAL REFERENCES

Abuelafia, Emmanuel, Sergio Berensztein, Miguel Braun and Lucian0 Di Gresia. 2005. Who decides on public expenditures? A political economy analysis of the budget process: the case of Argentina. Buenos Aires, CIPPEC-IADB.

AGN (Auditoria General de la Nacidn). 1993. Manual de Organizacidn y funciones de la AGN y Reglamento Interno del Colegio de Auditores Generales. Buenos Aires.

AGN (Auditoria General de la Nacidn). 2003. E l Control Pziblico en la Argentina, Buenos Aires.

AGN. 2003. Informe de Auditoria de Gestidn: Ministerio de Economia, Programas de Pre'stamos Otorgadospor e l BID y BIRF, en 10s que la Administracidn Central es e l Deudor Directo o Garante. Buenos Aires.

Alesina A., and R. Perotti. 1996. Budget Deficits and Budget Institutions. Working Paper No. 5556, NBER.

Atchabahian, Adolfo. 1999. Re'gimen Juridic0 de la Gestidn y del Control en la Hacienda Pziblica. Buenos Aires, Editorial Desalma.

Berensztein, Sergio, H e r n h Lerena Ortiz & Marcos Pena. 2000. Transparencia, instituciones y reforma: la economia politica del proceso de ejecucidn y ajuste presupuestario. Revista Internacional de Presupuesto Publico Aiio XXVII N o 44 - Noviembre-Diciembre.

Bertello, Nicolas. 2006. Proyecciones del Presupuesto Nacional: calidad de 10s prondsticos e incentivos institucionales para su elaboracidn. Working Paper, Fundacidn Siena.

CIPPEC. 2006. Cada cual iatiende su juego? El rol del Congreso en el proceso presupuestario de Argentina. Buenos Aires.

Comision Parlamentaria Mixta Revisora de Cuentas. 2005. La Cuenta de Inversidn. Buenos Aires. Editorial Dunken.

COSO (Committee o f Sponsoring Organizations o f Treadway Commission). 1985. COSO Report, National Commission on Fraudulent Financial Reporting. New York.

Diamond, J. 2005. Establishing a Performance Management Framework for Government. IMF Working Paper No. 50.

Gonzalez de Rebella, L. C. 2001. E l control del sector pziblico: la Auditoria General de la Nacidn. V I Congreso Internacional del CLAD sobre la Reforma del Estado y de la Administracidn P~blica. Buenos Aires, Argentina.


Handbook o f International Public Sector Accounting Pronouncements. 2004. International Federation o f Accountants. New York, USA.

Hornbeck, J.F. 2004. Argentina's Sovereign Debt Restructuring. US Congressional Research Service Report for Congress.

IMF & World Bank. 200 1. Guidelines for Public Debt Management.

IMF (International Monetary Fund). 2001. Code of Good Practices on Fiscal Transparency.

IMF Report No. 05/236-AR. 2005. Argentina: Article IV Consultation.

INTOSAI (International Organization o f Supreme Audit Institutions). 1977. Lima Declaration of Guidelines on Auditing Precepts. Lima, Peru.

INTOSAI. 1992. Auditing Standards. XIVth Congress o f INTOSAI. Washington D.C., USA.

Ivanega, Miriam Mabel. 2003. Mecanismos de Control Pziblico y Argumentaciones de Responsabilidad. Buenos Aires. Editorial Abaco.

Martirene, Roberto A. 2006. Presupuestar en Argentina, antes y despue's de la crisis de la deuda pziblica. EnseAanzas, posibilidades y recomendaciones. Serie Gesti6n Publica, CEPAL, GTZ.

Nicolini, J.P., J. Posadas, J. Sanguinetti, P. Sanguinetti, and M. Tommasi. 2000. Decentralization, Fiscal Discipline in Sub-National Governments, and the Bailout Problem: The Case ofArgentina. Mimeo, IDB.

OECD. 2001. Managing Public Expenditure: A Reference Book for Transition Countries. Edited by Allen, R., and D. Tommasi.

OECD. 2004. Public Sector Modernisation: Governing for Performance. OECD Public Governance Committee.

OECD.2005, Using Performance Information for Managing and Budgeting: Challenges Lessons and Opportunities. By John Mayne, 2nd Annual Meeting o f OECD SBO Network on Performance and results. OECD Public Governance Committee.

Petrei, H., Ratner, G. y R. Petrei. 2005. Prespuesto y Control: Las Mejores Prhcticas para Ame'rica Latina. Buenos Aires. Editorial Osmar Buyatti.

Rodriguez, Jesus and Alejandro Bonvecchi. 2006. El papel del poder legislativo en e l proceso presupuestario: la experiencia Argentina. Serie Macroeconomia del Desarrollo No. 32. Santiago de Chile: CEPAL.

Santiso, Carlos. 2005. Budget institutions and fiscal responsibility: parliaments and the political economy of the budgetprocess. Santiago de Chile: XVII Regional Seminar on Fiscal Policy, CEPAL.


Santiso, Carlos. 2005. Parliaments and Budgeting: Understanding the politics of the budget. Hamburg, Germany: Third Annual Meeting Euro-Latin American Governance for Development Network, IDB.

SIGEN. 200 1. Internal Control Report. Direcci6n Nacional de Proyectos con Organismos Internacionales de CrCdito (DNPOIC).

SIGMA - Joint Initiative o f the OECD and the EU. 2001, Managing Public Expenditure: A Reference Book for Transition Countries. Edited by Allen, R., and D. Tommasi.

SIGMA - Joint Initiative o f the OECD and the EU. Assessment Reports of the Supreme Audit Institutions. 2003. www.sigmaweb.org.

Slovene Court o f Audit. Strategy 2007-2013. www. rs-rs,si. Slovenia.

Sotelo Maciel, Jorge A. 2003. Mbdulo Organizacional. Andisis y Propuestas. Subsecretaria de Presupuesto, Ministerio de Economia y Producci6n, BIW Project Nr. 3958.

Stapenhurst, Rick. 2004. The Legislature and the Budget. WP 37233. Washington D.C.: World Bank Institute.

State Audit Office o f Estonia. Strategy for 2006-201 0. www. riigikontroll. ee. Estonia.

State Audit Office o f Hungary. Strategy 2006-2010. www. asz. hu. Hungary.

State Audit Office o f Latvia. Strategic Development Plan 2006-2009. www. 1rvk.nov. lv. Latvia

State Control. www.vkontrole.lt. Lithuania.

Stein, Ernesto, Axel Radics, Hernhn Blejer and Marina Sallustro. 1999. Reglas de procedimiento y transparencia. Documento No 32. Centro de Estudios para e l Desarrollo Institucional.

Supreme Audit Office o f Czech Republic. www. nku. cz. Czech Republic.

Supreme Audit Office o f the Slovak Republic. Concept of Development 2003-2005. www. nku.gov.sk. Slovak Republic.

Supreme Chamber o f Control. Strategy o f the Supreme Chamber o f Control, Mission and Vision, 2002. www.nik.gov.pl. Poland.

Turkish Court o f Accounts - www.sayistay.gov. tr. Republic o f Turkey.

Wehner, J. 2004. Back from the Sidelines? Redefining the Contribution of Legislatives to the Budget Cycle. World Bank Institute.


World Bank Public Investment Strengthening Technical Assistance Project (No. 3958). 2003. Propuestas de Fortalecimiento de la Administracidn Financiera Gubernamental, Buenos Aires, Argentina.

World Bank Public Investment Strengthening Technical Assistance Project (No. 3958). 2004. Hacia una mayor integracidn del Plan Estratigico del Gobierno y e l Presupuesto Nacional por medio del Fortalecimiento del Presupuesto Plurianual, e l Presupuesto Preliminar y el Sistema de Indicadores. By Martirene, Roberto A. Buenos Aires, Argentina.

World Bank Report No. 25991 -AR. 2003. Argentina: Reforming Policies and Institutions for Efjciency and Equity of Public Expenditures.

World Bank. 1998. Public Expenditure Management Book. Poverty Reduction and Economic Management Network. Washington, D.C. USA.

Zarlenga, Carlos. October 2001. La Auditoria Gubernamentalfiente a la Modernizacidn del Estado. Congreso Argentino de Administracidn Publica, AAEAP-AAG, Rosario, Argentina.


Rigo, Raul

Martirene, Roberto

Domper, Jorge

Hita, Gerard0

Duro, CCsar

Vega, Susana

Barboza, Juan Carlos

Amado, Jorge Nicolas

Dal Din, Claudio

Arias, Telma

Giorgiutti, Marcelo

Gurruchaga, Angel

Dominguez, Marcelo

Rodriguez, HCctor

LIST OF PERSONS INTERVIEWED

Undersecretary - Under-secretariat o f Budget Office - Ministry o f Economy and Production o f Argentina

Assessor - Under-secretariat o f Budget Office - Ministry o f Economy and Production o f Argentina

Treasurer - National General Treasury - Under-secretariat o f Budget Office - Ministry o f Economy and Production o f Argentina

Director - National Direction o f Projects with International Organizations o f Credit - Secretariat o f Economic Policy- MECON.

Director - General Accounting Office - Undersecretariat o f Budget - MECON.

Director - National General Budget Office - Under-secretariat o f Budget Office- MECON.

Director - Direction o f Financial Information - National Office of Public Credit - Ministry o f Economy and Production o f Argentina (MECON)

Director - Direction o f Public Debt Management - Ministry o f Economy and Production o f Argentina (MECON)

Coordinator - Department o f Debt Registration - National Office of Public Credit - Ministry o f Economy and Production o f Argentina (MECON)

Director o f Budget Programming and Control - Ministry o f Health

Administration and Finance Coordinator - International Financing Health Unit (UFI-S) - Ministry o f Health

General Undersecretary - SIGEN - Presidencia de La Nacion.

Supervision Manager o f Economy, Federal Planning and Regulatory Agencies - SIGEN

Assessor o f Presidency - Ex President o f AGN


Bruno, Norbert0

Casavelos, Julio

Forlano, Jorge

PCrez Ojea, Amalia

Despouy, Leandro

Arias,CCsar

Fadel, Mario

Fernhdez, Francisco

Fblica, Alfred0

Palacios, Gerard0

Pernasetti, Horacio

Lamberto, Oscar

Garrido, Manuel

Raigorodsky, Nicolas

President o f the State’s Internal Auditors Association, Internal Auditor o f the National Deputies Chamber (Ex National General Auditor)

Vice President o f State’s Internal Auditors Association, Internal Auditor o f ANSES (Ex National General Auditor)

Internal Auditor o f Federal Ministry o f Plannification, Public Investment and Services - Internal Auditors Association

Internal Auditor o f Ministry o f Economy and Production - State’s Internal Auditors Association

President - AGN

General Auditor - AGN






President o f Congress’ Mixed Public Account Committee

General Attorney o f Administrative Investigations

Undersecretary o f Transparency Policies - Anticonuption Office

AA

nndd

eess

PPaa

ttaa

ggoo

nnii

aa

AAnn

ddee

ss

PPaa

mmpp

aass

JUJUYJUJUY

S A L TAS A L TA

TUCUMÁNTUCUMÁN

SANTIAGOSANTIAGO

DEL ESTERODEL ESTERO

LALA

RIOJARIOJA

CATAMARCACATAMARCA

FORMOSAFORMOSA

CHACOCHACO

S A N TAS A N TAF EF E

CORRIENTESCORRIENTES

MISIONES

MISIONES

E N T R EE N T R ER Í O SR Í O S

B U E N O SB U E N O SA I R E SA I R E S

CORDOBACORDOBA

SANSANJUANJUAN

SANSANLUISLUIS

MENDOZAMENDOZA

L AL APA M PAPA M PA

RIO NEGRORIO NEGRO

NEUQUENNEUQUEN

TIERRATIERRADEL FUEGODEL FUEGO

C H U B U TC H U B U T

S A N TAS A N TAC R U ZC R U Z

CerroCerroAconcaguaAconcagua(6960 m)(6960 m)

Mar del PlataMar del Plata

Bahía BlancaBahía Blanca

RosarioRosario

StanleyStanley

Santa RosaSanta Rosa

NeuquénNeuquén

ViedmaViedma

RawsonRawson

Comodoro RivadaviaComodoro Rivadavia

UshuaiaUshuaia

Río GallegosRío Gallegos

MendozaMendozaSan LuisSan Luis

San JuanSan JuanCordobaCordoba

ParanáParanáSanta FeSanta Fe

La RiojaLa Rioja

CatamarcaCatamarca

San Miguel De TucumánSan Miguel De Tucumán

Santiago Del EsteroSantiago Del Estero

SaltaSalta

San Salvador De JujuySan Salvador De Jujuy

FormosaFormosa

ResistenciaResistenciaCorrientesCorrientes

PosadasPosadas

BUENOS AIRESBUENOS AIRES

LagunaLagunaMar ChiquitaMar Chiquita

Para

náPa

raná

ColoradoColorado

Para

náPa

raná

Para

guay

Para

guay

Pilcomayo

Pilcomayo

SSaallaaddoo

NNeeggrroo

DDeesseeaaddoo

CChhiiccaa

CChhiiccoo

CChhuubbuutt

DDeessaagguuaaddeerroo

UUrruugguuaayy

SSaallaaddoo

La PlataLa Plata

JUJUY

S A L TA

TUCUMÁN

SANTIAGO

DEL ESTERO

LA

RIOJA

CATAMARCA

FORMOSA

CHACO

S A N TAF E

CORRIENTES

MISIONES

E N T R ER Í O S

B U E N O SA I R E S

CORDOBA

SANJUAN

SANLUIS

MENDOZA

L APA M PA

RIO NEGRO

NEUQUEN

TIERRADEL FUEGO

C H U B U T

S A N TAC R U Z

Mar del Plata

Bahía Blanca

Rosario

Stanley

Santa Rosa

Neuquén

Viedma

Rawson

Comodoro Rivadavia

Ushuaia

Río Gallegos

MendozaSan Luis

San JuanCordoba

ParanáSanta Fe

La Rioja

Catamarca

San Miguel De Tucumán

Santiago Del Estero

Salta

San Salvador De Jujuy

Formosa

ResistenciaCorrientes

Posadas

La PlataBUENOS AIRES

PARAGUAY

B R A Z I L

URUGUAY

CHILE

CHILE

BOLIVIA

LagunaMar Chiquita

Para

ná

Colorado

Para

ná

Para

guay

Pilcomayo

Salado

Negro

Deseado

Chica

Chico

Chubut

Desaguadero

Uruguay

Salado

ATLANTICOCEAN

PACIFICOCEAN

A

nd

es

Pa

ta

go

ni

a

An

de

s

Pa

mp

as

CerroAconcagua(6960 m)

ToCoihaique

ToPuerto Montt

ToLos Ángeles

ToTalca

ToValparaíso

ToLa Serena

ToCopiapó

ToCalama

To Tarija

ToSan Pedro

ToCascavel

ToSanta Rosa

ToSanta Maria

ToArtigas

ToTacuarembó

ToMontevideo

80°W

70°W

70°W 60°W

60°W

50°W

50°W

50°S

40°S

30°S

30°S

50°S

40°S

ARGENTINA

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 100 200 300 Miles

0 100 200 300 400 500 Kilometers

IBRD 33362R

AUGUST 2008

ARGENTINAFALKLAND ISLANDS (ISLAS MALVINAS)

A DISPUTE CONCERNING SOVEREIGNTY OVER THEISLANDS EXISTS BETWEEN ARGENTINA WHICH CLAIMSTHIS SOVEREIGNTY AND THE U.K. WHICH ADMINISTERS

THE ISLANDS.

SELECTED CITIES AND TOWNS

PROVINCE CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

PROVINCE BOUNDARIES

INTERNATIONAL BOUNDARIES