the design and implementation of treasury systems ali...

1

The Design and Implementation of Treasury Systems

Ali Hashim

Europe and Central Asia RegionWorld BankMay 3,2005

2

Part I : Basic Concepts

3

IFMIS: Integrated Financial Management Information Systems

•Not a very specific term

•May mean different things to different people.

4

What are the main systems for Government Fiscal Management ?

•Macro economic forecasting•Budget preparation•Budget execution, accounting and fiscal reporting•Cash management•Debt management•Revenue administration (Customs and Tax)•Civil service management•Auditing

5

TREASURY SYSTEM

FunctionalProcess

CentralBank

DebtManagement

BudgetManagement

CashManagement

Govt.SpendingAgencies

Revenue CollectionAgencies

Paying/Receiving

BanksTaxes Customs

BUDGET PREPARATION

BUDGET MANAGEMENT& FISCAL REPORTING

Ac.Receiv. Ac. Payable

Treasury General Ledger

AGENCYBUDGET

EXECUTION

DEBT MANAGEMENT

POSITIONMANAGEMENT

PAYROLL &PENSIONS

PERSONNELMANAGEMENT

TAXATION

AGENCYBUDGET

PREPARATION

CUSTOMS

Domestic Foreign

Investment Current

CASHMANAGEMENT

AUDITINGSample Transactions from Government Systems to Auditing

BudgetGuidelines

Cash Forecasts; Allocations

COMMERCIAL

BANKS

MacroEconomic

Forecasting

BudgetPreparation

BudgetManagementAccounting

&Fiscal Reporting

CashManagement

DebtManagement

RevenueAdministration

Civil Service Management

Auditing

Estimateof

Borrowing and

Public Debt

Interest

Macro Economic Framework

Budget Proposals;old & new programs

AuditOrgan.

Revenue Estimates

Approved Agency Budget

CENTRALBANK(TSA)

Payment Instructionsto Central Bank

Report on Payments& Receipts to TSA

Reports on

RevenueReceipts

Information Systems Architecture for Government Fiscal Management

CentralOffice

RegionalUnits

EconomicPolicy

TreasuryMinistry of Finance

GovernmentBanking Arrangements

Feedbackfrom Audit

Vendors

TaxPayers

Previousyears data

MACRO ECONOMIC FORECASTING

6

The World Bank has financed a number of Treasury Systems Projects world wide.

•In some countries these projects have involved building on and repairing existing financial management arrangements and systems

•In transition economies, they have required setting up institutional structures and accompanying systems, ab-initio, as these countries move from centrally planned to market economies

7

•It has been easier to implement Treasury systems, ab-initio, at green field sites such as countries of the Former Soviet Union

•In other countries, e.g. Turkey, Pakistan, where the reform required that old systems be repaired and modernized, greater difficulties have been experienced due to resistance to changes in the organizational and legal framework, functional processes and procedures.

8

Why Treasury Systems ?•Ensure that expenditures are in accordance with budget appropriations, commitments and cash allocations, thereby enabling better control over expenditures, fiscal deficits, and arrears

•Enable better cash management and reduction of idle balances by bringing all government accounts under the control of Treasury and consolidation in a Treasury Single Account (TSA)

•Provide more accurate and timely information for decision making and accountability by integrating transaction processing, enforcement of controls, accounting and comprehensive reporting.

9

Why Automated Treasury Systems ?

Effective economic management requires the availability of timely and accurate dataon all government expenditures and revenues and balances in government accounts.

Without some degree automation this data maysimply not be available with the required degree of timeliness and accuracy since this requires compilation and consolidation of transactiondata from across a country wide network of offices

10

Why Automated Treasury Systems ?

In addition automated systems enable:

•Integration of transaction classification and posting with transaction processing thereby increasing data integrity

•Automation of many controls and procedures

11

What do Treasury Systems do?

•Record initial budgets, revisions, spending unit expenditure plans•Distribute budget appropriations, spending limits and warrant allocations•Record commitments•Record receipt of goods and services •Authorize payments after checking for controls•Give payment instructions to Bank•Record revenues and other receipts•Enable posting of all transactions, enforcement of controls, accounting and comprehensive reporting

12

What legal and institutional reforms are needed prior to work on systems design?

• Budget management law that provides a framework for management of public funds

• GFS compliant Budget classification system/Chart of Accounts

• Banking arrangements for consolidation of funds in a Treasury Single Account at the Central Bank

• Re- engineered functional processes and institutional arrangements for TSA based for payment and receipts processing

• Cash management unit within treasury

13

What needs to be done so that various systems modules can work together as an integrated system?

The systems modules should:

• Be able to exchange information without difficulty

• Be organized alongfunctional and not organizational lines

• Share commonly used data

14

How to achieve systems integration?

Develop an information systems architecturethat provides an over view of the GFM systems network in terms of its:

• Components- scope, scale and type• Connections- information flows• Agencies responsible

15

Development of an information systems architecture requires an analysis of:

• Functional processes• Responsibilities of agencies• Information flows in processes

and between organizations• Nature, volume and frequency of flows• Data characteristics

16

Commitment and verificationtransactions

Payment orders

Accounting reports

Regional Systems

Budget Appropriations

Central System Government Banking Arrangements

Consolidated FiscalReports

TREASURY

LEDGER

SYSTEM

TLS

Ministry ofFinance

Budget appropriations

Treasury System: Core Functional Processes and Information FlowsCase1: Treasury is directly responsible for making payments;

Central Bank responsible for banking operations

LineMinistries

&Central

SpendingUnits

RegionalSpending

Units

CentralBank(TSA)

RegionalCentralBank

Branches

BankBranches

CentralTreasury

andTreasuryOffices at

Center

RegionalTreasury

Units

Cash forecasts

Commitment Limits

Fund allocations

Commitment and verificationtransactions

Payment orders

Accounting reports

Payment transactions against TSA

Daily file of payments and receipts

Credit to suppliers Acs

Summary of receipts

Payment transactions against TSACredit to suppliers Acs

Receipts deposit to TSADaily file of payments and receipts

Commercial

Banks

TaxPayers Suppliers

17

TREASURY

LEDGER

SYSTEM

Treasury System: Core Functional Processes and Information FlowsTax and Customs Receipts and Refunds

TaxAdministration

CentralBank(TSA)

TreasuryOffices

RefundCredit

to Importers Acs

Tax Refund paymentorder drawn on TSA

Tax ReceiptsDeposited

in TSA and Tax Payer

Documents to

Central Bank

Daily file ofTax Payments

and Documents to Treasury

Commercial

Banks

TaxPayers

Importers

Customs Administration

Customs Duties

Electronic fileand documents

to Tax

Administration

Request for Tax Refund

RefundPayment

Order

RefundDeposit toTax payerAccount

Customs DutiesDeposited

in TSA

Duties Refund paymentorder drawn on TSA

File ofCustom Duty Payments

Duty Paymentadvice

to Customs

DutyRefund

Payment Order

Duty Refund Request

CustomsWarehouse Imported GoodsConfirmation of Receipt of Custom Duty

Confirmation ofExport for VAT Refunds

18

MOF

SpendingMinistriesand SUs

Treasury(Central &RegionalOffices)

TreasuryLedgerSystem

TSA heldat Central

Bank

CommercialBanks

MOF


MinistryLevel

LedgerSystems

TreasuryCentralOffice

CentralTreasuryLedgerSystem

TSA heldat Central

Bank

CommercialBanks

Budget appropriationsBudget appropriations



Fiscal Reports

Fiscal reports

Payment requests from Ministries and SUs to Treasury; Financialreports from Treasury

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

Payments to Suppliers Accounts; Government Receipts

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

Payments to Suppliers Accounts; Government ReceiptsReports to Treasury on Paymentsand Receipts

Reports from ministry systems

Alternative Arrangements for Payment Processing

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

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

19

MOF


Treasury(Central &RegionalOffices)

TreasuryLedgerSystem

FiscalAgent

CommercialBanks

MOF


MinistryLevel

LedgerSystems

TreasuryCentralOffice

CentralTreasuryLedgerSystem

FiscalAgent

CommercialBanks

Budget appropriationsBudget appropriations



Fiscal Reports from System

Fiscal reports from system

Payment requests from Ministries and SUs to Treasury and Financialreports from Treasury

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

Payments to Suppliers Accounts; Government Receipts

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

Payments to SuppliersAccounts; Government

ReceiptsReports to Treasury on Payments

and ReceiptsReports from ministry systems

Alternative Banking Arrangements(Banking Operations carried out by a Commercial Bank acting as a Fiscal Agent of the

Central Bank)

Case 2: Ministries and SUs aredirectly responsible for

Payment Processing

Case 1: Treasury responsiblefor payment processing;

CentralBank(TSA)

CentralBank(TSA)

20

Investment Cost Elements for a Treasury Project (Base Costs + Taxes and Duties+ Contingencies)

Policy and Design Consultancies•Legal Framework (Budget Law, CoA, Budget Classification Strc.)•Functional Requirements (Information flows, documents, procedures•Technical Design and Architecture (S/W, H/W, Comm Specs)•Project Management

Equipment and Software •Servers/Work stations ( incl. systems software and office software)•Printers and office equipment•LAN Networking/WAN Networking/Information Security•Misc- Site Preparation & Installation•Application Software (Licenses, Parametrization, etc.)•DBMS and Application Development tools

Training•End User Training•Technical Training for IT staff in the use of Specific Tools used •Financial Management Training for Managers

21

Recurrent Cost Items

•Hardware Maintenance / Replacement

•Application Software and DBMS/ Tools License fees ( 15% of installed software)

•Telecommunications Costs

•Stationary, Utilities, Office Premises

•Staff Costs

•On Going Training

22

Activities and tasks involved in the implementation of a Treasury system

•Develop Legal and Institutional framework

•Develop functional design, manualsand procedures

•Develop technology design andarchitecture

•Procure Application Software•Parameterize/Customize S/W•Test Application S/W for functionality

23

Activities and tasks - continued

Implement system at Pilot sites

•Procure and Install hardware at pilot sites•Institute change managementprocedures

•Train end user and technical staff•Implement systems

•Replicate systems across all sites

24

Legal and Institutional Framework

Functional Design, Budget Classification, CoA, Procedures and Manuals

Technical Design

Systems Procurement

Gap Analysis, S/W Parameterization/Customization/, Testing

Pilot Systems Implementation

Systems Replication

Change Management & End User Training

12-18 months 12-18 months 24-36 months

Indicative Implementation Schedule

25

Part II: Implementation Experience

26

Some Treasury Systems Projects-Financed by the World Bank

•Kazakhstan Treasury Modernization Project•Ukraine Treasury Systems Project•Russia Treasury Development Project•Hungary Public Finance Management Project•Turkey Public Finance Management Project•Pakistan Improvement in Financial Reporting and Accounting-PIFRA-project•Indonesia- GFMRAP

27

Institution Building / TechnicalAssistance Projects with Treasury Components

•Azerbaijan- IBTA II•Turkmenistan•Albania•Armenia •Uzbekistan-under preparation•Slovakia•Moldova –under preparation

28

Kazakhstan Treasury Modernization ProjectProject approved: July 1966Loan amount: $15.8 millionGovernment Financing: $5-10 million

Project Status:• Treasury Organization / Legal Framework in

place• Treasury Offices in Oblasts and Rayons• Payments and Receipts Centralized

through Treasury• Interim Computer System was first Installed• ORACLE- FINANCIALS based full function

system installed and working

29

Ukraine Treasury Systems Project

Approved: March 1988World Bank Loan: US $16.4 millionGovernment financing: $10-15 million

Status:•Treasury organization / Legal framework

in place; business processes re- engineered•Payments and receipts centralized through

Treasury for both central and local government

•Automated Treasury system installed andworking at HQ, 27 oblasts, and about 650 rayons

30

Russia Treasury Development Project

Project approved: June 2002World Bank Loan: $231 million ( Ist tranche) Estimated Cost: $400 millionStatus:

•Treasury Organization, Legal framework in place, business processes re-engineered•Payments and receipts processed through Treasury•Treasury Single Account established at Central Bank of Russia•Assorted Interim systems in use •New systems to be implemented under this project

31

Hungary PFMP Treasury Component

Project Approved: 1998Loan Amount: $7.5 millionGovernment Financing: $5-10 millionStatus:

•Treasury Organization, Legal framework in place, business processes re-engineered

•Payments and receipts processed throughTreasury

•Treasury Single Account established at Central Bank of Hungary

•Custom developed treasury system installedand in use

•Covers Central Government transactions

32

Critical success factors

• Government commitment and management support

• Good project management• Interagency cooperation• Orientation and training• Technical skills• Management of change

33

Commitment and Support of the MOF -1

A Government wide payment and accounting system, has implications for multiple agencies and possibly for multiple levels of government. Implementation of such systems therefore requires the full and active support of the MOF.

34


It is difficult to get senior policy makers in the MOF actively involved if reform measures are framed in terms of resolution of an accounting problem, e.g. non-conformity with international accounting standards, use of an archaic chart of accounts, lack of timely reporting etc.

Such a strategy will focus primarily on the reform of the organization and processes related to the accounting function.

35


Such projects should be framed as initiatives designed for reform of the expenditure management systems rather than merely accounting systems reform.

This raises the importance of the problem to a level where senior level policy makers in the country and their counterparts in donor organizations can relate to it.

Linkages can then be established between the Treasury development program and requirements under policy based lending from both the Bank and IMF. The MOF then starts taking an active interest in ensuring that project milestones are met.

36

Project Management and Interagency Coordination

The project needs to be headed by a competent public sector manager from the functional side who enjoys the respect of his colleagues and superiors in the Government service system and should have adequate financial and administrative authority.

37

•Core group of professionals need to be set up from the core functions, who are trained and can act as change agents as the system is rolled out.

•Representatives of participating agencies need to be represented on the team to manage the interface with their agencies.

•Project secretariat should have specialist staff with experience in the installation of large scale IT systems and IT procurement

38

Orientation and Training -1

• A large number of stake holders in various agencies need to become familiar with project scope, advantages (what it will do for them)and timeline.

• A very large number of staff need to be trainedin the actual use of the system.

• This number and the training task could appear overwhelming if a training plan is not prepared in a structured manner.

39

Orientation and Training –2

•Training effort needs to be coordinated closelywith implementation plans and focused to specific requirements of a given site implementation

•Training should be imparted just beforeimplementation

•Most staff need to know only specific features of the system

•Help Desk; Hand holding clinics.

40

Technical Skills and Capacity:

Lack of career prospects for technical IT staff within Government has been a major area of concern for sustainability of such projects

This could be remedied within the context of an overall civil service reform effort - this is however, a long term measureOther solutions:

•Hire specialist IT staff on contract at private sector salaries•Outsource the technical operations and maintenance of the system

41

Management of Change

Need to overcome opposition from vested interests who perceive the new systemsas a threat

•advantages of new system need to be recognized by MOF management and opposition resisted•perception of the system being a threat has to be removed

Lack of incentives for change in a civil service Setting

•Bureaucracies are normally risk averse•Give examples where this has been done successfully•Show case results internationally

42

Extending the central system to sub-national levels

This has posed problems in many countries. Sub-national levels of Government normally like to be able to control payments without reference to a functionary of the center.

The solution to this problem has to be found in the context of the local political economy and the relationships between the central and sub-national governments.

43

If the central government is the sponsor of the project then the scope should be restricted to central government payments and receipts.

If the central government wants to extend its control to provincial level payments then it should have some financial leverage and control over provincial finances; e.g. it should be funding a major portion of the LG budget.

Two types of solutionsUse of same system across multiple levels of governmentUse of common standards, CoA and data exchange protocols

44

Russia: The Provincial treasuries are required to use the central system if it is adeficit province. Surplus provinces can develop their own treasury systems basedon agreed standards and provide data atspecified time periods to the FederalGovernment.

Ukraine and Kazakhstan: Central and LocalGovernments use the central treasury system.Moneys are banked in the Central Bank.

45

Pakistan: Central and Provincial governments are required to use the same system. Moneys banked at the Central bank/ National bank inSeparate accounts.

46

Use of the Central System and Central Government Treasury offices for paymentprocessing can alleviate capacity constraintsat local Government level.

However, care should be taken to ensurethat this system use is provided as a servicerather than an attempt to control local government budget execution by the center.Local government moneys should not be co-mingled with central government.

47

Realistic time frames for reform program

•The functional reforms have taken several years to be implemented. Sustaining management support over long periods has been a problem. Linkage to IMF program and/ or SAL operations has often been used to reinforce commitment

•Some times interim technical solutions have been implemented to support these reforms followed by full function systems. This has proved useful.

•The whole process has can easily take 8-10 years

•Procurement delays using Bank procedures

48

ECA- Technical Infrastructure and Capacity

Technical capacity has not been a major constraint in ECA

Relatively good quality telecommunications

Expertise in the technical areas is relatively easily available from the local private sector.

However, there is a dearth of expertise in the functional areas.

Pay and remuneration in Government is a key constraint.

49

Some closing words

• Institutional and political economy issues are more difficult to resolve and take more time for resolution than technical issues

• Reform of underlying fiscal management processes should be the basis for systems design

50

Treasury makes apportionmentsfor line ministries and line

ministries make allotments forsubordinate spending units

MOF/ Loads BudgetAppropriations

( Initial, revised andsuppplementary)

LineMinistries

MOF/Treasury

Budgetappropriations

Treasury makes Warrantallocations to ministries andministries make sub warrant

allocations for subordinate units

Warrant allocations

Spending Units registercommitments/ enter purchaseorder and contracts data afterchecking for budget availability

System passes commitments datato Accounts payable module andTreasury authorizes paymentsfrom TSA after checking fundsavailability/ prior commitment

CentralBankTSA

Paymentorders

Vendors/Govt.

CreditorsBanks

TaxPayersBank

Payments

Receipts

System records receiptsinformation provided by the Banks

Apportionments

SpendingUnits

Line Ministries enter consolidatedcash requirements for year for all

subordinate spending units.

Debt Management Departmententers debt commitments, debt

servicing expenditure and loan/ aidreceipt transactions

DebtManagementDepartment

Develop revenue and expenditureforecasts/ monitor cash balances/

determine warrant amounts/borrowing requirements

Develop Overall Fiscal Reports

Fiscal Reportsto MOF

Fiscalreports

Management ofBudget Authority

CommitmentManagement

PaymentsManagement

ReceiptsManagement

CashManagement

Debt Management

FiscalReporting

Treasury SystemModules

Cash forecasts

RevenueCollectionAgencies

Revenue forecasts

Borrowing requirements

Donors/Aid

Givingagencies

Loan/ Aid Receipts to

TSA