4. Treasury and Government financial management information systems

4.1 Managing cash

Cash (mostly in the form of money held at the bank) is a scarce resource and must be managed to provide optimum benefit. Some cash is held for transaction needs and some is held against contingencies. But above this level, idle balances should be invested in a form that gives quick access and little risk in order to earn interest. Money can be borrowed, but this costs money and should be carefully controlled because it increases financial risk. Borrowing may also take time to put in place and this will effect how much cash has to be held for contingencies. A government is ill-advised to borrow, if it already has the available cash resources because the rate of interest on borrowing is higher than the rate of interest received on surplus cash balances, which in many cases may be zero.

With such principles in mind, governments monitor movements in their cash resources. They seek reports on cash balances (e.g. bank statements from the central bank). They also consider the likely incidence of cash flows both inward and outward. A cash flow occurs when the cash actually moves, so cash flows have very little to do with accrual accounting, which is based on different principles. To estimate cash flows involves forecasting cash flows associated with revenues and expenditures (both current and capital); and with borrowing and lending (including repayments). Expected cash balances can be forecast at dates into the future. Often cash flow forecasts are carried out monthly showing cash balance (positive or negative) at each month-end for the following 12 months. Forecast balances provide input to revenue, expenditure and borrowing policies. For instance a large expected cash surplus implies the need to invest cash, while a large expected deficit implies the need to borrow. The cash flow profile will also indicate for how long surplus funds are likely to be available to invest and for how long cash deficits will persist and therefore the period over which borrowing will be needed.

The ease of monitoring and managing bank balances depends on their number, the efficiency of the banks involved in supplying information and how quickly the sums involved can be transferred to alternative (temporary) uses. Obviously a treasury single account will be easy to monitor and manage. But a system in which spending agencies keep their own bank accounts (maybe more than one for each agency as in Mongolia) does not permit easy monitoring or management.

4.2 Bank accounts

In some cases, government's cash resources are held in many bank accounts (hundreds or even thousands in the case of the republics formerly part of the Soviet Union at the time of and its break). In such cases, cash management is more complex and less efficient. Borrowing may occur even though sufficient cash resources may exist for borrowing to be unnecessary. The problem is two-fold. Multiple bank accounts make it very difficult to monitor aggregate cash resources. And releasing the idle money from all of these accounts is also extremely cumbersome. In addition where spending agencies have their own bank accounts, MOF control is weaker because these agencies have greater control over their own spending. MOF receives financial statements from them but is not party to detailed transactions.

A treasury single account (TSA) avoids these difficulties. A TSA receives all government revenues, and out of it come all government expenditures. Or at least that is the case in principle. In practice, exceptions are necessary (for instance public enterprises are likely to retain their revenues, hold bank accounts and make their own payments from them). The case in favour of a TSA is clear enough. Establishing one is not always straight-forward:

  • spending agencies may be unwilling to give up their bank accounts
  • paying revenues into a single bank account is often physically impossible at locations outside the capital city
  • the central bank may be happy to administer the TSA but may not wish to be involved in "retail" banking. Anyway it is unlikely to have a sufficiently extended branch network to operate the TSA without help
  • the participation of the commercial banks is essential. They have branch networks and are active in retail banking. But their services have to be paid for (either via interest/fees or via a concession which allows them to hold money in transit longer than is strictly necessary). Of course such costs have to be set against the interest gains expected from establishing a TSA
  • a mechanism is needed between the central bank and the commercial banks so that they open credits in response to specific government needs, and pay surplus cash balances into the TSA at regular intervals

4.3 The need for treasury systems

The word treasury has several meanings. In this context it refers to related functions of the Ministry of Finance in the fields of budget execution, accounting, management of debt and cash, financial control and banking (See paper two for a more detailed discussion). Essentially, a treasury system addresses these issues in an integrated manner. It is therefore a type of government financial management information system.

Treasury systems address problems of missing information, weak and fragmented information systems, inadequate and inappropriate controls and the adverse impact on decision-making arising from such deficiencies. When in 1993 the IMF advised Government of Moldova on setting up a government treasury system, it listed the following “severe problems” facing budget management:

  • Poor short-term control over expenditures as reflected in large fiscal deficits and significant expenditure arrears
  • Lack of current information about the magnitude of expenditures
  • Highly inefficient cash management, reflected in the large amounts of involuntary lending to government….at the same time significant cash balances lie idle
  • As-yet undeveloped capacity to borrow from sources other than the banking system…
  • A system of budget classification that undermines efforts to improve forecasting, analysis and management

Other countries experience different problems such as:

  • Budget execution systems lacking appropriate information, controls and links with accounting
  • Accounting systems which are incomplete and untimely; cannot be reconciled with each other; cannot communicate with each other; require manual transfer of data; generate financial statements only with difficulty; do not respond easily to users’ needs for information; lack reliable information
  • Existence of multiple bank accounts, aggravating problems of control and rendering efficient cash management very difficult or impossible
  • Break-down of system of budgetary control
  • Lack of timely information on public finances for decision-making and accountability purposes
  • Line ministries entering into large commitments without MOF having prior knowledge; line ministries frustrated by abrupt changes in funding (lack of stability in budget allocations)

Treasury systems are designed to address such issues.

4.4 Functional processes of a treasury system

Hashim and Allan write about information systems for fiscal management (1998). They identify the following eight processes: macro-economic forecasting; budget preparation; budget execution, accounting and fiscal reporting; cash management; debt management; revenue administration; personnel administration; and auditing. In practice, treasury modernization projects tend to concentrate on only three of these: budget execution, accounting and fiscal reporting and cash management. However they also have to address the last phase of budget preparation (finalization of the budget and in-year changes to it) and auditing (the needs of auditors are covered in system design). Other fiscal management processes are commonly covered by separate, stand-alone systems.

In summary, treasury modernization projects usually cover:

  • The enacted budget including supplementary and revised budgets, budget allocations, budget transfers and warrants to incur expenditure
  • Accounting and reporting including the general ledger of government
  • Banking and cash management (via a single treasury account)
  • And by implication, the audit trails needed for auditing

Treasury systems differ from country to country. For instance, the project to improve Ukraine’s treasury system focuses on the following: legal regulatory and operational framework (guidelines, procedures, regulations, forms and operating manuals); budget classification and coding; developing better methods of forecasting expenditures and managing cash; improving fiscal reporting; developing detailed functional specifications of the treasury ledger system; and training and institutional development. The detailed functional specifications for the Ukraine general ledger provide the capability to:

  • Record initial and revised budgets
  • Distribute budget appropriation and authority to incur expenditure to spending units
  • Record expenditure in the form of cash and commitments against budget and authority to incur expenditure
  • Allocate funds to spending units
  • Permit checks on the availability of appropriation, funds allocation and commitments prior to approving payment
  • Print consolidated payment instructions to banks
  • Record revenue and other receipts against appropriate account heads
  • Print checks (or instruct electronic payment) against payment instructions
  • Consolidate data, facilitate reporting, provide for easy data retrieval for MOF, ministries, spending units etc.

4.5 Introducing a treasury system

Assessment and planning

Analysis of status quo and justification for introducing a treasury system

  • Identification of public finance components to be covered, government entities to be covered and their interface with the treasury system
  • Adequacy of institutional processes: budget process and act; classification and coding system; banking arrangements; accounting records; basis of accounting; financial statements; the treasury itself
  • Analysis of user needs; matching with national capacity; choice of approach (the old system computerized or a new system with bells and whistles?)
  • Analysis of relevant skills to create the system; to manage its implementation; to provide technical back-up; to operate the system (users) and to use its outputs

Specification

To embark on the modernization process, the system design has to be specified, permitting bidding documents to be prepared and contractors to submit bids. The specification has several components:

  • Functional design Each public finance component and each element making up each component will be specified (for instance data to be entered, its format, the classifications and codes to be used, the sub-divisions of the general ledger into which data are to be sorted, the format and destination of planned reports, the built-in controls, the content of screen data displays etc.). Also included will be the functions of each organizational entity involved, the data flows between them and specifications for how their actions are to be communicated and reflected in records (e.g. approvals, rejections etc.).

Software This involves the choice of IT platform and of software applications (whether off-the-shelf, customized or created anew); the protocols for information exchange, requirements for suppliers to provide technical back-up, etc.

Banking The banking services to be offered (by Central Bank/second tier banks); establishment of Treasury Single Account and sub-accounts; authoriization and format of instructions to bank; means of accepting instructions and processing transactions; bank statements; arrangements for the clearing of balances to TSA; other banking services.

  • Hardware configurations.

Staffing requirements.

  • Project supervision arrangements

Implementation

  • Resolving institutional inadequacies (laws, procedures, coding schemes, institutional deficiencies etc.)
  • Training staff
  • Creating or customizing software
  • Testing the adequacy of programs and systems
  • Piloting the system at selected locations
  • Validation
  • Extending the system
  • Validation
  • Abandoning the old system

4.6 Challenges

  • How to develop/ acquire/retain the necessary expert resources?
  • How to deal with staff redundancy caused by the move to computerized systems?
  • How to negate possible illicit pressures in procurement?
  • How many processes should be integrated? In principle, the more integrated processes, the larger advantages from computerization. But the more modules there are to integrate, the more difficult it is to achieve a working system.
  • What to do about processes either not computerized or not part of the treasury system (problem of interfaces)?
  • Treasury projects are usually slow in implementation, the causes being the subject of debate. The multi-stage nature of implementaion; the need for testing, piloting, fine-tuning, training and extensive adoption; and procurement complications are all possible candidates. How to deliver something timely and of good value?
  • The control implications of treasury systems are also the subject of debate. Treasury systems increase the information available to the ministry of finance, and therefore its possibilities of control and power. Depending on country circumstances and system design this may result in an over-intrusive ministry of finance and resentful spending agencies. How to give line ministries a genuine stake in the new system?

Sources

Asian Development Bank, "Cash management and the treasury function", Chapter 8 of Managing Government Expenditure, 1999.

IMF (1993), “Red books” on the introduction of treasury systems such as Moldova: setting up a government treasury system Washington.

Organization for Economic Cooperation and Development (2001) Managing Public Expenditures: A Reference Book for Transition Countries. Richard Allen and D. Tommasi, editors. (Chapter 9)

World Bank (1998), Information systems for government fiscal management, Ali Hashim and Bill Allan, PREM, Washington.

World Bank (date?), Information systems strategies for public financial management, Hywel M. Davies, Ali Hashim and Eduardo Talero, Discussion Paper 193, Washington.

US Government (1998), Core financial management system requirements, Joint Financial Management Improvement Program, Washington.

Annex

Assessing a treasury system

(based on notes by Ali Hashim)

Policy framework and institutional setting

1. Status of the budget law with specific emphasis on:

  • receipt and custody of public funds; consolidated fund
  • public expenditure controls and significance of control by appropriation
  • role and responsibilities of the central bank and second tier banks
  • role of MOF and its departments (in particular those responsible for treasury functions)
  • asset and liability management (including public debt)
  • accounting records, reports and statements and their audit
  • financial regulations

2. Budget classification system and chart of accounts:

  • How complete?
  • Compliant with IMF?
  • Sufficient for control purposes?

3. Payment processing:

  • Does a treasury single account (TSA) exist and where is it located?
  • Which entity/entities control/s the TSA/bank accounts and how?
  • Are payment requests of spending units routed through the treasury or are they sent directly to the bank/s

4. Steps in the budget execution cycle. Which agencies carry out the following?

  • Recording of appropriations
  • Distribution of appropriations/sub-appropriations
  • Budget revisions and transfers
  • Funds allocations
  • Spending limits (cash; commitment; authority to incur expenditure or “warrant”)
  • Cash allocations
  • Commitment controls
  • Payment controls
  • Receipt of tax and non-tax revenue
  • Loan accounting

5. Institutional arrangements for cash management

  • Which agency is responsible?
  • On what basis are revenue and expenditure forecasts made?
  • How frequently are agencies required to produce estimates of cash requirements?
  • How does government determine periodic cash requirements?
  • What are the links between cash and debt management?

Functional design

6. How is the treasury system designed: how do the processes listed in point four above, operate?

7. What is the coverage of the system?

  • Number of ministries
  • Number of spending units
  • Size distribution of payments (number/value)
  • Number of transactions of various types
  • Application to central/local government
  • Coverage and treatment of extra-budgetary funds

8. Are there subsidiary accounts of the TSA? How frequently are these accounts cleared to the TSA? Can idle balances build up in these accounts?

9. What information is recorded for receipts? Are taxes deposited directly in the TSA or are they first paid to second tier banks? How large is the “float” of undeposited receipts?

10. How long does it take for a payment instruction to be processed and acted upon? How many stages are there in this process and are they all strictly necessary?

11. How quickly are accounting reports made for budgetary and accountability purposes? What is the required standard for timeliness? What is the normal delay and to what is it attributable?

12. Is payroll automated and how does it interface with the treasury system? Which agency carries out payroll processing? How are personnel-related transactions sourced, recorded and authorized?

13. What other parts of government’s financial management systems are automated (e.g. debt management, tax administration, customs administration, personnel management, pensions) and how do these interface with the treasury system?

Information technology

  1. Technical architecture:
  • Hardware/software platform
  • Number and nature of sites
  • Nature of communications between the nodes of the network; volume and nature of transactions at each node; means of transferring information to and from the treasury; and to and from the Central and other banks
  • Application software: custom-developed; off-the-shelf; or customized?
  • Degree of automation of spending units’ processes
  • Nature of information security and other controls
  • Internet/intranet capabilities

Management training and institutional capacity

15. Which government agency manages information systems?

  • How does this agency relate to the treasury, ministries, spending units etc?
  • Who is responsible for the functional design of the treasury system?
  • Are changes to the functional design easy to accomplish?
  • How are information systems supervised?

16. What are the training arrangements (technical, end-user, end-user support, technical maintenance, change management, foreign/local, start-up/ongoing)?