Report No. 29845-GN Republic of Guinea Country Financial Accountability Assessment June 2003 Africa Region Operational Quality & Knowledge Service Unit Financial Management FOR OFFICIAL USE ONLY A Collaborative Exercise by the Republic of Guinea and Multi-Donor Task-Team Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. GUINEA Country FinancialAccountability Assessment 2003 HIGHLIGHTS Guinea continues to make progress inthe modernizationo f its public financial management processes and structures. There remains, however, considerable work to be done to ensure that the improvements are sustained and the implementation deepened. There i s a need to strengthenboth the components o fpublic financial management and to strengthen the linkages betweenthe components i.e. planning, budgetpreparation, budget execution, financial reporting, audit and control. The quality o fPublic Financial Management inGuinea does not yet provide sufficient assurance for external donors to implement their projects through the government's own systems via, for example, direct budgetary support. Insome aspectsof public financial management, e.g. the formal commitment control system, Guinea's simple and pragmatic approach i s more effective than some o f the more sophisticated and expensive systems inthe sub region. The level o fpublic expenditures processed outside the central commitment control system, inparticular by means of payment orders and advances remains a concern. Guinea has started a process o f decentralizing (dkconcentration) budgetmanagement for the priority sectors o fHealth, Educationand Rural Services to the District (Prbfectoral) level. This i s a significant change from the highly centralizedprocess that has characterized public financial management inGuinea to date. Movingbudget management closer to the deliveryo f services should result ingreater transparency and accountability o fthe use o f the financial resources provided. It i s too soon to assess whether the decentralizationi s achieving the desired results. There are, however, a number o f steps that could be taken to enhance the implementation o f decentralization. The ex post audit structures inGuinearequire significant strengthening Corruption inpublic service remains a concern although there are encouraging signs from the activities o f the anti-corruption Commission. Recent changes inparticular high-level responsibilities have eased some perceived roadblocks to the follow through o f anti- corruption activities. GUINEA Country FinancialAccountability Assessment 2003 TABLE OF CONTENTS PREFACE .......................................................................................................................... 5 ABBREVIATIONS/ ACRONYMS ................................................................................. 6 EXECUTIVE SUMMARY .............................................................................................. 7 OVERVIEW....................................................................................................................... 7 DECENTRALIZATION (DECONCENTRATION) ...................................................................... 7 EXPENDITURE CONTROL .................................................................................................. 8 REVENUE ......................................................................................................................... 9 FINANCIALREPORTING.................................................................................................... 9 AUDIT FUNCTIONS.......................................................................................................... 10 CORRUPTION.................................................................................................................. 10 KEY RECOMMENDATIONS ...................................................................................... 12 PUBLIC FINANCIAL MANAGEMENT ...................................................................... 1 GENERAL .......................................................................................................................... 1 OBJECTIVE OF THE CFAA ................................................................................................ 2 SCOPE OF THE CFAA ....................................................................................................... 2 RELATIONSHIPTO COUNTRY STATEGY ............................................................................. 3 COUNTRY BACKGROUND .................................................................................................. 4 CURRENT GOVERNMENT STRUCTURES ............................................................................. 8 PUBLIC FINANCIALMANAGEMENT ...................................................................... CYCLE 8 DECENTRALIZATION ........................................................................................................ 9 Current situation......................................................................................................... 9 Analysis ..................................................................................................................... 10 Recommendations ..................................................................................................... 14 LEGALFRAMEWORK ....................................................................................................... 14 Analysis..................................................................................................................... 14 Recommendations ..................................................................................................... 15 BUDGET FORM~LATION ................................................................................................. 15 Current System.......................................................................................................... 15 Analysis ..................................................................................................................... 16 Recommendations ..................................................................................................... 18 BUDGET EXECUTION EXPENDITURE - .............................................................................. 18 Current situation....................................................................................................... 18 Analysis ..................................................................................................................... 19 Recommendations ..................................................................................................... 20 3 BUDGET EXECUTION .REVENUE ..................................................................................... 20 Current situation....................................................................................................... 20 Analysis ..................................................................................................................... 21 Recommendations ............................. :. ...................................................................... 22 ACCOUNTING REPORTING ...................................................................................... 22 AND Current situation....................................................................................................... 22 Analysis ..................................................................................................................... 23 24 AUDITING...................................................................................................................... Recommendations ..................................................................................................... 24 Current situation....................................................................................................... 24 Analysis ..................................................................................................................... 26 27 CORRUPTION.................................................................................................................. Recommendations ..................................................................................................... 27 Analysis ..................................................................................................................... 28 Recommendations ..................................................................................................... 29 GUINEA Country FinancialAccountability Assessment 2003 PREFACE The 2003 Guinea Country Financial Accountability Assessment (CFAA) has beencarried out conjointly with the 2003 Guinea Public Expenditure Review (PER) andboth analysis will bereported as the IntegratedPublic ExpenditureReview andFiduciary Assessment (PER-FA) for Guinea. This approach has been followed inorder (a) to have a cohesive and coherent set o f analysis andrecommendations on Public Finance (b) to reduce the demands on the government o f Guinea which might have resulted from a duplication o f reviewsbeingcarried out inthe same time frame. This approach reduces the potential overlap inthe scope of PER and CFAA. This stand alone CFAA report is based on the chapter on Public Financial Management systems and processes inthe Integrated Public Expenditure Review and Fiduciary Assessment, with some additional context added. The govemment counterpart team designated bythe Minister o fFinance was ledby Dr. Souare, the Inspector General o f Finance andMr.Doumbouya the Deputy Inspector General o fFinance supported by representatives for key units. The team for the CFAA component ofthe PER-FA comprised: DavidWebber (LOAGl), Bella Diallo (AFTFM), Malado Kaba (European Commission, Conakry), Daniel Haemmerlin (KfW consultant PriceWaterhouseCoopers, Paris), Aissatou Diallo (ACTTF), Jack Titsworth (AFCMZ, consultant), Oury Diallo (AFT=). Peer reviewers were BrianNgo, LeadEconomist (AFRCE), Marius Koen, Senior FinancialManagement Specialist (AFTFM) and Anne Mondoloni (OPCFM) The World Bank gratehlly acknowledges the enormous contributions madebythe GuineanGovernment Counterpart Team, The Bank also expresses its gratitude to the numerous government andprivate sector officials and individuals who contributed information that made the CFAA possible 5 A ABBREVIATIONS/ ACRONYMS CAS Country Assistance Strategy C F A A Country Financial Accountability Assessment CPAR Country Procurement Assessment Report CRD Comite rural de dkveloppement DAAF Directeurs Administratives et Financiers DFID Department for International Development E C European Commission EU EuropeanUnion HIPC Heavily IndebtedPoor Countries IMF International Monetary Fund INTOSAI International Organization of Supreme Audit Institutions IT Information Technology Kfw Kreditanstalt fir Wiederaufbau MTEF Medium Term Expenditure Framework NGO Non-Govemmental Organization MOF Ministryof Finance MOF I C MinistryofFinance Implementing Committee PER Public Expenditure Review PER - FA Integrated Public Expenditure Review andFiduciary Assessment P F M Public Financial Management PRGF Poverty Reduction Growth Facility PRSP Poverty Reduction Strategy Paper ROSC Report on the Observance o f Standards and Codes WB World Bank Regional VP: Mr.Callisto Madavo, AFRVP Country Director: Mr.MamadouDia, AFCl1 Sector Director: Mr.JohnRoome, AFTQK Regional Financial Management Manager Mr.Anthony Hegarty, AFTFM Task Team Leaders: Mr.DavidWebber, LOAGl Mr.BellaDiallo, AFTFM Team Members Mme Malado Kaba EUConakry MmeAissatou Diallo ACTTF Mr.DanielHaemmerlinKfW Mr.OuryDiallo AFTR2 Mr.Jack Titsworth AFCMZ GUINEA CountryFinancialAccountabilityAssessment 2003 EXECUTIVESUMMARY OVERVIEW 1. Guinea continues to make progress inthe modemizationo fits public financial management process and structures. Over the last three years there has been a noticeable improvement inmany o f the basic elements o fpublic financial management. Continued efforts will be necessary to ensure that these changes are sustained and that the implementation o f the reforms i s implanted indepth inthe line Ministries andinthe decentralized (d6concentration)structures. 2. The impact o fthe improvements is, however, mitigatedby (a) the lack o f a reliable andpredictable revenue stream, (b) excessive government expendituresoutside the commitment control systems, and (c) the weak linkages between various elements o f public financial management processes. 3. The public financial management systems andprocesses inGuinea are not yet at a level that would provide reasonable assurances to the Bank or other donors that the government's own systems can beusedto channel funds to donor fundedprojects or programs. It is, however, not unreasonable to believe that ifthe current progress in improvements is sustained and deepened that the objective o f usingthe government's own systems for channeling donor funds could be realizedinthe medium term. DECENTRALIZATION (DECONCENTRATION) 4. The Guinea CFAA 2003 i s beingcarried out against a backdrop o f a fundamental change inthe management o fpublic funds. The management o fbudgets for the high priority sectors o f Health, Education and RuralDevelopment i s beingdelegated to the District (Prefectoral) level. This i s a significant change from the highly centralized budget management structures that have characterized public financial management in Guinea to date. Starting inFiscal 2002 certain budgets were decentralized on a pilot basis. For Fiscal 2003, the decentralizationhas been expanded to cover substantially all o f the budgetsfor the decentralized operations o f Education, Health andRural Services. 5. Locating the management o f the budgets for the priority sectors closer to the point o f service delivery should improve the accountability and transparency o f the use o f public funds. It i s too soon to say whether these changes have resultedinimprovements or a substantial increase inthe flow o fbudgetary funds to the point o f service deliveryto the community. 6. A number o fmeasures that should be takento increase the likelihood o f success include: 0 Establishing a program to report actual vs budgetedexpenditures at the decentralized community (Le. CRD or village) level for education, health andrural services together with a requirement for regular accountability sessions. 0 Implementing a policy o f movingthe management o fbudgeted expenditures to the closest point at which services can be delivered (Le. a school or a health center) a cost effectively. 0 Simplifyingthe expenditurecontrol processes at the decentralized level 0 Developing a more predictable flow o f funds (dkle'gations de cre'dit) to the decentralized level. 7. To sustain the decentralizationprocess there i s a needto: 0 Support the development o f fiduciary capacity at the decentralized level byproviding the necessary personnel, training, andtechnical guidance. 0 Provide the basic equipment, infrastructure andtools to support decentralized units 0 Progressivelyto establish computer terminals for the commitment control system (chaine des dkpenses) closer to the decentralized level. EXPENDITURECONTROL 8. Expenditurecontrol has improved in Guinea over the last three years with the introduction o f the computerized commitment control system (la chaine des de'penses). The system i s simple, pragmatic and its operation is, inmany respects, superior to far more expensive and elaborate systems inplace or under development inWest Africa. The commitment control systemis centralized at the Ministry ofFinance. Workstations are available at the Ministryo f Finance for line ministries to enter their data. There are linkages with the tax systems that require that any company or individual receiving government contracts should be up to date with their tax payments. 9. The utility o f the commitment control system as a budget control mechanism is diminishedhowever bythe extensive use o f expenditure mechanisms such as Zettres de paiement and advances which are outside the commitment control system. 10. The current configuration of the commitment control system i s beginningto reach the limits o fits capacity for reasons that includethe addition o f a substantial number o f budget lines for decentralized operations, the usagedemands oflineministries and advances intechnology. REVENUE 11.The Republic o fGuineais richinnaturalresources, inparticular Bauxite, the raw material for aluminum, for which Guineai s one o fthe leading exporters. Traditionally Guinea has relied on miningtaxes and customs duties for a major proportion of its intemally generated government revenues. More recently other sources o f revenue, such as income taxes are being expanded. 12. One o fthe most significant constraints to establishing a solid tax base i s the extentto which tax exemptions (exone'rations)are granted. Infiscal year 2002 the value o ftax exemptions amounted to some GNF 132billion, equivalent to about USD 66 million. 13. The government has established regular reporting mechanisms to monitor tax exemptions. The government should: 0 continue monitoring tax exemptions. 0 ensure that the data on tax exemptions are complete. 0 establish a policy framework within which exemptions may be awarded, and then take actions to reduce and minimize the level o f exemptions. FINANCIAL REPORTING 14. Guineahas made substantial progress ingetting up to date inits statutory financial reporting. Duringthe 1990's there had been a significant lag inthe statutory financial reporting obligations (la Zoi de rzglement). As at March 2003, with the approval o f la Zoi de r2gZement 2001, Guinea was fully up to date with the legal requirements. - 15. Guinea has also made significant progress over the last three years inthe quality and detail of the budget informationpublished. The 2003 Budget (la Zoi des$nances) includes, for the first time, a significant level o f detail for the operating expenses (Titre 111)andgrants andcontributions (Titre IV)downto the levelofindividualschools and health centers for the decentralized budget operations o f Education, Health andRural Development. 16. Inorder to improve accountability, there is a need to continue to improve the quality, timeliness and availability o f financial information on budgets and expenditures and revenues, 17. Financial reports to the President and the National Assembly for the whole government should be ina form and content readily understandable by citizens with a non-financialbackground. Additional commentary and analysis on the financial reports couldbe usefulto assist inthe understandingofthe reports. 18. To reinforce the accountability to communities, financial reports o f expenditures comparedto budget allocations shouldbeprepared at a level o f detail comparable to the allocations inthe National Budget. Mechanisms for public dissemination and discussion o f financial information should be reinforcedto allow communities to more easily hold their governments to account. AUDIT FUNCTIONS 19. Guineahas a fragmented and incomplete audit framework. 20. There i s no overall independent,external government audit body responsible for providing assurance that state expenditures were actually used for the purposes intended with dueregard for economy, efficiency and effectiveness. 21. The Audit Division o fthe Supreme Court (la Chambre des Comptes)provides assurance that expenditures andrevenues conform to the legal authority. However, the Audit Divisionlacks the mandate andresources, instaffing, equipment andoperating budget, to effectively engage inabroader audit role. 22. The lack o f an effective and credible independent government audit body with a broad mandate i s a significant obstacle to extemal donors beingable to rely for assurance on the government's own systems when providing either general budgetary support or for executing donor fundedprojects usinggovernment systems rather than usingstand alone Project ImplementationUnits (PIUs) 23. Untilthe government audit structures are significantly strengthened,external donors may have to continue conducting their own separate audits, a practice that does not necessarily assist indevelopingcapacity within government. CORRUPTION 24. There i s a perceptionthat corruption diminished the effectiveness o fpublic financial management inGuinea. Corruption i s an issue not solely inGuinea or West Africa but is an issue to a lesser or greater extent in all countries. 25. Guineahas taken some very positive andprogressive steps to beginaddressing the corruption issue. 26. A National Anti-Corruption Commissionhas beenestablished with a wide membership representative o f the mainpolitical parties inthe National Assembly, the executive andjudicial branches o f government, civil society and the private sector. 27. The Anti-Corruption Commission has made progress inraising the public's awareness o f corruption issues and inprobing a number o fhigher profile cases. After some earlier rapid activity, institutional blockages appeared to slow down the progress. During2003 there has been areassignment o fcertainministerial responsibilities and some o fthe key obstacles have been removed. 28. A comprehensive Governance and Corruption Survey will be completed during2003. Inadditionto obtaininginformation about corruptionper se andlinkingitto service delivery, the survey results will also provide information about the relationships between corruption and financial management, public procurement, and personnelmanagement. These results will thus provide further insightsinto areas o f financial management that need strengthening. x x x x x x i x x i-, rd U x X X X X x x x x x x 4 X X GUINEA Country FinancialAccountabilityAssessment 2003 PUBLIC FINANCIALMANAGEMENT GENERAL 1. The 2003 Guinea Country Financial Accountability Assessment (CFAA) is being carried out as an integratedproject with the 2003 GuineaPublic Expenditure Review (PER). The findings, analysis and recommendations o fthe CFAA form part o f the IntegratedPublic Expenditure Review and Fiduciary Assessment (the PER-FA) for Guinea andwhich, together with the Country Procurement Assessment Report (CPAR) completed in2002, form the basic buildingblocks of the Bank's programme o f fiduciary analytical work. 2. The CFAA team included representatives of the EuropeanCommission and Kreditanstalt fir Wiederaufbau (KfW),the German DevelopmentBank. Input was also sought from other development partners. 3. The PER-FA was carried out inclose collaborationwith the government o f Guinea. The government counterpart teams preparedthe initial documentation for the description o f the public financial management processes. This documentation i s available separately andprovides more detailed descriptions o f the current systems andprocesses than the summary inthis report. 4. The CFAA has also made extensive use o fthe existing knowledge base for public financial management inGuinea, including the Rapid FiduciaryAssessment (2001), the series o freviews (supported by the EuropeanCommission) o f elements o f the structure and operation of the Ministryof Finance (2001 -2003), the EuropeanUnion audits and other recent reports. 5. The update o f the HIPC tracking study inMarch 2002 indicatedthat Guinea met 5 out o f the 15 basic public financial management criteria. Inrelative terms 12 out o fthe 24 countries met more than 5 of the criteria. Meeting less than 8 o f the H P C criteria i s considered to indicate that public financial management requires "significant upgrading". 6. The EuropeanCommission has recently carried out a series audits o f elements o f public financial management inGuineawhich identifiedthe need for improvements inpublic financial management. Audits carried out include: 1 National Tax directorate (December 2001); National BudgetDirectorate (May 2002); National Financial Control directorate (June 2002); National Customs directorate (November 2001); Management o fPublic Debt; Chambre des Comptes (December 2002); Pensions division March2002); National Investments directorate (March2002); InspectionGCnkrale des Finances (November 2002). 7. The IMF has completed a Safeguards Assessment o fthe Central Bank o f Guinea inJuly2002. The Fundhasnot completedaFiscalTransparency ROSC, nor are there plans to complete a Fiscal Transparency ROSC inthe near term OBJECTIVE OF THE CFAA 8. The CFAA supports the Bank and other donors' development objectives by identifyingstrengthsand weaknesses inpublic financial management systems. The CFAA facilitates a common understandingamong the government, the Bank, and other development partners on the performance o f the institutions responsible for managingthe country's public finances. This common understanding helps to identifypriorities for action andinforms the designand implementation o f capacity-buildingprograms. The knowledge base developed in CFAAs also helps the Bankto respect its fiduciary objectives byidentifying risks to the use o fBank and other development partners' financial resources posedby weaknesses in recipient government's public financial management arrangements. SCOPE OF THE CFAA 9. Inorder to maintain a focus on the key current public financial management issues for Guinea the 2003 CFAA concentrated on a limitedgroup o f issues that may be constraints to the improvement over time o fpublic financial management. These included: 0 Decentralization 0 Budgetexecution - Expenditures 0 Budgetexecution - Revenues 0 Financial Reporting 0 Auditing 0 Corruption 10. The rationale for this focus was to align the CFAA with the objectives o fthe country strategy for Guineawhich is, over the mediumterm, to move to transferring financial resources through the Government's public financial management systems. The transitional strategy anticipates the transfer o f resources through broader sector programs ie Health, Education andRural 2 Services. The current CAS was approved by the Board inMay 2003 and i s available separately. 11.One majorrecent development inpublic financial management inGuineais the decentralization o fbudget managementfor certain central government functions. The decentralizationprocess started on a pilot basis. Budget decentralization was expanded inFiscal 2003 to include the operating expendituresand subsidies for priority sectors o fHealth, Education Rural Services. Inview o f the importance o f the decentralizationprocess to the government o f Guinea, the Bank and other donors the scope o fthe CFAA was expanded to have a higher level of coverage in this area. 12. The mainState OwnedEnterprises (SOE) include the Electricity and Water Utilities and the Port o f Conakry. The strategy o f the government, supported by the Fund, is to increase private sector participation inthe major utilities; they are therefore not considered to be a long-term part o f state public financial management and are not includedwithin the scope o fthis report. 13. The private sector auditing and accountingprofessionin Guinea does not have any impact on public financial management and therefore i s not includedinthe scope o f this CFAA. Private sector auditors currently carry out audits o f Bank fundedprojects implementedthroughstand alone Project ImplementationUnits (PIUs), however the Bank strategy o f movingto a programmatic basis of funding will inthe medium term gradually phase out the use ofthese PIUs . 14. Community BasedCouncils (CRDs) could a major factor indecentralized budget management and are therefore included inthe assessment o f the Decentralized activies. Other N o n Governmental Organizations (NGO's) are not a major factor inpublic financial management inGuinea and aretherefore not includedinthe scope of this CFAA. RELATIONSHIP TO COUNTRY STATEGY 15. A Poverty Reduction Strategy Paper (PRSP) has beenpreparedby the government througha process o f extensive discussion and dialogue. The full PRSP was presented to the Boards o f the Bank and the FundinJuly 2002. 16. The major near term objectives o f the PRSP are: 0 to consolidate macroeconomic stability as aprerequisite to sustainable growth; 0 to improve efficiency and effectiveness of the public sector and enhance the quality o fpublic services that focus on strengtheningpublic expenditure analysis andmanagement; 3 promote public sector govemance, decentralize budgetary resources and decision-making; and rationalize the interactions betweenthe public and private sector. 17. The Guinea CAS was presented to the Boardo fthe Bank inJune 2003. The previous full CAS for Guineahadbeenapproved inNovember 1997. A CAS Progress Report for Guinea was presented to the Board inJuly 2001 covering a period o f 12 to 18 months. An Interim Poverty Reduction Strategy Paper (I- PRSP) was presented to the BoardinDecember 2000. 18. The new CAS period will be a period o ftransition duringwhich the Bank and other donors would move gradually towards more programmatic lending. During this period, the Bank will (a) support the implementation o fthe three pillars of the PRSP; and (b) ensure that sector reforms are consistent with cross-sectoral reforms inthe areas o f public finance management, management o fhuman resources, andlocal administration to ensure that resources intended to reduce poverty are usedefficiently andtransparently. This would allow possible fbture support through PRSCs provided that Guinea maintains a stable macroeconomic framework and strengthens public finance management. 19. The CFAA took into considerationthe orientation o f the 2003 CAS, with a specific focus on the increasing decentralization o fbudget management for the priority sectors o fHealth, Education and RuralDevelopment andthe need for capacity development to support the evolution of the decentralizationprocess. COUNTRY BACKGROUND. 20. Guinea's development over the last 50 years has followed a pattem at significant variance to that o fneighboring countries inthe sub-region. Guinea has a population of some 8.72 million (EIU2002 estimate). Most development indicators are at the low end o f the scale for the sub-region (which i s also one o f the lowest inthe world). Male life expectancy at birthis 46 years and female 47 years (1997 data). This i s an improvement over the life expectancy in 1965 o f 35 years. Only 31% of the population outside the capital have access to basic health facilities. 21. The country i s rich innatural resources. Guinea has 30% o f the world's reserves o fbauxite, the raw material for aluminum. Guinea has some 6% o fthe world's reserves o f iron ore and there are significant deposits o f other minerals including gold and diamonds. There is also significant agricultural potential 22. Guinea voted for independence from France in 1958. This was a fundamental break that resulted ina withdrawal o f support from France and a break with the other French speaking countries inWest Africa which retained close economic ties with France. Guinea adopted Marxist economic policies and for the next 26 4 years received technical assistance almost solely from the Soviet Union and other communist counties. The state took control over most aspects o f economic life. Duringthis period GNP declinedsteadily andthe deteriorationininfrastructure was evident. 23 Ahmed Sekou Toure, President o f Guinea since 1958, died in 1984. Within a few months there was a military coup ledbyPresident Lansana Conte, who has remained inpower ever since andhas beenelected twice ingeneral elections. The next Presidential electionis anticipated inlate 2003. 24. Although there a long-standingtradition o f strong Presidential government, in recent years the role o f the NationalAssembly has evolved to be more active in reviewing and debating issues includingissues relating to public financial management. 25. A legacy o f the 1958 - 1984period was a highly centralized government structure with central economic planning. The public sector financial management systems had deteriorated into an amalgam o fthe worst features of French colonial public accountingmixed with the opacity of Soviet accounting, aptly named "Revolutionary accounting". 26. Since 1984 Guinea has reoriented its economy. There have beensignificant economic andpublic sector reforms. Inparticular, over the last six years, there has been significant support for improvingpublic sector financial management systems and structures from the World Bank, the IMF, France, the European Union, Canada and other donors. The key areas improvement inpublic financial include: 0 BudgetFormulation. BudgetExecution. 0 PublicExpenditureAuditing andMonitoring. Decentralizationo fbudget resources, decision making, and service delivery. 0 Computerization o f the public financial management systems. New Public Procurement Code 27. Budget Formulation. To address weaknesses inbudget formulation, the Government adopted a multi-year reform process. The key elements o f the reform included: (i) adopting a medium-term approach inthe budget formulation process; (ii)providingline ministries with three-year indicative ceilings whichwere linked 5 to annual budgets; (iii) undertaking, incollaboration with other stakeholders, public expenditure analysis and institutional reviews for key sectors to help set sectoral priorities; and (iv) improving management of donor assistance, ensuring coherence between projects andpolicies, and linkingthe public investment program (PIP) to the recurrent budget. 28. The Government initiated a medium-term approach for the FY02 budget preparation cycle. The Ministryof Economy and Finance (MEF) provided a budgetcircular containing multi-year ceilings to ministries and agencies. Ministries o fpriority sectors were requested to prepare a two-year period budget, startingin2002. Special emphasis was placedon establishing links between sectoral priorities andrequested budget allocations and, to this end, all priority sectors were asked to initiate policy reviewsto derive clear statements of objective and expenditure priorities inpreparation o f the FY02 budget.A training workshop was organizedto enhance capacity inpriority sectors by launching public expenditure and institutional reviews inthe two key sectors o f education andhealth. By the end o f the reform program coveredby SAC IVYit was expected that there would be: (i) a further increase innon-wage recurrent expenditures allocated to priority sectors from the current level o f 35 percent o fthe total; (ii) better enforcement o f sectoral budget ceilings to ensure fiscal discipline; (iii) complete public expenditureand institutionalreviews for education andhealth, clearly articulating priorities; and (iv) the adoption o fkey features o f an MTEF. 29. Budget Execution. The Government identifiedthe following important actions for enhancing budget execution: (a) institutingquarterly cabinet-levelreviews o f budget execution and disseminating key results to the National Assembly, local media, and donor representatives; (b) reducing delays through more critical use of data provided by the financial management information system; (c) monitoring the variance between original budget allocations and actual spending,beginning with priority sectors; (c) initiating ex-post audits o finvestmentprojects; (d) adopting new measuresto strengthen asset and inventory management; (e) undertakingex-post audits of all procurement contracts exceeding GNF150 million and 15 percent, on a sampling basis, o f all other contracts; (f) adopting sanctions, applicable to both government officials and suppliers, to prevent unlawfulpractices inmanaging procurement contracts; and (g) reinforcing conditions to participate inpublic tenders, thereby restricting participation to legitimate suppliers. 30. Public ExpenditureAuditing and Monitoring. To strengthenauditing and monitoring capacity, the Governmentdirected its actions inthe medium-termto three key areas o f reform: (i) the production anddissemination o f auditedbudget accounts on a timely basis; (ii) reassessment o f the roles o fvarious oversight agencies such as the Chambre des Comptes with a view to strengthening the existing system; and (iii) capacity buildingfor these agencies 31.Decentralization of budget resources, decision making, and service delivery. The Government has been implementing a decentralization policy with an 6 important budget component. A comprehensive set o f measures was launchedin the context o fthe FYOl budget, which aimed at: (i) enhancing the importance o f decentralized structures inpriority sectors by increasing their budgetary allocations and making these explicit inthe budget document and, inthe process, removing arbitrary practices o fbudget execution observed inthe past; (ii) promoting transparency bymaking budgetary allocations directly to schools and health clinics; (iii)initiating tracking o f expenditures inpriority sectors to assess the efficiency o fbudgetexecution; and(iv) strengtheningbudget management at the local level. Inaddition, withinabroadrange o f local taxes, the Government raised the share that local communities are allowed to retain and, most importantly, head tax. 32. The decentralization measures included the following: (a) increasingthe share o f non-wage recurrent budgetresources allocated to lower tiers o f government to at least 80 percent o f the total for priority sectors; (b) making allocations directly to schools and health clinics inConakry and the administrative region o f Kindia which covers five prefectures; and (c) increasingthe resource base o f local government through fiscal transfers and local revenue mobilization (in2000/01, government sharply increased the shares o fthese taxes to CRDs. For the Minimumtax (IMDL),this sharejumped from 50 to 75 percent; for the Property Tax (CFU), from 22 to 68 percent; and for the Business tax (TPU), from 14 to 68 percent. The much larger shares to CRDs andthe districts were expected to sharply improve collections o f these taxes); (d) encouraging consultations o f and participation by citizens inthe budgetprocess; and (e) creating awareness and demand for priorities and performance (through tracking surveys andparticipation inpublic expenditure review discussions). 33. Computerization of thepublicfinancial management systems. The systems for recording, controlling and administering commitments have been computerized. The system is centralizedinthe Ministry o fFinancewith data inputterminals available to the line ministries. The system handles the commitment, the recording o f the receipt o f goods or services and the recording o f the payment approval. The payments are made using a separate computer system (SAGE) in the Treasury division o f the Ministryo f Finance. 34. Public Procurement Code. A new Public Procurement Code was introduced in 1997. Public procurement issues were extensively reviewedjointly by the World Bank and the AfricanDevelopmentBank inthe Country ProcurementAssessment Report issuedinJune 2002. The overall conclusions o f this assessment were that although the newprocurement code represented an important improvement inthe framework o fpublic procurement many anticipatedbenefits hadnot materialized andthere remained a lack o ftransparency, a lack o f efficiency inpublic procurement, a non competitive private sector and administrative environment which was not favorable to the development o f the private sector. 7 CURRENT GOVERNMENT STRUCTURES 35. The current government financial management structure i s based on the French governmenttradition. This tradition includes strong centralizedbudget preparation and control and apowerful role for the Ministryo fFinance. Another feature i s an emphasis on clear legal guidance for the process andmechanisms to ensure compliance with this legal basis. A fundamental element o f control inthe French structure i s the separation o f the commitment authority (I'ordonnateur) and payment authorization (le comptable). The commitment authority i s delegated from the Minister ofFinance to the spending Ministry, e.g.,the Minister ofHealth. Payments are authorized by the Directors o fFinance inthe spending Ministries (Directeurs Administratives et Financieres or DRAF) who are members o fthe Ministry o f Finance. The laws, regulations and directives provide very detailed guidance on the ex ante controls for expenditures. 36. The highly centralized government structures remain inplace from the First Republic (1958 - 1984). Up untilFY 2001 virtually all government programs, i.e. health, education, agriculture, justice etc. were administeredby the central government from the capital, Conakry. Recently initiatives are underwayto decentralize (deconcentration) and to devolve (decentralization)many o fthese programs. Decentralizationrefers to the transfer o f the administration o f government programs from the capital to the regional units o fthe central government, i.e. the Regions (there are eight Regional governors for Labe, Kindia, Nzerekore, Boke, Kankan, Mamou and Farananah, plus the region o f Conakry), 32 Districts (Prefectures) and 302 sub Districts (sous Prefectures). Devolution refers to the transfer o fthe administrationo f governmentprograms to elected local authorities (comites rurales de development or CIiD or inurban areas communes). PUBLIC FINANCIAL MANAGEMENT CYCLE 37. The public financial management cycle includes: budget formulation; budget execution; accounting andreporting; and audit and evaluation. This cycle operates within a legislative framework and i s supported by information systems and qualified humanresources. 38. A detailed description o f the public financial management cycle inGuinea has been preparedby the government counterpart team as part o f the IntegratedPublic ExpenditureReview andFiduciary Assessment (the PER-FA) ofwhich this CFAA forms part. The detailed description o f the public financial management cycle i s incorporatedby reference as volume I1o f this CFAA. 39. Inview of the importance o f the current decentralization initiative, bothto the government and to the development partners the analysis and recommendation for 8 decentralizationhave beenset out as a separate section preceding the usual order of the public financial management cycle as follows: a. Decentralization b. ControlEnvironment c. Budget Formulation d. BudgetExecution - Expenditure e. Budget Execution - Revenue f. Accounting andReporting g. Auditing h. Corruption DECENTRALIZATION Current situation 40. Guinea i s going through a period o f fundamental change inthe management o f public funds. The management o f the non-salary budgets for the priority sectors o f Health, Education and Rural Services i s being decentralized, initiallyto the District (Prefectoral) level. This i s a significant change from the highly centralizedbudget management structures that have characterized public financial management inGuinea to date. 41. Starting inFiscal 2002 management o fbudgets for operating expenditures and subsidies were decentralized to a limitednumber o f subsectors, eg for the Education Sector inConakry and Kindia, on a pilot basis to accumulate experience o f decentralization 42. The budget (la Zoi definances) for FY2003 continues the process by expanding the decentralizationo fthe management o fbudgets for the non-salary expenditures for Health, Education and Rural Development. This decentralizationi s consistent with the PovertyReductionStrategy Paper (PRSP) preparedby the government o f Guinea and i s supported bythe Bank and other development partners. There has been a detailed manual o fprocedures prepared and workshops have been held for staff participatinginthe decentralized units. 9 Analysis 43. The management ofthe budgetsfor the priority sectors closer to the point of service delivery should improve the accountability and transparency o fthe use o f public funds. It i s too soon to say whether these changes have resulted in improvements or a substantial increase inthe flow o fbudgetary funds to the level where services are provided to the community. 44. The budget commitment andmanagement authority (I'ordonnateur) for the decentralized budgets has been delegated to the Prefects o f the Districts. 45. The expenditure process at the decentralized level is based on the same comprehensive, complex andtime-consuming processes that are used centrally. Inpracticeadditional controls havebeenadded at the decentralized level. For example, all expenditures have to be authorizedby the Prefect at two points o f the expenditure cycle - once at the commitment stage (engagement) and secondly at the approval stage (ordonnancement). 46. Effectively there is no decentralized budget management below the District (Prkfecture) level. Districts (Prkfecture) incorporate, on average, nine sub Districts (Sous Prkfectures) and a wide range o f educational institutions ranging from smallprimary schools to Universities, and health facilities rangingfrom communityhealth centers to Regional Hospitals. 10 47. The evolution o fthe decentralized budget management canbe seen from the following table: Foreign 12,55 11,66 1 3 m 17,a5 17,ga 2 2 , ~ 2 3 s 52,ii IOU 137,4 99,46 140,29 Common expenses 49,a5 44,3a 63,17 66,s 6 ~ 1 6 3 6 , ~ 21,06 6 0 , z 25,52 59,13 3a,ii TOTAL 119,2 107,6 160,3 124 192,6 195,31 76,9 90,Ol 186,7 184,l 184,6 209,21 48. The greatest benefit o f decentralizingbudget management i s the increase inthe resources used for the delivery o fpriority services such as education and health. It i s generally accepted that the closer budget management is to the delivery o f the service, the more effective i s the outcome o f the budget decentralization. It is recognized that inthe early stages of the decentralization of budgetmanagement, and Guinea i s at the early stages, there will be concerns, bothreal and perceived, about the capacity o f the lowest level o f budget centers to manage funds. There will also be concerns about the potential cost o f such changes. There are financial accountability challenges inthis decentralization process to ensure that the tight budget controls remain inplace andto ensure timely accounting for expenditures. 49. There are, however a number o f measures that should be taken inorder to increase the likelihood of success. These measures include: 0 Reportingto the community. Establishing aprogram o freportingthe actual expenditures at the community (i.e. CRD or village) level compared to the amounts budgetedto be spent at a decentralized level for education, health and rural services together with a requirement for regular accountability sessions. 11 0 Movingbudgetmanagementto the locallevel. Implement apolicyo fmoving the management o fbudgetedexpenditures to the closest level to the delivery o f service (Le., a school or a health center) that can be accomplished ina cost effective manner. 0 Simplifythe process. Simplifythe expenditure controlprocesses at the decentralized level 0 Predictableflow of funds. Develop amore predictable flow o f funds (dklkgutions de crkdit) to the decentralized level Reporting to the community 50. One o f the more powerful non-formal financial control mechanisms i s for the communities who shouldbebenefitingfrom government services to be informed about the value o fthe services that have been approved for their communities and then to be informed o fthe actual expenditures. Ifthis information is transparent and readily available the communities will inevitably have some questions or need clarification from those who should be held accountable. 51.Accountability sessions with the government officials can clear up misunderstandings betweenall parties. For example, it is not unusual for communities to look at their budgetsand compare them with the expenditures at the local level and assumethat the differences are a result of funds beingdiverted. Accountability sessions give the opportunity for officials to explain which expenditures charged to the budgetswere for materials more efficiently procured centrally or regionally, e.g., text books for schools. The sessionswould also allow the communities to give feedback onwhich goods and services are available locally or what quantities o f centrally procured goods are actually needed. Havingto participate inaccountability sessions i s also a good incentive for officials to continue to take community considerations into account. A model o f community accountability inGuinea i s found inthose communities participating inthe Village Improvement Program (PACV). 52. On a broader level, accountability sessions at the District (Prbfecture) level can ensure an overall understandingo f the distribution o fresources and raise issues o f the equity o fthe distribution. The broader based District Development Councils, currently beingintroduced on a pilot basis maybethe appropriate vehicle for the broader accountability sessions. These Councils include the Prefect, other govemment officials, elected officials and civil society. 12 Moving budget management to the local level 53. To support a policy o f movingbudget management closer to service delivery a series o f procedures needs to be put inplace: 0 Establish the basic criteria that a budget center must meet to become a Budget Management Center. 0 Create a mechanism for reviewingbudget centers to see ifthey meet the accreditation criteria, with periodic subsequentreviews to update the accreditation on a regular basis (i.e. every three years or five years) 0 Start a program to develop the fiduciary capacity o f those budget centers that do not meet the basic accreditationcriteria, and to support those that qualify as Budget Management Centers 54. Budget centers that do not meet the accreditationcriteria should have their budgets managed by the closest (hierarchical or geographic) budgetcenter that qualifies as an accredited Budget Management Center. 55. It i s reasonable to expect that at the beginningo f the process most Districts (Prbfectures) will meet the criteria, as will most Universities and Regional Hospitals. 56. Although the above concepts are relatively simple and straightforward, inreality they represent a major capacitybuildingeffort that may take many years to develop and implement. Simplify theprocesses 57. The budgets for operating expenses and grants and subsidies which are currently decentralized to the District (Prbfecture) level are managedfollowing the same comprehensive, complex and time consumingprocedures as for other central government expenditures. These are followed even for expenditures as small as GNF 40,000 (some USD20). Some additional process steps have also beenadded at the decentralized level. There i s a risk that these processes will strangle the decentralizationmovement. 58. Simplifyingthe process could include the establishment of minimumthresholds and fewer process steps. Predictablefundsflow 13 59. The total budget allocated i s one factor inbudgetmanagement; another i s the availability o f the funds to implementthe activities to be financedby the budget. At present the release o fbudget funds (delegations du credit) i s unpredictable andnot linked to the patterns o f expenditure, e.g., for the schools there i s a peak o f resource needs to prepare for the beginning o f the school year in September. Recommendations 60. Establish aprogram of reporting the actual expendituresat the community level together with a requirementfor regular accountability sessions. 61.Implement apolicy of moving the management of budgeted expenditures to the closest level to the delivery of service that can be accomplishedin a cost effective manner. 62. Simplifi the expenditure controlprocesses at the decentralized level 63. Develop a morepredictableflow of funds (dklbgations de crkdit) to the decentralized level. LEGALFRAMEWORK 64. The legal basis for public financial management inGuinea includes: 0 The Constitution (1990) -provides the general powers to establish laws for the public service 0 The Organic Finance Law (1991) -provides the legal basis for the public financial management procedures andprocesses including the requirement for approval by the National Assembly o f the fundamental financial documents, i.e. the National Budget, Supplementary Budgets and the Public Accounts. 0 The FinanceMinistryRegulations (1997) -which set out the organization and functions of the Ministryo f Finance. 0 The Organic Supreme Court Law (1991) -which gives the Supreme Court the responsibility and authority to audit the Public Accounts. Analysis 65. The legal framework for public financial management provides a reasonably comprehensive foundation for the existing public financial management procedures and processes. 14 66. The legal framework provides for a very comprehensive and detailed ex-ante financial controls and relatively less substantial ex-post. The basic control framework i s similar to that found inmanycountries inWest and Central Africa. 67. A fundamental element o f the ex-ante control inthe structure inGuinea i s the clear separation o f officials who can authorize commitments and implement expenditure (I'ordonnateur) andofficials who can authorize payments (lecontrdeur). The commitment authority i s delegated from the Minister o f Financeto the spending Ministry, e.g., the MinisterofHealth. Payments are authorizedbythe Directors of Finance inthe spendingMinistries (Directeurs Administratives et Financieres or DAAF). 68. The National Assembly may make amendments to the proposedNational Budget Law to reduce expenditure, increase revenueor to improve controls but cannot increase expenditures. 69. The modernization ofbudgetprocedures that has taken place over the last three years has not yet beenreflected inchanges to the basic legislation. 70. The program approach to budgeting,which i s a basis for the MediumTerm Expenditure Framework, does not have legal authority inexisting legislation. 71.There are elements o fpublic financial management relating to the decentralizationo f budget management that would benefit from clarification and simplification. The same comprehensive, complex and time-consuming processes that are applied to central expenditures continue to be requiredfor small expenditures at the local level. Recommendations 72. Update the legalframework to clarij) theprogram basis of budgeting under the Medium Term Expenditure Framework. 73. Amend the basic legislation to allowfor moreflexibleprocesses for small decentralized expenditures. BUDGETFORMULATION Current System 74. Guinea, for mucho f its history, has practiced a very centralized "top down" approach to preparation ofthe National Budget. The Ministry of Financehas traditionally dominatedthis budgetprocess. Historically, government budgeting has beenwithin a framework o f single year budgets. 15 75. In 1999 the Government o f Guinea, with the support and encouragement o f the Bank and the IMF, started aprocess of modernizing the budgetprocess and establishing a MediumTerm ExpenditureFramework (MTEF). 76. The move to a multiyear budget framework represents a fundamental change in approach. It may take a number o f years for the changes to be fully internalized inthe government structures and there will be continuing training requirementsto support this change initiative. 77. The detailed description o f the budgetaryprocedures that has beenprepared by the government o f Guinea i s included as Volume I1. Analysis 78. The government budgetingprocess has beenprogressively improved over the last three years. The government i s inthe process o f improving the programming o fmedium- term expenditure for the priority ministries o fHealth, Education andRural Services including provisions to train financial staff attached to the line Ministries (theDAAF). 79. The structure o f the National Budgetwas substantially revised starting with FY2000. The National Budget document (la Zoi desfinances) i s detailed and includes all central government activities including defense expenditures. State owned enterprise (SOE e.g. the Port of Conakry) and municipal governments are not consolidated on the recommendation o f the IMF. 80. The Government has already a fairly comprehensive set o fprocedures inplace, which, for the past two fiscal years, has beenfacilitating the establishment o f a medium- term macroeconomic fiscal account by the year 2005, based on the sectoral policies developedinthe PRSP. The next step is to include inthe process a number o fobjectives to be attained bythe ministerial departments andto take into account progress made with the decentralization(de'concentration) of expenditures. 81. The FY2003 National Budget, for the first time, includes detail o f operating budgets at the level o f units that provide delivery of services, e.g., schools, health centers. 82. Expendituresfunded from the HIPC initiative are being tracked separately within the budget. The HIPC savings are targeted at priority sectors e.g. health and education. 16 83. The table below shows the evolution o f the budget allocations to the priority sectors from 1997to 2003 (Titre I11-Operating Expenses; Titre IV - Grants and Subsidies): PriorityI All Sectors 29,4% 35,0% 34,9% 29,5% 32,2% 313% 33,2% PriorityI Non Defense 31,7% 38,0% 44,2% 35,1% 48,1% 43,2% 43,3% 84. Weakness inthe budget systemare (a) a lack o fpublic participation and transparency and (b) a relatively weak mediumterm expenditure framework (described inmore detail inthe Integrated Public ExpenditureReviewandFiduciaryAssessment) 85. The National Budget document (la loi desfifinances) is a technically complex and voluminous document that i s difficult for an ordinary reader to comprehend andtherefore questionor challenge. It would be useful to have a simplified, condensed version o f the budgetthat could be providedto the National Assembly and to the mediato explain the budgetina way that could be understandable to abroader section o fthe population. 86. The settingo fRevenue levels inthe National Budget has beenproblematic and continues to be one of the sources o f the disconnect inthe implementation o f the budget. 17 The Revenuebudgetsfor taxes arebased ina large measure on a mechanical calculation o f the estimated growth inthe tax base and anticipated improvementsinthe level o f collection. These Revenue levels are often unrealisticallyhighand do not provide a reliable indicator o fthe budgetresources that will be available to meet the budgeted expenditures. Recommendations 87. The reforms to the budgetprocessshould be continued, reinforced and deepened. 88. Thereshould be more extensive dissemination of the National Budget to all levels of society, including thepoorer and more remote rural and urban areas. Thereshould be simplified budget information prepared that includes the information relevant to individual communities. 89. A methodology should be developedfor calculating the revenuepotential and the cost of collectionfor each category of revenue with a view to using such information, along with otherfactors, to develop a revenue collection strategy. BUDGET EXECUTION EXPENDITURE- Current situation 90. The PER exercise in 1996 had noted serious deficiencies inthe budget execution systems andprocesses including very weak commitment control. 91. The budget control systems havebeen computerized with financial assistance from the Bank andthe EU. The new computer system became operational inJanuary 2000; budget execution for FY2000 and subsequent years are controlled inthe computerized system. The system covers all aspects o fbudget control, i.e., commitments, budget utilization, approvals control. The process makes it impossible, inthe commitment control system, for a fund center to commit funds inexcess of budget authority, and any commitment requires the approval, through the system, o f the financial control unit, the budgetdirectorate and the Treasury directorate. 92. Inaddition over the last three years there have been significant improvements in expenditurecontrol processes andprocedures. Regulations andDirectives havebeen updated. Certain procedures have beensimplified. The ex-ante controls have been reorganized. The Financial Control division (la Direction National du ContrdeFinancier or DNCF) within the Ministryo fFinancewas established at the end o f 1997. This Financial Control division plays a keyrole inreviewingthe commitments madeby the line ministries. 18 Analysis 93. Expenditure control has improved inGuinea over the last three years with the introduction o f the computerized commitment control system (la chaine des dbpenses). This systemi s simple,pragmatic and its operationis, inmanyrespects, superior to far more expensive and elaborate systems inplace or under development inother countries inWest Africa. The commitment control systemis centralized at the Ministryof Finance. Workstations are available at the Ministry o f Finance for line ministries in Conakry to enter their data. Linkages with the tax systems requirethat any company or individual receiving government contracts mustbe up to date with their tax payments. 94. For FY 2003 the commitment control systemhas beenprogrammed andloadedwith a far greater levelo f detail for operating expenditures (Titre III)and grants and subsidies (Titre IV)relating to the decentralized budgets. This should allow a greater ability to track, control and analyze the actual expenditures at the decentralized level. 95. The utility o f the commitment control system as a budget control mechanism is, however, diminishedby the extensive use o f expendituremechanisms that are outside the commitment control system such as payment orders (Zettres depaiement) and advances (sousforme de rbgie). A comparisonbetweenthe expenditures inthe commitment control system (la chaine de dbpenses) compared to the summary of expenditures (the Tableau des Opbrations FinanciBre) for the FY2002 inmillions o f GNF. Financial Commitment Difference Summary Control T I Salaries and Benefits 214.55 215.03 (0.48) T 2 Operating Expenditure 128.42 123.83 4.59 T 3 Grants and Subsidies 240.10 183.70 56.40 T 4 Capital Expenditure 32.36 36.30 (3.94) T 5 1Foreign exchange 388.68 154.80 233.88 1TOTAL 1,004.11 713.66 290.45 96. Givendelays inrecording some expenditures the difference inthe above table i s not necessarily an absolute indication o f the level o f government expenditures that are outside the commitment control system. The data, however, support the contentionthat payments outside the commitment control system are substantial and concentrated in expenditureswhich use foreign exchange, which may include defense expenditures. 97. Highlevels of expenditure outside the formal commitment control systems reduce (a) the effectiveness of ex-ante financial controls and (b) the predictability of financial planning 19 98. The processes and procedures for the commitment, execution and authorization o f expenditures are very comprehensive, complex andtime consuming. These very onerous procedures not only cause delays, but also dilute specific accountability for expenditures and give opportunities for inappropriate interventions. Inthe shorter term, giventhe weakness o f the ex-post financial controls described elsewhere the current ex-ante controls should bekept inplace, with minor simplifications. As the ex-post financial controls are strengthened consideration could be given to a more substantive revision o f the ex-ante financial controls. 99. The current configuration o fthe commitment control system i s beginningto reach the limitso fits capacity. Causal factors include the addition ofa substantial numbero f budget lines for decentralized operations, the usage demands of line ministries and advances intechnology. 100. Inaddition, giventheprogress towards managing agreater percentage of expenditure at the decentralized level, consideration shouldbe given to installing terminals for the computerized commitment control system ineach o f the regions. Recommendations 101. The level of expenditures that do not follow the formal commitment control system should by significantly reduced, and regular summary reports of exceptions should beprovided to senior officials. 102. The computerized commitment control system should be updated (in terms of equipment and technology) to ensure that it continues to be a useful and relevant part of the budget management structures. BUDGET EXECUTION REVENUE - Currentsituation 103. Historically government revenues inGuineahave beenhighly dependant on revenues from miningoperations and customs duties. There has, however, been substantial erosion over the last twenty years o f the specific tax on bauxite extraction and the product o f the miningtaxes. This has led to efforts to develop an income tax base in the non-extractive domestic economy. 104. The concept of income taxes is relatively young inGuinea. The tax base of organizations and individuals that are part of the formal economy and o f a sufficient scale to enable the efficient collection o f taxes i s developingbut remains narrow. 20 Analysis 105. Progress has beenmade inestablishing a domestic income tax base and collections have been increasing over time. The routine o fpaying taxes i s beginningto become habitual. 106. There is room, however, for improvements inincome tax processes and procedures. 107. There is little follow up o f uncollectedtaxes after the end o f the tax year. Efforts are made to collect taxes due duringthe year; however, once the annual cycle i s completed there i s often little subsequent follow-up collection activity. 108. Some o f the tax rates do not reflect the capacity o f individuals to pay. Standard national rates may be appropriate inmajor urban centers, yet maybe beyond the capacity to payinpoorer rural areas. The consequence may behigher levels o f tax avoidance or informal locally set reductions. 109. Incertain cases itmaybemoreproductiveto change the datesofthe tax cycle to coincide with the periods of higher cash flows o ftaxable individuals or organizations. 110. The most significant issue i s the level o f tax exemptions grantedor assumed. These exemptions may be under the Investment Code, the MiningCode, diplomatic exemptions or other specific-purpose exemptions. 111. It is estimated that inFY 2002 the value o fthe taxes forgone for exemptions was some GNF 132billion equivalent to some USD 66 million, and for the last six years the taxes forgone are estimated to be GNF 721 billion equivalent to some USD 317 million. 112. The following table shows the estimated loss o ftax revenue as a result o f exemptions: ESTIMATEDVALUE OFREVENUELOSS GNF billions 21 Diplomats privilege 10.20 0.01 7.27 1.73 5.03 0.72 24.96 NGO Imports 0.00 0.00 0.00 0.27 0.34 0.04 0.65 Project and Public Procurement 0.00 0.00 0.00 6.09 4.87 9.91 20.87 Fuel 8.80 0.31 82.72 12.61 30.76 35.95 171.15 Vehicles 0.01 0.00 0.00 0.00 0.00 0.00 0.01 TOTAL 128.09 37.90 176.19 83.34 163.21 132.62 721.35 Recommendations 113. Thegovernment of Guinea should continue to monitor the level of tax exemptions and take actions to reduce or limit the exemptions when the opportunity arises. ACCOUNTING AND REPORTING Currentsituation 114. The accounting and reporting systems o f the government o f Guinea reflect the legal requirements to manage and account for the funds allocatedinthe National Budget (la loi desfinances) and any supplementaryallocations. 115. There i s a statutory requirement to report the actual expenditures for each fiscal year inthe Public Accounts (la loi de riglement) which should be audited by the Audit division o f the SupremeCourt (la Chambre des Comptes) for conformity with the Budget Law. The Public Accounts are requiredto be submittedto the National Assembly within twelve months o f the end o fthe fiscal year. 116. Inadditionto therequirementto maintain accounts for statutory purposes, the government maintains management or administrative accounts to support ongoing decisionmaking andbudget control. The "SAGE"information system is used for recording payments through the Treasury system. Management reports (tableau des ope`rationsfinanciires de 1'e`tator TOFE) and "dashboard reports" (tableau de bord) provide the Minister o f Finance and senior officials with up-to-date data on government expenditures and revenues. 22 Analysis 117. Guineahas made great progress ingettingits approval o fthe Public Accounts by the National Assembly up to date. For many years the approval o fthe Public Accounts had beeninarrears, sometimes exceeding the legal requirements by several years. Arrears o f approving Public Accounts had also beenchronic inmany other countries in West Africa. 118. InMarch2003 thePublic Accounts for fiscal year 2001were approvedbythe National Assembly, and therefore Guinea i s currently up to date with its statutory requirements for Public Accounts. 119. Inrelationto the management accounts, the computerizationofthe commitment control system has allowed for greater budgetary control o f commitments. Inthe near future the Treasury payment system, "SAGE," andthe commitment control system (la chaine de dkpenses) will be linked. This should provide a sound foundation for managingpublic finances, so long as there i s a reduction inthe transactions that are executed outside the commitment control system. 120. Financial reporting i s key element to assure that there is accountability for the use o fpublic funds. Accountability is needed at many levels. 121. At the National level there is aneedto beheldaccountability for all govemment expenditures to the President, the National Assembly and to citizens. The media are an important institution for transmitting government financial information to the population. To be useful the financial information should be: 0 Timely 0 Comprehensive 0 Simple andcomprehensible 122. Progress has beenmade inthe timeliness o f the overall government financial information. The Budget Law and the Public Accounts are very comprehensive and detailed, however it appears very difficult for lay readers to understand, to analyze or to draw conclusions from them. Efforts have beenmaderecently to provide simplified information andto disseminate information to the press andthrough speeches bythe Finance Minister. Continuing efforts could be made inthis area. The Finance Commission o fthe National Assembly has been increasingplaying a role inreviewing the financial information and makinganalysis available to the media. This progress shouldbe encouraged and supported. 123. There i s also a needto have accountability at the local level. The National Budget for fiscal 2003 provides significantly greater detail than previous years o f allocations for operating expenditures as well as grants and subsides. There i s a need to beginto close 23 the accountability loop by reporting actual expenditures against budgetedamounts at the local level. 124. At the community (CRD) level there shouldbeannual expenditure reports comparing budgetedamounts with actual amounts. These reports couldbeprovidedto the community institutions created under the Village Community Support Program(the PACV). -125. At the District (PrkfectoraZ) level summary financial information couldbe provided to the broader based Development Committees that are beingpiloted incertain districts. Recommendations 126. There should be continuing support to modernization and updating of the government accounting systems. 127. Support to the NationalAssemblyfor the analysis and dissemination of financial information should be strengthened and continued. 128. Financial reports should be developedfor the community (CRD) and District (Prkfectoral) level. AUDITING Current situation 129. Guinea has a fragmented and incomplete government audit framework. 130. There is no overarching, independentgovernment audit body responsible for providing assurance that state expenditures were actually used for the purposes intended, with due regardfor economy, efficiency andeffectiveness. 131. Duringthe years since independence in 1958 there have been several configurations of the government's audit control framework with varying degrees o f emphasis on different dimensions o f control. 132. The lack o f an effective and credible independent government audit body with a broadmandate i s a significant obstacle to external donors being able to rely for assurance on the government's own systems when providing general budgetarysupport or for executingdonor fundedprojects using government systems rather thanusingstand alone Project ImplementationUnits (PIUs) 24 133. Untilthe government audit structures are significantly strengthened, external donors may have to continue conducting their own separate audits which do not necessarily assist indeveloping capacity within government 134. Current elements o fthe government audit framework include: 0 The Audit Divisionofthe Supreme Court (la Chambre des Comptes) 0 The State Inspector General (1'Inspection Ge'ne'raled'Etat- IGE) 0 The Inspector General o f Finance (L'Inspection Ge'ne'raledes Finances -IGF) TheAudit Division of the Supreme Court (la Chambredes Comptes) 135. The Audit Division o f the Supreme Court (la Chambre des Comptes - the chambre) provides assurance that expenditures andrevenues conform to the legal authority. However, the Audit Division lacks the mandate andresources, instaffing, equipmentand operatingbudget, to effectively engage inabroader audit role. The chambre i s under the authority o fthe Supreme Court. Although it has an authorized establishment of 13 professional staffthere have only been 7 or 8 professionals on strength inrecent years. Inaddition, the chambres operationalbudgets have been extremelymeager so they have definitelynot been able to engage external expertise from the market. The principal output o f the chamber i s the report on the public accounts (la loi de rsglement), a statutory reporting obligation. TheState Inspector General (I'Inspection GtMrale d'Etat- IGE) 136. The State Inspector General (1'Inspection Ge'ne'raled 'Etat- IGE) was established in1997andreportsdirectly to the Presidentof the Republic. Upto 1996there was a Ministryo fEconomic andFinancial Control (leMinistBre du ContrGleEconomique et Financier) that incorporated elements often found incentrally plannedeconomies. The mandate o f the IGEis broad and includes financial and operational oversight roles. 137. The IGEhas significant powers but limitedresources. There i s a staff of 25 TheInspector General of Finance (L'Inspection GtWrale des Finances -IGF) 138. The Inspector General of Finance (L'Inspection Ge'ne'raledes Finances -IGF) i s the largest o f central audit organizations. The IGFi s under the authority o f the Minister o fFinance. The mandate o f the IGFincludes carrying out audits inthe line departments; auditingofficials who have financial authority; making recommendations for 25 improvementsinpublic financial management and administration; andhas responsibilities as advisor to the Minister o fFinance on technical financial administration matters. 139. The IGFhas a staff o f some 50 professional and technical personnel. There are units o f the IGFinthe seven administrative regions; however, at present the regional unitsare not fully staffed (there is only one agent perregion). 140. The IGF carried out some 98 audits inFY2002. The audits are heavily skewed towards audits o frevenue related matters (72 audits) compared to expenditure related audits (26 audits). The IGFwork program i s also weightedmore towards central services and less on decentralized services. Analysis 141. An effective and credible independent government auditbodywith abroad mandate i s a feature o f a well functioning public financial management system. Such an audit body provides assurancethat funds included inthe budget, developed by the executive government andapprovedby the legislaturehave been usedfor the purpose intended. Assurance about the use o f funds for the purpose intended is broader than solely ensuringthat expenditures correspond to the funds that were budgeted. For example, it is not sufficient to simply ensure that the funds budgeted for teachers salaries are disbursedas teachers salaries, it i s also important to ensure that individuals who are paidteachers' salaries are actually teaching inthe schools. 142. InGuinea there isno credibleindependentgovernment audit bodywiththe mandate to provide this broad assurance that budgetedfunds are actually usedfor the intended purpose and that value for money i s obtained inthe process. 143. The reports of anindependent government audit body are also useful for providing information on government activities which can be usedby elected members o f National Assemblies, the mediaand the general public to help hold government officials to account. 144. The mandates o fthe three principal audit bodies (the IGE,the IGFand the chamber) that are the foundation o f the audit framework inGuinea need to be established with more precision and clarity. 145. The overall level ofresources (staff, equipment and operating expensed) inall three o f the principal audit bodies i s not sufficient to adequately fulfill existing mandates, let alone a broader assurancerole. 146. Itis not unusual inpublic financial management systems derivedfrom the classical French systemto have more emphasis placed on the ex ante controls than the ex post audit controls. This i s based on the assumptionthat the strong ex ante controls 26 which include the fundamental principles o f the clear separation o fthose officials who have the authority to make commitments o f expenditure (Z'engagement)from those who may approve the expenditure (Z'ordonnateur), together with the keyrole o f the accountant (le comptable) to ensure that the requiredprocessed have been followed and who has a personal liability ifthe procedures have not been followed. This model has many inherent strengths. Over the years, however, the strength o f the ex ante controls has eroded inmany countries. There have beenno cases inrecent history o f the chambre havingrequired public accountants (les comptables) to make restitution for income foregone or expenditure irregularly paid as provided for inthe law. The erosion o f such practices and the ex ante financial controls results ina need for a significant strengthening o f the ex post control structures. 147. There is no Guinean government audit oversight o fthe audits o f donor-financed projects that are a significant element o fpublic expenditures. Most donors require audits o fthe projects they finance. It would be appropriate that copies ofthe audit reports be provided for the review o f an appropriate Guinean government audit agency, inorder that government may be informed about financial mis-management and able to take appropriate remedial actions. 148. There is an absence o fclear proceduralmanuals for the principal audit bodies in Guinea. This may result ina lack o f consistency, inefficiency or effectiveness o f these bodies Recommendations 149. I n the shorter term there is need to strengthen the capacity of the three existing principal audit bodies in Guinea to ensure that they have the capacity in terms of staffing, equipment and operating budget to carry out their existing mandates 150. I n the medium term consideration should be given to establishing an independent national audit agency with a broad mandate which would enable it carry out many of the activities of the existing bodies. CORRUPTION 151. Corruption inpublic finances i s an issue to a greater or lesser extent inall countries. The control and reduction o f the effects o f corruption is a highpriority in lower income countries where the distortions o f income resultingfrom corruption have a more dramatic effect. Corruption inpublic finances (including government procurement) inNorthAmerica andEuropeis also aserious matter, however inthese areasthere are stronger institutions which act as a restraint and deterrent (e.g., strong investigative journalism as part o f an independent media functioning within an environment where there i s effective freedom-of-access-to-information legislation, active reviewsby an 27 unfettered political establishment, an assertive police andjudiciary, a robust challenge by civil society and greater opportunities for competitors to use these institutions). 152. There i s a widely heldperceptionamongst citizens that corruption has diminished the effectiveness o fpublic financial management inGuinea. Corruption can take many forms. Policemenmay supplement their income by systematically demandingcash payments for minor infractions. Politicians could benefit from influencing the award o f major contracts or creating a policy environment that provides exemptions from the payment o f taxes and customs duties. As with all perceptions it difficult ifnot impossible to draw conclusions or take appropriate mitigation measures. A corruption survey is currently being planned to probe the issue ingreater depth. 153. The value ofthe diversion o f funds by corrupt activities reduces the amount o f funds available for direct developmentactivities such as educational or health expenditure. Analysis 154. Guinea has taken some very positive andprogressive steps to begin addressing the corruption issue. 155. A National Anti-Corruption Committee (the Comite'National de laLutte contre la Corruption or CNLC) was established in2000 with a wide membership including members o fthe National Assembly, opposition members, civil servants andcivil society. 156. The Anti-Corruption Committee has made progress inheightening the awareness o f corruption issues and inprobing a number ofhigher profile cases. After some earlier rapid activity, institutional blockages appeared to slow down the progress o f some o f these cases within the legal-judicial system. 157. Some highprofile cases have beeninvestigatedby the Anti-Corruption Committee but, after make muchprogress, they appear to have been waylaid when they entered the judicial system. A number o f investigative cases appeared to have been suspended after political intervention. This hada discouraging effect on the activities of the Anti-Comption Committee. After a reassignment o f Ministerial responsibilities in early 2003 the apparent blockages appear to have lessened. 158. One of the lessons of the initial period o f the Anti-Corruption Committee is the need to establish a clearer definition o fthe roles andresponsibilities ofthe Anti- Corruption Committee, thejudicial police (lapolicejudiciaire), and the courts for criminal investigations o f alleged corrupt activities. 159. The government o f Guineawith support from the World Bankis inthe process o f carrying out a Corruption Survey. This survey is anticipated to be completed inlate 2003. The corruption survey will provide an indepth analysis of the extent that citizens 28 perceive that they have to paybribes or make informal payments for government services or for compliance with government laws and regulations. The contract for the Corruption Survey was signed inApril 2002 and the questionnaires and other survey tools have been finalized Recommendations 160. T h egovernment of Guinea should continue to give a high priority to the reduction of corruption inpublicfinancial management in Guinea. I n particular the government of Guinea should: 161. Continue to support the activities of the National Anti Corruption Committee. 162. Support the Corruption Survey and disseminate its results. 163. Clarifi the role and responsibilitiesfor investigating andprosecuting cases of alleged corrupt activities between theAnti-Corruption Committee, thejudicialpolice and thejudiciary and, ifnecessary, make appropriate changes to the relevant laws and regulations. Mariej.bolou C:~OC~ME-l\wb76090VOCALS-1\Temp\k.notes.data\GuineaCFAA vl0.0 final.doc September21,2004 12:43 PM 29