Excessive Line-Item Control: FMIS tail wags the dog

The introduction of automated financial management information systems (FMIS) has, in some developing countries, had a remarkable unintended negative effect – namely, to set in a concrete an excessively detailed level of central line-item control over spending ministry budgets. This is a major obstacle to a successful introduction of performance budgeting in those countries. It also prevents ministries from using their resources in an efficient way even under traditional budgeting systems, and contributes to under-execution of budgets.

The issue at stake here is the extent to which the center – be it the parliament or the ministry of finance – should control the way in which spending ministries allocate their budgets between types of inputs. At one end of the contemporary international spectrum lie advanced OECD countries like France, Australia and the UK which control on only a handful of broad aggregates such as employee compensation, expenditure on goods and services, and capital expenditure. The countries I am talking about lie at the other extreme. They subject spending ministries to central control over how much they can spend on postage stamps, stationary, training, books and magazines, and a host of other input categories. In such countries, it is forbidden to spending ministries to move items from one of these categories to another without obtaining the prior approval of the ministry of finance.

It is paradoxical that the introduction of FMISs has, in some of these countries, played a key role in aggravating the intrusiveness and detail of line-item controls.

The problem lies in a confusion between accounting and central control. For internal management purposes each ministry needs its accounting system to record its expenditure in detailed economic classification categories. It needs to know, for example, the break-down of its expenditure on goods and services expenditure between detailed categories such as stationery, utility supplies, consultancy services and training. Because accounting is a core function of an FMIS, it follows that the FMIS must recognize expenditure at the most detailed level of the economic classification.

However, for the purposes of central line-item controls of expenditure, most countries use much more aggregated categories. For example, they control the global amount of expenditure on goods and services by each spending ministry, but not the detailed breakdown of that expenditure. Under the performance budgeting systems adopted in the most advanced OECD countries, there has been a particularly radical reduction in central line-item controls. Countries like France, Australia and the UK, for example, impose line-item control on only a handful of aggregates such as employee compensation, current expenditure and capital expenditure. But this does not mean that they have ceased recording the detailed economic classification of expenditure in their accounting systems. Accounting and control are too entirely different things.

The problem is that, in some countries, the fact that the FMIS needs to record expenditure on such a detailed basis has been misinterpreted as implying – or requiring – that the center should control expenditure at the same detailed level. When the budget is approved, extremely detailed budget estimates which have been entered into the FMIS are treated as “control totals” with which the spending ministries must comply. Reflecting this, the FMIS is configured in such a manner that no funds may be moved from one category to another without prior central approval.

Everyone knows that the move to performance budgeting should be accompanied by a major reduction in line-item controls. But even in a traditional budget, it makes no sense for the center to control expenditure at a very detailed line-item level. Why, for example, would the center wish to prevent spending ministries shifting money between, say, postage stamps and stationery, or between internal training and external training? Particularly since such detailed control necessarily reduces the capacity of spending ministries to choose the most efficient way of producing services. Yet this type of detailed control is exactly what is happening under FMIS systems in the form that they have been introduced in certain countries.

In some of these countries, it seems to be assumed that this is the only way that an FMIS can be designed. It does not appear to be fully understood that an FMIS is merely a tool, and can be readily configured so as to operate on the basis of graduated rules governing transfers (“virements”) between one category and another. In other words, it is easy to building to the FMIS the capacity of spending ministries to make certain transfers at their own discretion without any need for central approval, while requiring central approval for certain other types of transfer.

Not only does excessively detailed line-item control interfere with efficient management, but it also leads to under-execution of the budget. The requirement to obtain prior central approval before transferring funds, taken together with the fact that such approvals take time to obtain, commonly means that – particularly at the end of the year – spending ministries have multiple small pools of money which are marooned in certain line item categories and cannot be spent. For example, there may be unspent money in the internal training budget which, although it could have been used advantageously to purchase additional fuel, is left unspent because it has not been possible to obtain central approval for the transfer of the funds prior to the end of the financial year. In many developing countries, under-execution of the budget is a significant problem, and this type of over-detailed line-item control is a major contributing factor.

The inappropriate design of FMISs is, in some of these countries, symptomatic of another problem – that the accountants rather than the budget directorate call the shots, with budgeting ending up serving accounting rather than the other way around.

 

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