Financial Reform

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The Problems

It was envisaged that personnel and financial reform would be undertaken together but this did not happen. There was a greater reluctance to change the control based human resources regime. However, the Financial Secretary decided to start the financial reform process by using an independent consultant to diagnose what was wrong with our current financial system. This involved 50+ interviews with politicians and members of the civil service.

The key conclusions from the diagnosis fell into four main areas:

  1. Weak strategic management and prioritisation
    • Government's strategic policy priorities not clear
    • Little linkage between policy and plans and budgets
    • No criteria for assessing competing expenditure bids resulting in confusion and uncertainty
    • Ministerial and Cabinet involvement in priority setting too late in the process if at all
    • Decision makers have little information to allocate scarce resources to the areas of greatest need
    • Cuts at the end of budget process with no knowledge on how service delivery will be affected
    • Departments operate in isolation-little policy integration and coordination
  2. Poor accountability/performance mechanisms
    • Roles and accountabilities of a Minister, Permanent Secretary, Head of Department NOT defined and unclear.
    • Confusion in the day to day operation of government - "who is responsible for what"
    • No mechanisms to establish and enforce top down performance
    • D Plans process ineffective: Objectives not linked to expenditure allocations; stated objectives could not be achieved; nobody can be held accountable as funding not always available and it is difficult to measure whether the objectives had been achieved.
    • Statutory authorities and NGOs receive grants; no information what services these funds are used to provide
    • Performance expectations for individuals based on behaviors; not linked to Government priorities
    • Performance increments never refused; no reward for good performance nor sanction for poor performance
    • No annual reporting that is linked back to performance expectations
    • Managers not allowed to appoint, remunerate or discipline staff; unfair to hold them accountable for agency performance
  3. Efficiency and productivity issues
    • Duplication of effort - "everyone is doing everything"
    • No incentives on managers to operate more efficiently or reduce costs; no flexibility allowed to change input mix
    • Strong incentive to spend the budget
    • No barriers to getting additional funds
    • Delays in bill payments resulting in suppliers requiring up front payments
    • Poor cash management
    • Poor productivity resulting from central vehicle services not responding on time
  4. Budget process issues
    • Poor budget process, no directions given to departments
    • No information on government revenues
    • Huge difference between proposed Government expenditure and revenue
    • Horse trading
    • No departmental ownership of the final budget
    • Little fiscal discipline; contingency warrants and supplementary appropriations common place
    • Single year budget decisions not viewed in medium term context
    • No capital replacement policy, assets maintained at great cost when way past their working life
    • Capital Projects not linked to operating costs

The diagnostic conclusions reflected Caymanís situation which was typical of an input, control-based financial management system. Diagnosis confirmed that a performance oriented financial management system was what Cayman needed.

The Model

The Cayman Islands Government adopted a performance system; the key features of the system were:

  • Explicit focus on results
    • Outputs and outcomes
  • Improved financial measurement
    • accrual accounting
  • Improved transparency
    • regular forecasting and reporting
  • Improved accountability
  • Greater delegation of input authority to managers

The Design

The design was based on the diagnosis. It was developed by a team of civil servants from Finance, Budget, Treasury, Internal Audit, Audit Office, two Permanent Secretaries and three Heads of Department at a 3 day workshop. A Design Document was considered and approved by Cabinet. The design was based around four design objectives

  • Clarify roles
  • Redefine performance to focus on results
  • Establish effective accountability mechanisms
  • Develop stronger strategic processes linked to the budget

The design was translated into the Public Management & Finance Law 2001 and Financial Regulations and Accounting policies. It set a three-year strategic planning & budgeting horizon, legislative principles for responsible fiscal management and the use of GAAP for financial information and the requirement to publish a Pre-election Economic & Fiscal Update.

The Implementation

A full-scale implementation was decided rather than on a pilot basis with implementation parameters to be staged over 3 years:

  • 2003 financial year - Output Budgeting & Reporting (cash basis)
  • 2004 financial year - Accrual Budgeting & Reporting
  • 2005 financial year - Decentralisation of Input Authority)

Responsibility for implementation was:

  • Budget Process and Reporting - Peter Gough
  • Accrual Accounting & IRIS Modification- Jim Brough
  • Cash Management - Sonia McLaughlin
  • Agency Management - Marco Archer
  • External Accrual & Output Auditing - Nigel Esdaile
  • Internal Accrual & Output Auditing - Anne Owens

The financial reform was driven from the new budget process with new documentation new appropriations and new accountabilities.

The Budget

There was a significant change to the budget documentation:

Strategic Policy Statement (SPS):

  • Outcome Goals (Broad and Specific)
  • Economic Overview
  • Financial Targets (Budgetary Sector only; for 3 years)
  • Financial Budget Parameters (Ministries/Portfolios)
  • Capital Limits

Annual Plan & Estimates (AP&E):

  • Overview of outcomes and key policy actions
  • Legislative measures
  • Output Groups
  • Transfer Payments
  • Executive Expenses
  • Ownership actions
  • Financial Forecasts
  • Schedule of Appropriations
  • Guarantees
  • Changes to Coercive Revenue
  • Financial Statements

Annual Budget Statement (ABS):

  • Strategic Goals and Objectives
  • Outputs to be delivered
  • Nature and Scope of Activities
  • Ownership Performance Targets
  • Summary Cash Financial Statements
  • Summary of Establishment

There have been changes to the initial design which have weakened accountability and reduced efficiency and incentives to reduce costs. Quarterly output reporting has been suspended which has reduced accountability of the Chief Officers to justify why they havenít produced the services they have been paid to deliver. Charging entities interest on their capital investments was never implemented this means that the cost of delivering services are understated. The same applies to the withdrawal of interagency charging - the true costs of services are now hidden.

Last Updated 2013-09-19