REPUBLIC OF THE MARSHALL ISLANDS PUBLIC FINANCIAL MANAGEMENT PERFORMANCE REPORT AND PERFORMANCE INDICATORS FINAL REPORT Alfred Alfred, Jr, MoF Kayo Yamaguchi-Kotton, MoF Boris Anni, MoF Clarence Samuel, MoF Itibo Tofinga, MoF Ron Hackett, PFTAC Sanjesh Naidu, PIFS Mary Betley, Consultant October 2012 Republic of the Marshall Islands – PEFA Public Financial Management Performance Report Page ii Acknowledgements The PEFA assessment has relied on the generosity of a large number of stakeholders in providing information and documents to assist in assessing the indicators in this report, not to mention giving up their time to meet with members of the team. The assessment also benefited from discussions during both the opening and the closing stakeholder consultations. The team would like to thank all of those who participated in the assessment in any way. Special thanks go to the Minister of Finance, the Financial Secretary, his Assistant Secretaries, and the staff at the Ministry of Finance, and to Development Partners for financial and logistical support during the exercise. Notes 1. Fiscal year: 1 October-30 September. Fiscal year 2010 refers to 1 October 2009 - 30 September 2010. 2. Assessment period for many of the indicators covers fiscal years (FY) 2008/09 (FY09), 2009/10 (FY10), and 2010/11 (FY11). 3. Currency Unit: US dollar (US$). Republic of the Marshall Islands – PEFA Public Financial Management Performance Report Page iii Republic of the Marshall Islands – PEFA Public Financial Management Performance Report Page iv Table of Contents MAIN REPORT Acronyms and Abbreviations .................................................................................................viii Summary Assessment .............................................................................................................viii 1. Introduction ........................................................................................................................ 1 2. Background ......................................................................................................................... 2 2.1 Description of Country Economic Situation .............................................................................. 2 2.2 Budgetary Outcomes ................................................................................................................. 3 2.3 Legal and Institutional framework for PFM .............................................................................. 4 3. Assessment of PFM System, Processes and Institutions .................................................... 6 3.1 Budget Credibility ..................................................................................................................... 6 3.2 Transparency and Comprehensiveness .................................................................................... 10 3.3 Policy-based Budgeting ........................................................................................................... 21 3.4 Predictability and Control in Budget Execution ...................................................................... 25 3.5 Accounting, recording and reporting ....................................................................................... 43 3.6 External scrutiny and audit ...................................................................................................... 46 3.7 Donor Practices ........................................................................................................................ 51 4. Government Reform Process ............................................................................................ 54 4.1 General Description of Recent and On-Going Reforms .......................................................... 54 4.2 Institutional Factors Supporting Reform Planning and Implementation ................................. 55 ANNEXES Annex A: List of stakeholders met Annex B: List of documents consulted Annex C: Evidence used for indicators Annex D: Background data for PI to PI-3 Annex E: Terms of reference Republic of the Marshall Islands – PEFA Public Financial Management Performance Report Page v Republic of the Marshall Islands – PEFA Public Financial Management Performance Report Page vi Acronyms and Abbreviations ADB Asian Development Bank BCC Budget Co-ordinating Committee CAP Comprehensive Adjustment Program (Government expenditure control program) CG Central Government CM Cabinet Minute (documenting a decision taken by Cabinet) CRP Comprehensive Recovery Plan CP Cabinet Paper (Proposal presented to Cabinet) EPPSO Economic Policy, Planning and Statistics Office (under the President’s Office) FY Fiscal year GPPO Government Public Procurement Office GRMI Government of the Republic of the Marshall Islands IAS International Accounting Standards IFRS International Financial Reporting Standards IMF International Monetary Fund ISSAI International Standards for Supreme Audit Institutions KALGOV Kwajalein Atoll Local Government LG Local government LRA Land Registration Authority MALGOV Majuro Atoll Local Government MDA Management Discussion and Analysis (as used in GRMI audit reports) MDA Ministries, Departments and Agencies (as used in PEFA Guidelines) MEC Marshall Islands Electricity Company MICNGOs Marshall Islands Council of NGOs MIRC Marshall Islands Revised Code MISSA Marshall Islands Social Security Administration MoF Ministry of Finance MTBIF Medium Term Budget and Investment Framework NDP National Development Plan NA Not applicable N/A Not available NR Not rated OCI Office of Compact Implementation ODA Official Development Assistance (as used by OECD-DAC) OIDA Office of International Development and Assistance (co-division, with Budget, of MoF) OIEDF Outer Islands Economic Development Fund PA Personnel Action PC Procurement Code PEFA Public Expenditure and Financial Accountability PFM Public Financial Management PFM-PR Public Financial Management Performance Report PFTAC Pacific Financial Technical Assistance Centre (of the IMF) PIFS Pacific Islands Forum Secretariat PO Purchase order PR Purchase requisition PSC Public Service Commission PSCROP Public Sector Comprehensive Reform Program RMI Republic of the Marshall Islands RMITC Republic of Marshall Islands Trust Company (Ship Registry) ROC Republic of China (Taiwan) SN Sub-national (government) SOE State-owned enterprise SOP Standard Operating Procedures SPC Secretariat of the Pacific Community TA Technical assistance TCMI Trust Company of the Marshall Islands, Inc. (Ship Registry) TRAM Tax and Revenue Reform and Modernisation Commission WAM Waan Aelon in Majel (Canoes in the Marshall Islands) – NGO Republic of the Marshall Islands – PEFA Public Financial Management Performance Report Page vii Summary Assessment The purpose of this assessment has been to evaluate the current status of the Public Financial Management (PFM) systems in the Republic of the Marshall Islands (RMI) in terms of the main systemic strengths and weaknesses and in accordance with the PEFA framework. It is important to underline that the purpose has not been to assess different institutions or responsible individuals in the Government but to focus on the PFM systems themselves. (i) Integrated assessment of PFM performance The PFM system is centered on a basic legislative framework for financial management, summarized in the RMI Code. There is not yet in place an up-to-date set of financial management regulations to accompany the Financial Management Act. In general, there is a lack of accompanying regulations to support PFM legislation (e.g. in taxation, procurement, and expenditure management), and this serves to undermine the overall clarity and comprehensiveness of the underlying processes. Measured along the 6 core dimensions of public financial management, the PFM systems in the Marshall Islands may be summarized as follows: Credibility of the budget Over the last three years, domestic revenue receipts were for the most part higher than projected in the budget, reflecting an appropriately conservative approach. In line with accurate domestic revenue projections and stable levels of external support (mainly reflecting the stability of Compact and other US funding flows), aggregate expenditures over the past three years have been largely in line with the levels planned in the budget. However, at the level of line ministries and agencies, actual expenditures have differed significantly from those planned in the budget. This is likely to reflect weaknesses in expenditure controls, as well as unclear rules for moving expenditures between appropriations, both of which were found by the assessment. Comprehensiveness and transparency of the budget Limited fiscal information is available to the public in the form of audited annual financial statements and compliance audits available on the Nitijela’s website. In addition, while the PAC hearings are open to the public, their reports on the subject of the hearings (i.e. the audit reports) are not published. However, in the absence of widespread use of websites (e.g. for MoF), it has been difficult to provide easy access for the public to key fiscal information. In particular, it is not possible for members of the public to get copies of the budget documents or audit reports without specifically requesting a copy from government staff. In addition, the budget documents are not comprehensive, with key information lacking, including macroeconomic assumptions and fiscal policy objectives, and at least a three-year run of budget