## cr17271

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---

### Summary of findings and recommendations
- Stock of verified arrears at end-FY 2016: UGX 2.7 trillion, equivalent to 3.2 percent of GDP.
- Increase in verified arrears FY 2015/16: over 90 percent relative to the prior FY.
- Verified arrears by reported years:
  - 2013/14: 1,434 (bn) — 2.03 percent of GDP
  - 2014/15: 1,390 (bn) — 1.78 percent of GDP
  - 2015/16: 2,701 (bn) — 3.20 percent of GDP
- Coverage gaps and discrepancies:
  - Reported stock does not fully cover budgetary central government (BCG)—sub-vented agencies; all categories of expenditure (salary and pensions); local government and the broader public sector.
  - Discrepancies between verified stock and annual financial statements reflect coverage, timing, and definition/recognition issues.
- Expenditure breakdown highlights:
  - Court awards and compensations constitute the largest component, ranging between 35–40 percent of the stock.
  - Personnel-related arrears (salary, pension, gratuity) have increased sharply: personnel costs increased from 1.6 percent to 25 percent over the last two years (text statement).
  - Aggregate share of development expenditure and goods and services (utilities, rent, other recurrent) account for 40 percent of the total stock (text statement).

### Detailed composition and selected verification figures (UGX billions)
- Increases in verified arrears FY 2014–16 (IAD, MoFPED):
  - Utilities: 2013/14 136.0; 2014/15 48.1; 2015/16 83.3; Increase 35.2
  - Rent: 25.4; 21.8; 18.9; Increase (-)2.9
  - Salary Arrears: 2.2; 13.1; 96.2; Increase 83.1
  - Pensions and Gratuity: 21.0; 26.5; 597.9; Increase 571.5
  - Other Recurrent: 183.7; 226.3; 353.7; Increase 127.5
  - Court Awards: 448.4; 477.7; 684.4; Increase 206.7
  - Compensation: 64.6; 88.4; 218.9; Increase 130.5
  - Contributions to Int. Org.: 139.0; 139.8; 167.5; Increase 27.6
  - Development: 377.7; 288.8; 363.1; Increase 74.2
  - Taxes / Other Statutory Deductions: 35.6; 59.0; 116.4; Increase 57.3
  - Total: 1,434.0; 1,389.9; 2,700.7; Increase 1,310.7

### Drivers of the recent increase in arrears
- Presidential pledge payment of pensions and gratuity for veterans accounts for 40 percent of the growth in FY 2015/16 (authority attribution in text).
- Other contributors: increase in court awards and compensations and rising interest on old court awards; recognition of arrears in newly-included votes (e.g., Kyambogo University and Uganda National Examination Board); arrears related to negotiated salary increases (e.g., Makerere University); arrears on account of taxes and statutory charges under tax holiday schemes and counterpart funds (e.g., VAT).
- Absence of an ageing analysis limits determination of new versus legacy arrears.

### Weaknesses in PFM processes and arrears management
- MoFPED lacks a comprehensive, transparent and credible arrears clearance strategy; current liquidation policy described as unrealistic and leading to recycling.
- Weaknesses across the PFM cycle:
  - Inadequate linkages of medium-term expenditure priorities with the annual budget.
  - Weak costing of development projects and monitoring of multi-year commitments.
  - Prevalent cash rationing regime.
  - Commitment controls cover only purchase-type items and not all expenditure categories.
- Definition, recognition and reporting issues reduce incentives for full disclosure.
- PEFA PI 4 scores: D in 2006, D+ in 2008, and C+ in 2012; budget credibility indicators show a downward trend.

### Existing mitigation steps and legal framework
- PFM Reforms Strategy 2014–18 addresses planning, IFMS implementation, procurement, audit, and monitoring/reporting of domestic arrears.
- Corrective actions taken:
  - Prepayment of utilities.
  - Verification of salary and pension payroll and linking with national ID.
  - Decentralization of salary and pension payroll to government entities.
  - Annual budget provision for clearance of arrears: historical UGX 80 billion, increased to UGX 111 billion from FY 2016/17.
  - Making arrears payment the first call on budget resources.
  - Adoption of semi-annual reporting of arrears.
  - Verification of stock by Internal Audit and Inspectorate Directorate (IAD).
- PFMA 2015 provisions:
  - Obligations on Accounting Officers to commit budgets on basis of annual cash flow plan; quarterly reporting of expenditure commitments.
  - Prohibition on AOs from obtaining goods and services on credit during budget execution from foreign companies.
  - Rules on virements; monitoring of multi-year commitments; submission of summary statement of commitments outstanding at end-FY.
  - Personal accountability of AOs; incurrence of unauthorized expenditures and commitments considered an offence.

### Recommendations: verification, reporting, clearance strategy, and controls
- Reconcile the verified stock of arrears with those reported in the annual financial statements.
- Issue consolidated guidelines on recognition, ageing, settlement and reporting of arrears.
- Complete verification for BCG and establish mechanisms for regular reporting and verification of arrears by local government and the broader public sector.
- Develop and publish an arrears clearance strategy including:
  - Prioritization criteria.
  - Liquidation policy.
  - Institutional responsibility for monitoring and clearance of arrears.
- Ensure line ministries provide for arrears clearance in their budgets and work plans.
- Improve recording of all commitments into IFMS, implement the contracts management module, and focus expenditure controls at the stage of commitment rather than at payment.
- Develop and implement the projects and contracts database including functionality for:
  - Full costing of projects.
  - Disaggregated future commitments.
- Conduct further due diligence and detailed classification of verified arrears to ensure a fair and open verification process.

---

### Arrears concentration and vote-level stocks (June 30, 2016)
- Top five votes account for 72.5 percent of the verified stock; around 91 percent of verified arrears are with only thirteen votes.
- Vote-level verified arrears (UGX and percent):
  - Ministry of Defense: UGX 718.4 Bn, 26.6 %
  - Ministry of Justice and Constitutional Affairs: UGX 684.7 Bn, 25.3 %
  - Uganda National Roads Authority: UGX 283.8 Bn, 10.5 %
  - Ministry of Finance, Planning and Economic Development: UGX 139.5 Bn, 5.1 %
  - National Medical Stores: UGX 137.2 Bn, 5 %
  - Makerere University: UGX 130 Bn, 4.8 %
  - Uganda Land Commission: UGX 124 Bn, 4.5 %
  - Ministry of Water and Environment: UGX 51.6 Bn, 1.9 %
  - Uganda Prisons: UGX 49.9 Bn, 1.8 %
  - Ministry of Foreign Affairs: UGX 47.3 Bn, 1.7 %
  - Office of the President: UGX 37.1 Bn, 1.3 %
  - Ministry of Local Government: UGX 31.5 Bn, 1.1 %
  - Uganda Police Force: UGX 27.3 Bn, 1 %
  - Other Entities (55): UGX 237.8 Bn, 8 %

### Reporting, verification, coverage and definitions — key issues
- Verification exercise initiated in FY 2015/16; IAD coordinated consolidated submissions certified by AOs, head of accounts and internal audit.
- Expenditure arrears exceed outstanding commitments in consolidated financial statements; variance ~20 percent for FY 2015/16 contributing to a qualified opinion.
- Table of AFS vs Verified (UGX billions):
  - 2013/14: AFS Total 1,387.8; Verified 1,434.0; Difference -46.2
  - 2014/15: AFS Total 1,325.1; Verified 1,389.9; Difference -64.8
  - 2015/16: AFS Total 2,254.3; Verified 2,700.7; Difference -446.4
- Factors limiting comprehensiveness:
  - Partial coverage of central government and autonomous agencies; 13 entities non-submission and under-reporting.
  - Local government not covered by IAD verification; AGO reports outstanding commitments UGX 25.9 billion (UGX 10.7 billion pension arrears) unverified and incomplete.
  - Partial coverage of public corporations (e.g., Uganda Railways UGX 14 billion; inter-entity arrears UGX 2.16 billion).
  - Omission of expenditure categories: salary, pension, gratuity arrears unclear in financial statements; tax refund arrears not systematically reported.
  - Absence of ageing analysis; mission ageing analysis suggests ~80% of court awards are more than one-year-old.
- Definition issues:
  - Current PSI MOU definition treats arrears as stock of unpaid bills at year-end and does not recognize arrears arising during the year.
  - International definition includes obligations not paid by the due date and includes interest/penalties.
  - Scattered MoFPED instructions differ from AFS categories, causing non-uniform understanding.
- In-year reporting:
  - Year-end recognition restricts in-year reporting; semi-annual reporting under PSI irregular; recommendation to consider quarterly reporting for high-risk entities.
- Institutional responsibilities:
  - Consolidated reporting and reconciliation currently with IAD; recommendation to restrict IAD to guidance/quality assurance and assign AGO responsibility for consolidation, monitoring clearance, reconciliation, and central database maintenance.

### Reporting and verification recommendations (with deadlines)
- Issue updated consolidated guidelines and clarify AGO responsibility (April 2017).
- Reconcile verified stock and consolidated financial statements for FY 2015/16 and publish report (April 2017).
- Include an ageing category in consolidated reports and annual financial statements (April 2017).
- Complete stock-taking and verification for BCG—sub-vented agencies and publish reports on MoFPED website (June 2017).
- Operationalize semi-annual reporting and move to quarterly reporting for high-risk entities (July 2017).
- Establish mechanisms for local government arrears reporting and verification (September 2017).
- Clarify responsibility and processes for monitoring public corporations (December 2017).

---

### Arrears clearance strategy — status, principles and five-step approach
- Current status:
  - Uganda lacks an official arrears clearance strategy; piecemeal liquidation is unrealistic; policy of arrears as first call leads to recycling.
  - Table: Verified arrears v/s Budget and Supplementary (UGX billion)
    - 2014/15: Verified 1434; Approved Budget 80; Supplementary 70; Total 150
    - 2015/16: Verified 1390; Approved Budget 84; Supplementary 0; Total 84
    - 2016/17: Verified 2700; Approved Budget 111; Supplementary 0; Total 111
- Concerns on proposed funding:
  - 2016/17 budget provision UGX 50 billion for pension arrears small relative to UGX 598 billion identified pension and gratuity arrears.
  - Proposal to pay UNRA arrears from “savings” may ignore multi-year commitments.
  - Proposal to pay UGX 684 billion in court awards over three to four years may not account for pipeline of new awards; ~25 percent of court award arrears value relates to interest as at June 30, 2016.
- Guiding principles for strategy:
  - Comprehensive, Transparent, Credible, Realistic, Verifiable.
- Recommended five-step approach: stocktaking, verification, classification, prioritization, liquidation.

### Stocktaking and verification design, governance and database
- Procedural elements before exercise:
  - Clear timetable with cut-off date; clear definition of arrears and unpaid bills; sanctions for non-reporting/fraud; coverage instructions for all central government votes, local government votes, government institutions, and statutory entities.
- Roles and sanctions:
  - Accounting Officers responsible for arrears data; AO certification and internal auditor verification required; sanctions for non-reporting/fraudulent/incomplete reporting.
- Verification rigor and validation:
  - Stringent checks on utility bills, sample reviews, confirmation with development partners, verification of interest and duplicate payments.
  - Records of rejected claims to be reported; contestable claims referred to independent arbitration.
  - Threshold-based additional validation and suggested validators by category (independent auditors for goods/works, government team for salaries/pensions, etc.).
- Consolidated database and temporary AGO unit:
  - Create consolidated database (Excel or Access) of all verified claims.
  - Establish temporary unit in AGO to manage database, administer centralized payments, monitor/report; unit to have specified life and report to high-level committee (e.g., PS/ST, Accountant General, Auditor General, Director of Budget, Debt Management Commissioner).
  - Publish agreed list of arrears on MoFPED website as a one-off exercise.
- Stocktaking/verification deadlines:
  - Establish temporary AGO unit and high-level committee (April 2017).
  - Complete comprehensive stock take and verification for all government arrears, focusing initially on BCG (March–September 2017).
  - Maintain records of rejected and contestable claims with quarterly independent arbitration review (March–September 2017).
  - Undertake additional validation and develop comprehensive database of independently validated arrears (October 2017).

### Classification, prioritization and data requirements
- Recommended database fields per claim:
  - (i) agency; (ii) creditor; (iii) age; (iv) budget expenditure classification; (v) currency; (vi) contractual terms — interest/penalties.
- Suggested prioritization criteria:
  - Socio-economic impact; Age; Cost (penalties/interest); Risk (legal/industrial); Currency (foreign-denominated in devaluation periods).
- Use of database analysis:
  - Review types, vintage, and spending agencies generating arrears to identify causes and inform remedial policy.

### Liquidation policy options, risks, administration and deadlines
- Policy objectives: decide full or partial honoring of claims; financing form and timeframe; designate payment administration responsibility.
- Risks:
  - Discounting/haircuts risk supplier price inflation, rent-seeking, increased litigation.
  - Netting discouraged due to lack of transparency and fraud risk.
- Settlement options:
  - Cash expenditure budget (may require multi-year spread).
  - Borrowing (compatible with MTDS; suitable for court awards but carries moral hazard).
  - Securitization (last resort; trades at discount; may encourage fiscal indiscipline).
- Court awards:
  - Many include significant interest; renegotiation or specific borrowing may be considered but risks moral hazard.
- Administration:
  - Temporary AGO unit envisaged to carry out payment duties; centralized payment provides control/transparency if well governed.
- Budgetary transparency:
  - Funds for clearance should be on a specific budget line; supplementary budget provisions must include documentation for Cabinet and Parliamentary approval; include schedule of payments in medium-term budget strategy.
- Liquidation and strategy deadlines:
  - Develop and disseminate comprehensive arrears clearance strategy including prioritization criteria and liquidation policy (June 2017).
  - Include a schedule of payments in the medium-term budget strategy 2018–21 (June 2017).

---

### Budget formulation, release, commitment controls and cash management — key findings
- Revenue performance FY 2010/11 to FY 2015/16 (UGX billion; % Perf.):
  - 2010/11 — Target 5034.37; Outturn 5114.15; % Perf. 102
  - 2011/12 — Target 6199.26; Outturn 6135.94; % Perf. 99
  - 2012/13 — Target 7284.46; Outturn 7123.69; % Perf. 98
  - 2013/14 — Target 8578.46; Outturn 7950.08; % Perf. 93
  - 2014/15 — Target 9576.59; Outturn 9713.56; % Perf. 101
  - 2015/16 — Target 11659.00; Outturn 11280.40; % Perf. 97
- Aggregate budget release for FY 2015/16: overall release 103.8 percent; absorption 98.6 percent.
- Decentralization and virements:
  - PFMA allows virements up to 10 percent of item’s budget.
  - MoFPED directive that arrears must be first call on budget funds is difficult to achieve and may undermine current-year implementation.
- Contingencies Fund:
  - PFMA 2015 stipulated allocation of 3.5 percent of appropriated annual budget; November 2015 amendment rescinded provision for supplementary expenditure, retaining allocation of one half of one percent for natural disasters.
  - No allocation made in the budget to resource the Fund.
- Issues by expenditure category (selected):
  - Salaries/pensions: IPPS improved; salary arrears rose due to backdating of incentive allowance to Makerere University with no budget provision.
  - Utilities: Ministry of Defense, Police and Prisons account for UGX 76.3 billion (91 percent) of utilities arrears UGX 83.4 billion as at June 30, 2016.
  - Court awards: >80 percent older than a year; contingent liability relating to ongoing court cases assessed at UGX 5.5 trillion.
  - Compensation: budget for compensation increased from UGX 44 billion in 2015/16 to UGX 99 billion in 2016/17, but agencies in arrears had virtually zero allocations.
  - Other Recurrent Transactions (ORT): ORT arrears almost doubled over two years; planned cut of consumptive expenses by approximately 50percent in the 2017/18 budget could exacerbate pressures.
  - Development projects/contracts: absence of projects/contracts database leads to under-costing; UNRA MTEF ceiling UGX 2.58 trillion is UGX 787 billion short of actual requirement UGX 3.37 trillion for 2017/18.
- Commitment Control System (CCS) and IFMS:
  - CCS does not cover all expenditure categories; IFMS configured to control purchase-type commitments only.
  - No pre-commitment process for salaries, pensions, utilities, contributions to international organizations and other non-purchase recurrent expenditures.
  - Contract payments usually committed only when payment certificate (invoice) received; contracts not committed at signing.
- Donor-funded projects:
  - Not transacted through IFMS; undermines central repository and commitment controls.
- Oversight and sanctions:
  - PFMA 2015 codifies fiscal discipline but enforcement weak; no recourse to sanctions despite infractions.

### Key recommendations and action deadlines (selected)
- Guidance to MDAs on incorporating arrears clearance in budget submissions and work plans (May 2017).
- Public awareness campaign: only authorized orders via IFMS accepted (June 2017).
- Implement contracts database/module in IFMS (July 2017).
- Enhance recording of all commitments into IFMS to enable commitment across all expenditure categories (July 2017).
- Explore cost saving measures (electricity consumption reduction, membership rationalization, rental reviews) (August 2017).
- Develop and implement projects and contracts database with full costing and disaggregated future commitments (December 2017).
- Continue engagement with development partners to bring donor projects into IFMS (Ongoing).
- Action plan highlights (selected from Appendix I):
  - Issue consolidated guidelines and clarify AGO responsibility (April 2017).
  - Complete stock-taking and verification and publish semi-annually on MoFPED website (June 2017).
  - Establish temporary AGO unit and high-level oversight committee for clearance management (April 2017).
  - Develop and disseminate comprehensive arrears clearance strategy and include schedule in MTBS 2018–2021 (June 2017).

### Definitions for major arrears categories (selected)
- Employee expenses: arrears if salary not remitted within the month due; new starters arrears if not paid within 60 days of commencing duties; staff claims arrears if not settled within 30 days of claim.
- Utilities: arrears if invoice not settled within 30 days of receipt.
- Rents: arrears if not paid by due dates in contract/lease.
- Recurrent goods and services: arrears if not settled by contract due date or within 30 days of invoice where no term specified.
- Construction works: arrears if not settled by contract due date or within 60 days of certificate/invoice where no term specified.
- Tax refunds: in arrears if unpaid longer than one month since refund claim lodged with URA.

---

### Court awards — statistics, ageing and observations
- Number of court awards in arrears: 477.
- Total arrears on court awards: UGX 681.7 billion.
- Top 33 awards account for 92.3 percent of total arrears on court awards.
- Observations:
  - Awards have interest rates varying between 6 percent and 30 percent; interest rates not shown in all cases.
  - Anomalies where cumulative interest exceeds original judgement amount noted; some items warrant further investigation (items 108, 426, 134 cited).
  - Criteria for partial payments unclear.
- Ageing of court award arrears (Number of Awards; Value UGX Bn; % of Total Value):
  - 0 to 90 Days: 8; 23.9; 3.5%
  - 90 to 180 Days: 9; 59.7; 8.8%
  - 180 to 365 Days: 11; 43.9; 6.4%
  - 1 to 2 Years: 83; 193.8; 28.4%
  - 2 to 3 Years: 72; 78.1; 11.5%
  - 3 to 4 Years: 61; 143.5; 21.1%
  - 4 to 5 Years: 28; 6.6; 1.0%
  - Above 5 Years: 205; 132.2; 19.4%
  - Total: 477; 681.7; 100.0%

---

*Fiscal Affairs Department, International Monetary Fund; aide memoire of East AFRITAC mission to MoFPED (January 9–20, 2017), Internal Audit Department and MoFPED figures as cited in the document.*

### 1. Summary of Findings and Recommendations __________________________________________________ 4

### 1. Summary of Findings and Recommendations

### Key Findings: magnitude and coverage of arrears
- Stock of verified arrears at end-FY 2016: UGX 2.7 trillion, equivalent to 3.2 percent of GDP.  
- Increase in verified arrears FY 2015/16: over 90 percent relative to the prior FY.  
- Verified arrears by reported years:
  - 2013/14: 1,434 (bn) — 2.03 percent of GDP  
  - 2014/15: 1,390 (bn) — 1.78 percent of GDP  
  - 2015/16: 2,701 (bn) — 3.20 percent of GDP  
- The reported stock does not fully cover budgetary central government (BCG)—sub-vented agencies; all categories of expenditure (salary and pensions); local government and the broader public sector.  
- Discrepancies exist between the verified stock and the annual financial statements; differences reflect coverage, timing, and issues with definition and recognition of arrears that do not encourage full disclosure.  
- Breakdown by expenditure category (June 30, 2016) shows arrears increased across all categories; court awards and compensations constitute the largest component, ranging between 35–40 percent of the stock.  
- Personnel-related arrears (salary, pension, gratuity) have increased sharply: personnel costs increased from 1.6 percent to 25 percent over the last two years (text statement).  
- Aggregate share of development expenditure and goods and services (utilities, rent, other recurrent) account for 40 percent of the total stock (text statement).  

### Detailed composition and changes (selected figures from verification)
- Table of increases in verified arrears (UGX billions) FY 2014–16 (source: IAD, MoFPED):
  - Utilities: 2013/14 136.0; 2014/15 48.1; 2015/16 83.3; Increase 35.2  
  - Rent: 25.4; 21.8; 18.9; Increase (-)2.9  
  - Salary Arrears: 2.2; 13.1; 96.2; Increase 83.1  
  - Pensions and Gratuity: 21.0; 26.5; 597.9; Increase 571.5  
  - Other Recurrent: 183.7; 226.3; 353.7; Increase 127.5  
  - Court Awards: 448.4; 477.7; 684.4; Increase 206.7  
  - Compensation: 64.6; 88.4; 218.9; Increase 130.5  
  - Contributions to Int. Org.: 139.0; 139.8; 167.5; Increase 27.6  
  - Development: 377.7; 288.8; 363.1; Increase 74.2  
  - Taxes / Other Statutory Deductions: 35.6; 59.0; 116.4; Increase 57.3  
  - Total: 1,434.0; 1,389.9; 2,700.7; Increase 1,310.7

### Drivers of the recent increase in arrears
- Implementation of the Presidential pledge relating to payment of pensions and gratuity for veterans accounts for 40 percent of the growth in FY 2015/16 (authority attribution in text).  
- Other contributors: increase in court awards and compensations and rising interest on old court awards; recognition of arrears in newly-included votes (e.g., Kyambogo University and Uganda National Examination Board); arrears related to negotiated salary increases (e.g., Makerere University); arrears on account of taxes and statutory charges to be paid by government under tax holiday schemes and counterpart funds under development projects (e.g., VAT).  
- Absence of an ageing analysis limits determination of how much of the increase is new versus legacy arrears.

### Weaknesses in PFM processes and arrears management
- MoFPED does not have a comprehensive, transparent and credible arrears clearance strategy; criteria for prioritization are not clearly set out, in part due to absence of ageing and other factors.  
- Current liquidation policy is described as unrealistic and leading to recycling of arrears given magnitude of the stock and escalating interest costs.  
- Arrears viewed as a historic problem, detracting attention from preventing new arrears.  
- Weaknesses across the PFM cycle contributing to accumulation:
  - Inadequate linkages of medium-term expenditure priorities with the annual budget.  
  - Weak costing of development projects and monitoring of multi-year commitments.  
  - Prevalent cash rationing regime.  
  - Commitment controls are weak and cover only purchase-type items and not all expenditure categories.  
- Issues with definition, recognition and reporting of arrears reduce full disclosure incentives.  
- PEFA assessment history reflects persistent problems: PI 4 (stock and monitoring of expenditure payment arrears) scored D in 2006, D+ in 2008, and C+ in 2012; budget credibility indicators have shown a downward trend over assessments.

### Existing mitigation steps and legal framework
- PFM Reforms Strategy 2014–18 addresses budget planning and presentation, IFMS implementation, procurement, internal and external audit, and monitoring/reporting of domestic arrears.  
- Corrective/mitigating actions already taken include:
  - Prepayment of utilities.  
  - Verification of salary and pension payroll and linking it with the national ID system.  
  - Decentralization of salary and pension payroll to government entities.  
  - Annual budget provision for clearance of arrears: UGX 80 billion (historical provision), increased to UGX 111 billion from FY 2016/17.  
  - Making arrears payment the first call on budget resources.  
  - Adoption of semi-annual reporting of arrears.  
  - Verification of stock of arrears by the Internal Audit and Inspectorate Directorate (IAD).  
- Public Finance Management Act, 2015 (PFMA) provisions highlighted:
  - Obligations on Accounting Officers (AO) to commit the approved budget on the basis of annual cash flow plan; quarterly reporting of expenditure commitments.  
  - Prohibition on AOs from obtaining goods and services on credit during budget execution from foreign companies.  
  - Clear rules on virements; monitoring of multi-year commitments including submission of a statement on multi-year commitments as part of the annual budget; submission of a summary statement of commitments outstanding for supply of goods, works and services for each vote at end-FY to be consolidated into annual financial statements.  
  - Personal accountability of AOs in budget execution; incurrence of unauthorized expenditures and commitments considered an offence.

### Recommendations: verification, reporting, clearance strategy, and controls
- Reconcile the verified stock of arrears with those reported in the annual financial statements.  
- Issue consolidated guidelines on recognition, ageing, settlement and reporting of arrears.  
- Complete verification for BCG and establish mechanisms for regular reporting and verification of arrears by local government and the broader public sector.  
- Develop and publish an arrears clearance strategy including:
  - Prioritization criteria.  
  - Liquidation policy.  
  - Institutional responsibility for monitoring and clearance of arrears.  
- Ensure line ministries provide for arrears clearance in their budgets and work plans.  
- Improve recording of all commitments into the Integrated Financial Management System (IFMS), implement the contracts management module, and focus expenditure controls at the stage of commitment rather than at payment.  
- Develop and implement the projects and contracts database including functionality for:
  - Full costing of projects.  
  - Disaggregated future commitments.  
- Scope for further due diligence and detailed classification of verified arrears to ensure the verification process is fair and open.

### Mission context, methodology and outputs
- Mission: East AFRITAC (AFE) TA mission to Kampala during January 9 to 20, 2017; team comprised AFE public financial management advisors and an expert.  
- Scope: review of stock-taking exercise for expenditure arrears; identification of weaknesses in budget planning and expenditure controls; advice on clearance strategy; meetings with selected entities to understand issues.  
- Outputs: practical guidance on management and prevention of expenditure arrears; advice on clearance strategy and constraining future accumulation; wrap-up workshop with MoFPED senior officials; this aide memoire.  
- Subsequent sections of the aide memoire (not reproduced here) cover: comprehensiveness of stocktaking (Section II); strategy to clear arrears over the medium term (Section III); review of practices across the budget cycle and measures to prevent new arrears (Section IV); Appendix I Action plan; Appendix II Definitions; Appendix III Note on court awards.

*Source: 1. Summary of Findings and Recommendations, aide memoire of East AFRITAC mission to MoFPED (January 9–20, 2017), Internal Audit Department and MoFPED figures as cited in the document.*

### 2016. The top five votes account for 72.5 percent of the verified stock and around 91 percent of

### cr17271 - 2016. The top five votes account for 72.5 percent of the verified stock and around 91 percent of

### Arrears concentration and vote-level stocks
- The top five votes account for 72.5 percent of the verified stock and around 91 percent of the verified arrears are with only thirteen votes.
- Table 4. Uganda: Arrears by Votes on June 30, 2016 — Total verified arrears
  - Ministry of Defense: UGX 718.4 Bn, 26.6 %
  - Ministry of Justice and Constitutional Affairs: UGX 684.7 Bn, 25.3 %
  - Uganda National Roads Authority: UGX 283.8 Bn, 10.5 %
  - Ministry of Finance, Planning and Economic Development: UGX 139.5 Bn, 5.1 %
  - National Medical Stores: UGX 137.2 Bn, 5 %
  - Makerere University: UGX 130 Bn, 4.8 %
  - Uganda Land Commission: UGX 124 Bn, 4.5 %
  - Ministry of Water and Environment: UGX 51.6 Bn, 1.9 %
  - Uganda Prisons: UGX 49.9 Bn, 1.8 %
  - Ministry of Foreign Affairs: UGX 47.3 Bn, 1.7 %
  - Office of the President: UGX 37.1 Bn, 1.3 %
  - Ministry of Local Government: UGX 31.5 Bn, 1.1 %
  - Uganda Police Force: UGX 27.3 Bn, 1 %
  - Other Entities (55): UGX 237.8 Bn, 8 %
  - Source: Internal Audit Department, MoFPED.

### Issues in reporting of arrears — verification, coverage, and definitions
- Verification exercise
  - The verification exercise started in FY 2015/16 and is the most comprehensive one carried out by MoFPED; internal audit units in line ministries verify arrear claims; PS/ST issued guidelines and reporting formats; submissions require certification by Accounting Officers, head of accounts and internal audit.
  - IAD in MoFPED coordinates and consolidates submissions and reconciles with outstanding commitments reported to the Accountant General’s Office (AGO).
- Persistent inconsistencies and variances
  - Expenditure arrears (a subset of accounts payable) are always greater than outstanding commitments in consolidated financial statements; variance increased to around 20 percent for FY 2015/16 and contributed to the qualified opinion on consolidated financial statements for FY 2015/16.
  - Table 5. Uganda: Arrears and Payables in Annual Financial Statements (UGX billions)
    - 2013/14: Arrears as reported in AFS — Pensions 122.4, Others 1,265.4, Total 1,387.8; Verified stock (IAD) 1,434.0; Difference -46.2
    - 2014/15: Arrears as reported in AFS — Pensions 216.7, Others 1,108.4, Total 1,325.1; Verified stock (IAD) 1,389.9; Difference -64.8
    - 2015/16: Arrears as reported in AFS — Pensions 561.4, Others 1,692.9, Total 2,254.3; Verified stock (IAD) 2,700.7; Difference -446.4
    - Source: Annual Report 2015/16, Office of Auditor General.
  - Remedial action to reconcile variations has not yet been taken by MoFPED.
- Factors limiting comprehensiveness and reliability of verified stock
  - Partial coverage of budgetary central government: verification concentrated on central government votes; some autonomous agencies included, others excluded; non-submission by 13 entities and under-reporting noted; IAD capacity constraints.
  - Incomplete coverage of local government: local government votes not covered; AGO consolidated statements for district local government and municipal councils for FY 2015/16 report outstanding commitments at UGX 25.9 billion (UGX 10.7 billion pension arrears) but this is unverified and incomplete.
  - Coverage of public corporations is partial; examples include Uganda Railways arrears UGX 14 billion and inter-entity arrears UGX 2.16 billion between Uganda Property Holdings Limited and KCCA; PFMA requires consolidated statements but consolidation was only partially done for FY 2015/16.
  - Omission of expenditure categories: lack of clarity leads to non-inclusion of salary, pension, gratuity arrears in financial statements; IAD verification incomplete for salary and pensions (decentralized to MDAs from July 2014 and July 2015 respectively); tax refund arrears not systematically reported.
  - Absence of an ageing analysis: IAD consolidated report does not analyze arrears by age; mission’s ageing analysis of court awards suggests around 80% are more than one-year-old.
- Definition and recognition issues
  - Current definition (per PSI MOU): arrears seen as stock of unpaid bills at year-end including utilities, rent, employee costs, other recurrent, court awards, compensation, contributions to international organizations, development, taxes and other deductions — does not recognize arrears arising during the year.
  - International definition quoted: “financial obligations that have been incurred by any level of the public sector for which payments have not been made by the due date...” (includes interest/financial penalties).
  - Frequent MoFPED instructions are scattered, differ from AFS categories, and lack clarity leading to non-uniform understanding across line ministries.
- In-year reporting
  - Recognition as year-end commitments restricts in-year reporting; MoFPED committed to semi-annual reporting under PSI but this has been irregular due to verification delays; recommendation to consider quarterly reporting for entities prone to arrears once definitions are clarified.
- Institutional responsibilities
  - Consolidated reporting and reconciliation currently rests with IAD; recommendation to restrict IAD to guidance and quality assurance and assign AGO responsibility for consolidation, monitoring clearance, reconciliation, and maintaining central database; Treasury Services under the AGO indicated as responsible in MoFPED work allocation.

### Recommendations on reporting, verification, and institutional roles (with deadlines)
- Issue updated and consolidated guidelines on recognition, settlement and reporting of payment arrears and unpaid bills including a clear and consistent definition of arrears; and clarify the institutional responsibility of AGO in reporting and monitoring of arrears and commitments (April 2017).
- Identify and reconcile the differences between the stock of verified arrears and those reported in the consolidated financial statements for FY 2015/16 and publish the report (April 2017).
- Include an ageing category for all reported and verified arrears and unpaid bills in the consolidated reports and the annual financial statements (April 2017).
- Complete the stock-taking and verification exercise for budgetary central government—sub-vented agencies and all categories of expenditure and publish reports on domestic arrears on the MoFPED website (June 2017).
- Operationalize semi-annual reporting of arrears, unpaid bills and commitments and move to quarterly reporting for entities that are more prone to accumulating arrears (July 2017).
- Establish mechanisms for regular reporting, monitoring and verification of arrears incurred by local government (September 2017).
- Clarify the responsibility and establish processes for regular monitoring and oversight of public corporations (December 2017).

### Developing an arrears clearance strategy — current status and principles
- Current status
  - Uganda lacks an official arrears clearance strategy; annual budget provisions have been made; MoFPED initiated negotiations to reduce/freeze interest on older court awards; arrears clearance strategy promised by June 2014 (Second PSI review) was not developed.
  - Piecemeal liquidation practice is unrealistic; MBTF does not make adequate explicit provision for clearance; policy of arrears being first call on a Vote’s approved budget leads to recycling of arrears.
- Table 6. Uganda: Verified Arrears v/s Original Budget and Supplementary (UGX billion)
  - 2014/15: Verified arrears 1434; Approved Budget 80; Supplementary 70; Total 150
  - 2015/16: Verified arrears 1390; Approved Budget 84; Supplementary 0; Total 84
  - 2016/17: Verified arrears 2700; Approved Budget 111; Supplementary 0; Total 111
  - Source: Budget Department and Internal Audit Department, MoFPED.
- Concerns on proposed funding
  - 2016/17 budget provision of UGX 50 billion for pension arrears (full amount in Q1) is small relative to identified pension and gratuity arrears of UGX 598 billion; criteria for payments unclear.
  - Plans to pay UNRA arrears from “savings” from reduction in new projects may not account for multi-year contract commitments.
  - Proposal to pay UGX 684 billion in court awards over three to four years may not account for pipeline of new awards; as at June 30, 2016, approximately 25 percent of court award arrears value is related to interest.
- Guiding principles for an effective strategy
  - Comprehensive — apply to all outstanding payments of central government, general government and public sector; initial focus on budgetary central government.
  - Transparent — public timetable and published prioritization criteria; one-off exercise to avoid moral hazard.
  - Credible — include measures to avoid new arrears; enforce accountability and penalties for non-compliance.
  - Realistic — budget and medium-term fiscal projections should provide for cash cost of clearance over multiple years if needed.
  - Verifiable — ensure verification of arrears so only valid claims are cleared.
- Recommended five-step approach: stocktaking, verification, classification, prioritization, liquidation.

### Stocktaking and verification process — design and governance
- Key procedural elements to set out before exercise
  - (i) clear timetable with cut-off date for inclusion of new arrears;
  - (ii) clear definition of arrears and unpaid bills;
  - (iii) sanctions for non-reporting and fraudulent claims;
  - (iv) clear instructions on coverage: all central government votes; all local government votes; all government institutions such as training institutions (with no separate vote); all statutory corporations, statutory funds or pension schemes (e.g., Uganda Communications Employees Contributory Pension Scheme).
- Roles and sanctions
  - Accounting Officers (AOs) must take responsibility for arrears data for ministries and subordinate agencies; sanctions for AOs and delegated officials for non-reporting, fraudulent, and incomplete reporting should be announced and enforced; AO certification and internal auditor verification required before submission to MoFPED.
- Verification rigor and additional validation
  - Stringent verification recommended: checks on utility bill reasonableness; sample review where no arrears reported; confirm development partner payments; verify interest calculations and detect duplicate payments.
  - Records of rejected claims should be reported; contestable claims referred for independent arbitration.
  - Threshold-based additional validation: consider a threshold above which all claims and random selection of smaller claims undergo independent tests for existence, validity, value, and age.
  - Suggested validators by category:
    - Goods, works and services contracts — independent auditors checking government and supplier records.
    - Salaries and pension — government team.
    - Court awards — government team ensuring no duplicate records and correctness of charge.
    - Utilities and rent — government team checking original documentation and suppliers’ records.
    - Compensation — independent auditors.
    - Contributions to international organizations — government team to confirm with organizations.
    - Taxes and other statutory payments — government team with checks against revenue agency records.
    - Social security and similar contributions — government team to check with institutions (e.g., NSSF).
- Consolidated database and temporary AGO unit
  - Create consolidated database (Excel or Access) of all verified claims; establish temporary unit in AGO to manage database, administer centralized payments and monitor/report on arrears management; unit to have specified life and report to a high-level committee (e.g., PS/ST, Account General, Auditor General, Director of Budget, Debt Management Commissioner) with clear publicly available mandate.
  - Once stocktaking complete, publish agreed list of arrears on MoFPED website and clarify this is a one-off exercise.
- Recommendation deadlines (stocktaking/verification)
  - Establish a temporary unit in AGO responsible for management of the clearance of the identified stock and a high-level committee for oversight purposes (April 2017).
  - Complete a comprehensive stock take and verification exercise to include all arrears across government, focusing initially on BCG and extending the scope to local government and the wider public sector (March-September 2017).
  - Maintain records of rejected and contestable claims with the latter being reviewed quarterly by independent arbitration (March-September 2017).
  - Undertake an additional validation exercise on some of the identified claims and develop a comprehensive database of independently validated arrears (October 2017).

### Classification, prioritization, and data requirements
- Database fields recommended for each arrear claim
  - (i) agency (MDA, State Corporation or local government);
  - (ii) creditor (employee, private supplier, social security agency);
  - (iii) age (based on invoice/due payment date);
  - (iv) budget expenditure classification;
  - (v) currency (local or foreign);
  - (vi) contractual terms — interest/penalties for non-payment.
- Prioritization criteria suggested
  - Socio-economic impact (e.g., protection of low-paid workers);
  - Age (older over newer);
  - Cost (claims accruing penalties and interest);
  - Risk (legal action, industrial action);
  - Currency (foreign-denominated claims may be prioritized in devaluation periods).
- Use of database analysis
  - Review types, vintage, and spending agencies generating arrears to identify underlying causes (poorly costed budgets, lower than approved releases, excessive rental commitments, poor contract management, non-commitment of known expenditure) and inform remedial policy.

### Liquidation policy options, risks, and administration
- Liquidation policy objectives
  - Decide whether legitimate claims honored in full or partial payments; determine financing form and timeframe; designate payment administration responsibility.
- Risks of discounting/haircuts and netting
  - Discounting can reduce immediate cost but risk future higher costs, supplier price inflation, rent-seeking, and increased litigation.
  - Netting (offsetting against tax obligations) discouraged due to lack of transparency and fraud risk.
- Settlement options and considerations
  - Cash expenditure budget — timeframe depends on fiscal space, may require multi-year spread, diverts resources from planned activities.
  - Borrowing — proceeds can settle arrears if compatible with MTDS; suitable for court awards but carries moral hazard.
  - Securitization — delays financing needs, phases impact, but should be last resort and comply with MTDS; usually trades at discount and can encourage fiscal indiscipline.
- Court awards and interest
  - Many court judgements include significant interest and litigation risk; renegotiation or specific borrowing may be considered but risks moral hazard.
- MDA-level financing and sanctions
  - Some countries require MDAs to finance payments as a percentage of outstanding stock from efficiency savings; while sanctioning fiscal indiscipline, it may encourage non-declaration of arrears if applied in Uganda without proving timely and adequate budget funding.
- Administration of payments
  - Liquidation policy should specify administrative responsibility; temporary AGO unit foreseen to carry out some payment duties; centralized payment from center provides control and transparency but may contravene accountability practices if not well governed.
- Budgetary transparency
  - Funds for arrears clearance should be assigned to a specific budget line; supplementary budget provisions must include documentation for Cabinet and Parliamentary approval; medium-term budget strategy should set out planned future-year expenditures.
- Recommendation deadlines (liquidation and strategy)
  - Develop and disseminate a comprehensive arrears clearance strategy including prioritization criteria and liquidation policy (June 2017).
  - Include a schedule of payments in the medium-term budget strategy 2018–21 (June 2017).

*Source: Internal Audit Department, MoFPED; Annual Report 2015/16, Office of Auditor General; Budget Department and Internal Audit Department, MoFPED (excerpts and recommendations as presented in the source text).*

### 51.      Within MoFPED the arrears problem is viewed largely as an historic issue, but this

### cr17271 - 51.      Within MoFPED the arrears problem is viewed largely as an historic issue, but this

### Arrears: current assessment and dynamics
- The arrears problem is viewed within MoFPED largely as an historic issue, but evidence indicates this is not the case.
- Large parts of the increase (pensions, court awards and salaries) relate to original incurrence of arrears in prior years that are only now being recognized.
- Lack of ageing analysis masks the true picture of newly accumulated arrears.
- Despite large “one-off” increases, FY 2015/16 still saw a worsening position on the accumulation of new arrears across most expenditure categories (see Table 3, Section I referenced in the source).
- The extent of the ongoing problem needs to be recognized and addressed by required actions discussed later in the section.

### Economic and operational impacts of arrears
- Arrears identification, verification and reporting is largely seen as part of the year-end process; in-year monitoring, management and liquidation receive less attention.
- Consequences of in-year accumulation of arrears:
  - Hinders implementation of the current year’s budget as funds are diverted from planned activities to arrears clearance.
  - Late payment of bills (even in-year) can result in interest charges and penalties.
  - Unpaid obligations lead to court action, incurring further court costs, interest and penalties.
  - Suppliers increase bid prices and front-load contracts with higher advance payments when late payments are the norm.
  - Suppliers unable to service bank loans may default, with potential spillovers to the banking sector.

### Root causes across the PFM cycle
- Accumulation of arrears emanates from shortcomings at various stages: budget formulation, budget release and budget execution (commitment and expenditure control).
- Subsequent sections review adequacy of budget provisions by expenditure category; performance of budget release; and assessment of commitment and expenditure control environment.

### A. Budget Formulation: revenue credibility and budgeting practices
- Revenue projections over recent years have been reasonably realistic. Table 7: Uganda: Revenue Performance FY 2010/11 to FY 2015/16 (UGX billion)
  - 2010/11 — Target 5034.37; Outturn 5114.15; % Perf. 102
  - 2011/12 — Target 6199.26; Outturn 6135.94; % Perf. 99
  - 2012/13 — Target 7284.46; Outturn 7123.69; % Perf. 98
  - 2013/14 — Target 8578.46; Outturn 7950.08; % Perf. 93
  - 2014/15 — Target 9576.59; Outturn 9713.56; % Perf. 101
  - 2015/16 — Target 11659.00; Outturn 11280.40; % Perf. 97
- At aggregate level the budget appears credible, with no chronic shortfalls in revenue; this enabled the full release (103.8 percent) of the budget in aggregate terms for FY 2015/16.

### Decentralization, virements and first-call directive
- Budgeting and spending on certain expenditure categories have been decentralized to Accounting Officers to promote accountability (examples include salaries and pensions previously managed centrally).
- PFMA allows virement between expenditure categories up to a maximum of 10 percent of the item’s budget, providing limited flexibility while restricting fundamental changes to original budget objectives.
- MoFPED directive that arrears must be cleared as the first call on budget funds:
  - Difficult to achieve in practice given current year implementation challenges.
  - Most entities do not budget specifically for arrears; treating arrears as first call undermines implementation of current work plans and may encourage off-system transactions.
  - Given magnitude of arrears, expectation they can be liquidated through ongoing annual budgets is unrealistic; outstanding stocks could consume annual provisions or entire vote appropriations.

### Contingencies Fund and budget resilience
- Constitution provides for a Contingencies Fund; no funds allocated in the budget.
- PFMA 2015 stipulated allocation to the Fund of 3.5 percent of the appropriated annual budget, with 85 percent for supplementary budget and 15 percent for natural disasters.
- November 2015 amendment rescinded provision for supplementary expenditure, retaining allocation of only one half of one percent for natural disasters.
- No allocation has been made in the budget to resource the Fund; this limits GoU’s ability to respond to disasters and unforeseen calls and could contribute to arrears if existing appropriations are diverted.

### Issues by expenditure category (selected findings)
- Salaries, pensions and gratuities
  - IPPS now provides a robust platform; has undergone cleansing and can support accurate budgeting for wage-related items.
  - Increase in arrears on salary payments during FY 2015/16 attributable to backdating of incentive allowance to Makerere University employees for which there was no budget provision.
  - Policy decisions with financial implications should be funded through the budget or via supplementary to prevent arrears accumulation.
- Utilities and rent
  - General improvements due to prepayment implementation for utilities; exceptions exist.
  - Ministry of Defense, the Police and Prisons account for UGX 76.3 billion (91 percent) of total utilities arrears of UGX 83.4 billion as at June 30, 2016.
  - These three votes also accounted for an increase during the year amounting to UGX 36 billion.
  - Budget provisions for electricity and water for these three votes remained static between FY2014/15 and FY2015/16, totaling UGX 31.5 billion and may be inadequate.
- Memberships to international organizations
  - Absence of consolidated information has led to inadequate provisions and arrears.
  - MDAs required to compile inventory lists; MoFPED has attempted to review and rationalize memberships.
- Court awards
  - Arrears from court awards have been rising; estimated that more than 80 percent are older than a year and 70 percent relate to civil cases (e.g., contracts for goods and services).
  - Only token budgetary provisions have been made in recent years, insufficient to clear existing stock.
  - Contingent liability relating to ongoing court cases assessed at UGX 5.5 trillion.
  - Decentralization of new court awards management to Accounting Officers may affect defense of government interests and contingent liability realization risk.
- Compensation claims (infrastructure projects)
  - Most pertain to Uganda Land Commission (ULC) and the MoD; smaller amounts at Rural Electrification Agency and Ministry of Lands.
  - Compensation costs are often not factored into project planning and budgets.
  - Budget for compensation increased from UGX 44 billion in 2015/16 to UGX 99 billion in 2016/17, but budgets for agencies in arrears were virtually zero.
- Other Recurrent Transactions (ORT)
  - ORT arrears almost doubled over the past two years.
  - MDAs report difficulty containing these expenditures within budget constraints without substantially reducing planned activities.
  - Planned cut of consumptive expenses by approximately 50percent in the 2017/18 budget could exacerbate pressures; MoFPED should provide advance guidance to MDAs to scale back work plans within budget ceilings.
- Development projects and contracts
  - Absence of a comprehensive projects/contracts database leads to under-costing and insufficient provision for land acquisition, compensation, counterpart costs and tax payments.
  - UNRA figures: MTEF ceiling UGX 2.58 trillion is UGX 787 billion short of the actual requirement totaling UGX 3.37 trillion for 2017/18.
  - Potential over-commitment against multi-year contracts could increase arrear stock at UNRA; significant scaling back may be necessary unless other funds are identified.
  - IFMS has a contracts ledger in the purchase management module but it is not used comprehensively nor integrated with procure-to-pay functionality (e.g., contract payment schedules do not automatically create draft commitments).
  - GoU plans to implement a projects database system as part of the public investment framework; improving project appraisal and selection is part of strengthening public investment management.
  - GoU has sought assistance from FAD and East AFRITAC for public investment management reform priorities.

### B. Budget Release: aggregate performance and variances
- ABPR 2015/16 highlights:
  - Aggregate overall release of GoU funds: 103.8 percent.
  - Absorption level: 98.6 percent.
- Majority of larger votes received close to full allocation or greater than 100% of original appropriation; some votes received significantly less (examples: Ministry of Agriculture 89.5 percent; Ministry of Gender 78.8 percent).
- Releases across expenditure categories show:
  - Priority categories like personnel emoluments are protected.
  - Shortfalls more common in GoU funded development expenditures.
- Table 8 excerpts (selected vote-level release percentages, 2015/16):
  - Defense total %: 81%
  - Finance total %: 92%
  - Agriculture total %: 74%
  - Education total %: 88%
  - Health total %: 112%
  - Energy total %: 13% (Energy total % appears as 13% in the source table)
  - UNRA total %: 99%
  - Makerere Univ. total %: 92%
  - Lands Comm. total %: 119%
- Quarterly budget releases are based on appropriated budget and annual work plans; proper profiling of funding needs based on work plans (not simple pro-rata) is vital for smooth implementation.
- Recommended practice: ongoing contracts should be committed at the start of each quarter against the release (funding budget) in IFMS.

### C. Cash management and commitment control
- Effectiveness of budget release depends on good cash management practices to ensure sufficient cash throughout the year and to move away from cash rationing and arrears accumulation.
- MoFPED steps to strengthen cash management:
  - Establishment of a new Directorate of Debt and Cash Policy.
  - Reviewing the role and function of the Cash Management Committee.
  - Finalization of guidelines for cash management in government.
- MoFPED should continue improving MDAs’ capacity to provide accurate cash flow projections in conformity with approved budgets.

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### 72.      A major shortcoming in stemming further accumulation of arrears is that the

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### Commitment Control System (CCS) and IFMS coverage
- Finding: The commitment control system (CCS) does not cover all expenditure categories.
- Finding: IFMS has been configured to control commitments against procurement of goods and services using the standard purchase order functionality in the purchase management module.
- Finding: There is no process for pre-committing other expenditure categories such as salaries, pensions, utilities, contributions to international organizations and other (non-purchase type) recurrent expenditures.
- Finding: Contract payments are only usually committed once the payment certificate (effectively the invoice) has been received.
- Finding: Commitments are not made in respect of counterpart contributions and obligations, including tax contributions.
- Analysis: An effective CCS requires comprehensive coverage of all expenditure categories so that an aggregate position of the overall commitment position is available; this information is particularly important for cash forecasting and management.
- Recommendation (functional): Ability to commit non-purchase type expenditures, e.g. as an expense order, is a standard feature of most IFMS solutions and should be implemented.

### Salary, utilities, rent, and membership contributions
- Salaries:
  - Finding: Salary arrears are exacerbated where MDAs recruit new staff without adequate budget provision.
  - Action: A Presidential directive stipulates that no new staff may be recruited without the necessary funding in the approved budget; strict enforcement would help control the wage bill and prevent new salary arrears.
  - Practice: Wage related payments should be committed in IFMS each month using the IPPS payroll date; speedier processing of payroll amendments in IPPS, including adding new recruits, will help reduce arrears.
- Utilities:
  - Finding: Committing utilities on a monthly basis would flag issues early and allow corrective action.
  - Practice: Commitments can be estimated based on past consumption and bills; where funds are inadequate remedial action can be taken.
  - Recommendation: Consider a public awareness campaign of thrift (posters to cut unnecessary waste, e.g. turning lights off, air-conditioners, etc.).
- Rent:
  - Finding: Rent arrears have reduced slightly over the past two years and the stock now stands at an average equivalent of three months’ rent.
  - Finding: Judiciary, defense, and police account for the bulk of rent arrears.
  - Practice: Lease agreements contain commitments and rent schedules can be produced for each vote and committed in IFMS monthly.
  - Recommendation: Review and rationalize rental rates; MoFPED could develop standards rental rates applicable across government.
- Contributions to international organizations:
  - Finding: Amounts and due dates for contributions are known and commitment in IFMS should be straightforward.
  - Practice: MDAs should maintain schedules of payments in work plans and requests for quarterly budget release.
  - Recommendation: MDAs should assess membership needs, unsubscribe from less important ones or seek reallocation in the budget.

### Other recurrent expenditures, purchases outside IFMS, and contract commitments
- Recurrent goods and services:
  - Finding: Controls on other recurrent expenditures are weak and resulted in an increase in arrears during 2016/17 of UGX 127 billion.
  - Large items include medical stores, maintenance costs and other consumptive costs.
  - Finding: These items are not being committed properly on a systematic basis in IFMS; if commitments were made and orders restricted to available releases, arrears would not be escalating.
- Manual purchase orders and bypassing IFMS:
  - Finding: Commitments are often made outside IFMS via manual purchase orders, bypassing system-based commitment controls.
  - Practice: Manual orders are often intended to be regularized later but commitments are often not posted as other commitments consume available budget releases.
  - Recommendation: AOs must cease issuing manual orders; only orders issued through IFMS are acceptable for payment.
  - Past action: A prior public awareness campaign notified suppliers that only system generated purchase orders would be accepted; a follow-up campaign is recommended.
  - Monitoring: Metrics reports from IFMS can identify bypassing (e.g., purchase order, goods received and invoice posted simultaneously).
- Contracts and projects:
  - Finding: Contracts are not committed into IFMS prior to realization of the obligation; the real obligation is incurred when the contract is signed but commitment is usually recorded only once invoice or stage certificate is received.
  - Practice: Ideally contracts should be committed in full upon signing; payments due are known from contract payment schedules and can be committed at the start of each quarter.
  - Finding: MoFPED does not have a comprehensive contracts database; IFMS PM module has functionality but is not being fully utilized and the system does not enforce entry of contract details.
  - Recommendation: Implement a complete list of contracts including payment schedules; proposals exist for a projects database—interlinkages between contracts and projects should be considered.
  - Finding: Project expenditures are only partially committed into IFMS ex-ante; associated project costs (compensation, counterpart funds, land acquisition, taxes) are rarely committed when obligations are incurred.
  - Practice: Use IFMS requisitioning functionality to reserve funds prior to issuing purchase orders to ensure project cost elements are properly committed.

### Donor-funded projects, oversight, and enforcement
- Donor-funded projects:
  - Finding: Donor funded projects are not currently transacted through IFMS and therefore do not go through system-based commitment controls.
  - Impact: This undermines IFMS as a comprehensive central repository for financial information and prevents enforcement of commitment controls, which may lead to continued accumulation of arrears.
  - Recommendation: MoFPED should continue to engage donors to bring donor funded projects into IFMS; progress depends on donors’ assessment of fiduciary risks.
- Oversight and sanctions:
  - Finding: Discipline in spending public resources is primarily a management issue; IFMS provides controls but these are not fully exercised and are often bypassed.
  - Finding: MoFPED lacks oversight and enforcement of controls that would instill improved fiscal discipline within MDAs.
  - Legal framework: The PFMA 2015 codifies and reinforces the importance of fiscal discipline.
  - Practice: MoFPED has been entering into performance contracts with Accounting Officers; sections 79 and 80 on sanctions are referred to in MoFPED instructions.
  - Finding: Despite instances of committing in excess of available budget and incurring new arrears, no recourse has been made to sanctions; without enforcement continued incurrence of arrears is likely.

### Key recommendations (as listed)
- Provide guidance to MDAs on incorporating provisions for arrears clearance in their budget submissions and annual work plans (May 2017).
- Implement the contracts database or contracts management module in IFMS (July 2017).
- Enhance recording of all commitments into IFMS to enable commitments to be made for all expenditure categories and focus on expenditure controls at the stage of commitment and not payments (July 2017).
- Undertake a new public awareness campaign notifying suppliers that only authorized orders processed through IFMS will be accepted for payment (June 2017).
- Explore and establish options for implementing cost saving measures e.g. reduction of electricity consumption, rationalization membership with international organizations, reviewing rental agreements (August 2017).
- Develop and implemented the projects and contracts database including functionality for full costing of projects and disaggregated future commitment (December 2017).
- Continue to engage development partners for bringing donor funded projects into IFMS (Ongoing).

### Action Plan highlights (selected items from Appendix I)
- Reporting of expenditure arrears:
  - Issue updated consolidated guidelines on recognition, settlement and reporting of payment arrears; clarify AGO responsibility (April 2017).
  - Identify and reconcile differences between stock of verified arrears and those reported in consolidated financial statements for FY 2015/16 (April 2017).
  - Complete stock-taking and verification exercise for budgetary central government – sub-vented agencies and publish semi-annually on MoFPED website (June 2017).
  - Operationalize semi-annual reporting of arrears and commitments and move to quarterly reporting for entities more prone to accumulating arrears (July 2017).
- Developing an arrears clearance strategy:
  - Establish a temporary unit in AGO for clearance management and a high-level oversight committee (April 2017).
  - Develop and disseminate a comprehensive arrears clearance strategy including prioritization criteria and liquidation policy (June 2017).
  - Include a schedule of payments in the medium-term budget strategy 2018-2021 (June 2017).
- Preventing accumulation of arrears:
  - Provide guidance to MDAs on incorporating provisions for arrears clearance in budget submissions (May 2017).
  - Undertake new public awareness campaign on authorized IFMS orders (June 2017).
  - Implement the contracts database/module in IFMS (July 2017).
  - Enhance recording of all commitments into IFMS (July 2017).
  - Develop and implement projects and contracts database with full costing and disaggregated future commitment (December 2017).
  - Continue engagement with development partners to bring donor projects into IFMS (Ongoing).

### Definitions for major expenditure arrears (selected precis)
- Employee expenses:
  - Payments are in arrears where payments to existing employees are not remitted within the month for which those salaries are due.
  - Payments to new starters are in arrears if not paid within 60 days of the employee commencing duties.
  - Staff claims are in arrears if not settled within 30 days of claim being lodged.
- Utilities:
  - Payment is in arrears if invoice has not been settled within 30 days of it being received.
- Rents:
  - Rent payments are in arrears where not paid by due dates specified in contract/lease.
- Recurrent goods and services:
  - Payments are in arrears where not settled by the due date specified in the supply contract, or within 30 days of receiving the invoice where no term specified.
- Construction works:
  - Payments are in arrears where not settled by the due date specified in the construction contract or within 60 days of receiving the certificate or invoice in absence of specific term.
- Tax refunds:
  - Amounts unpaid for longer than one month since claim for refund was lodged with URA are in arrears.

### Court awards arrears (Appendix III)
- Data provided by Internal Audit Department:
  - Number of court awards in arrears: 477.
  - Total arrears on court awards: UGX 681.7 billion.
  - Table summary (top 33 awards):
    - Total top 33 Awards: 519,234,572,921    3,433,777,591   177,386,382,874            700,054,733,386      70,764,039,112     629,290,694,274
    - Overall Total Arrears 681,651,864,063
    - Largest Items as Percentage of Total Arrears92.3%
- Observations on court awards:
  - The largest 33 awards account for 92.3 percent of the total arrears on court awards.
  - These awards have interest rates varying between 6 percent and 30 percent; interest rates are not shown in all cases.
  - The criteria used for partially paying some of the arrears is not clear from the information provided.
  - Anomalies where cumulative interest exceeds the original judgement amount warrant further investigation (notably items 108 and 426); item 134’s high cumulative interest may be explained by interest rates of 25 percent and 6 percent over six years.
  - The table total differs slightly from the reported arrears owing to errors in the listings provided in the reported arrears.
- Ageing analysis of court award arrears (Table A.2):
  - 0 to 90 Days: Number of Awards 8; Value (UGX Bn) 23.9; % of Total Value 3.5%
  - 90 to 180 Days: Number of Awards 9; Value (UGX Bn) 59.7; % of Total Value 8.8%
  - 180 to 365 Days: Number of Awards 11; Value (UGX Bn) 43.9; % of Total Value 6.4%
  - 1 to 2 Years: Number of Awards 83; Value (UGX Bn) 193.8; % of Total Value 28.4%
  - 2 to 3 Years: Number of Awards 72; Value (UGX Bn) 78.1; % of Total Value 11.5%
  - 3 to 4 Years: Number of Awards 61; Value (UGX Bn) 143.5; % of Total Value 21.1%
  - 4 to 5 Years: Number of Awards 28; Value (UGX Bn) 6.6; % of Total Value 1.0%
  - Above 5 Years: Number of Awards 205; Value (UGX Bn) 132.2; % of Total Value 19.4%
  - Total: Number of Awards 477; Value (UGX Bn) 681.7; % of Total Value 100.0%

*Fiscal Affairs Department, International Monetary Fund*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17271.pdf_