## _cr10341 (PEFA assessment - Timor-Leste) ## Source details **Canonical URL:** [_cr10341 (PEFA assessment - Timor-Leste)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10341.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10341.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10341.pdf.json) --- ### Preface and scope - In 2009 the Ministry of Finance of Timor-Leste (TLS) requested the IMF Fiscal Affairs Department (FAD) to lead a Public Expenditure and Financial Accountability (PEFA) assessment to evaluate PFM system strengths and weaknesses and provide a performance benchmark. - The PEFA assessment was part of a diagnostic package that included a fiscal ROSC against the IMF’s Code of Fiscal Transparency. - The PEFA exercise used the standardized PEFA indicator set and was led by the IMF with full participation of the MOF, the World Bank (WB), and the Asian Development Bank (ADB). The PEFA team visited Dili in May–June 2010. - Assessment period: performance over 2007–10, with comparison to an initial 2007 assessment. ### Methodology and missions - IMF FAD visits: January–February 2010 (two weeks) and May–June 2010 (two weeks). - Activities: collect data for fiscal ROSC and PEFA; prepare ROSC; train MOF/donor staff on PEFA; set up PEFA working group for self-assessment; finalize PEFA; present results; discuss inputs to a PFM reform strategy. - Information sources: in-depth interviews, publicly available data/reports, meetings with MOF, line ministries, international agencies, civil society, and parliament. ### Country background and fiscal context - Statehood: TLS became a state on May 20, 2002. - Population: around 1 million; about half below the age of 17; demographic projections indicate the population will triple by 2050. - Non-oil real GDP growth: almost 13 percent in 2008. - Poverty: 50 percent of the population living in poverty in 2007. - Agriculture: makes up 30 percent of non-oil GDP; 80 percent of the population dependent on agriculture, forestry, and fisheries. - Petroleum Fund: accumulated financial assets of US$5.3 billion by the end of 2009. - Net present value of proven petroleum wealth: about US$16.7 billion, i.e., about US$15,500 per capita. - Estimated Sustainable Income (ESI): increased from US$103 million (30 percent of non-oil GDP) in the 2005/06 budget year to US$512 million (about 87 percent of non-oil GDP) in 2009. In 2009 withdrawals were for the first time above ESI. ### Budgetary outcomes and trends - Total government spending: increased from 23 percent of non-oil GDP in 2004 to 103 percent in 2009. - Total expenditure (US$): rose from US$61 million in 2002 to US$681 million in 2009 (increase of 1016 percent). - Central government domestic revenues: grew from 5.8 percent to 14.6 percent of non-oil GDP between 2007 and 2009. - Recurrent vs capital composition: - Recurrent expenditure: 98.9 percent in 2007; 82 percent in 2008; 72 percent in 2009 of central government expenditure. - Capital expenditure: 1.1 percent of total expenditure in 2007; 28.4 percent in 2009. - Capital spending execution performance remained low due to limited capacity. - 2010 budget note: initial 2010 budget did not propose an increase of expenditure; a recent supplementary budget will increase the original budget by more than 30 percent. ### Selected budget execution figures (Table 3 & Table 4 excerpts) - Non-oil GDP (memo): - 2007: 398,000 - 2008: 499,000 - 2009: 590,000 - Comparison between original and actual budget expenditure (US$ million): - 2007 (July 1-Dec 31): Budget Total Expenditure 116.4; Actual Total Expenditure 64.3; Deviation (%) -44.8 - Recurrent: Budget 107.7; Actual 63.6 - Capital: Budget 8.7; Actual 0.7 - 2008: Budget Total Expenditure 347.8; Actual Total Expenditure 483.9; Deviation (%) 39.1 - Recurrent: Budget 280.1; Actual 397.4 - Capital: Budget 67.6; Actual 86.5 - 2009: Budget Total Expenditure 680.9; Actual Total Expenditure 605.3; Deviation (%) -11.1 - Recurrent: Budget 475.5; Actual 433.6 - Capital: Budget 205.4; Actual 171.7 - Comparison between original and actual budget revenue (US$ million): - 2007 (July 1-Dec 31): Total Revenues Budget 62.5; Actual 63.2; Domestic Revenue Actuals as percent of Estimates 2007 = 101.2 - Tax revenues: 15.5 / 14.5 - Non-tax revenues: 7.0 / 8.7 - Petroleum Fund: 40.0 / 40.0 - 2008: Total Revenues Budget 321.0; Actual 466.5; Domestic Revenue Actuals as percent of Estimates 2008 = 145.3 - Tax revenues: 11.5 / 37.3 - Non-tax revenues: 15.5 / 33.2 - Petroleum Fund: 294.0 / 396.0 - 2009: Total Revenues Budget 680.2; Actual 598.2; Domestic Revenue Actuals as percent of Estimates 2009 = 87.9 - Tax revenues: 49.3 / 46.7 - Non-tax revenues: 41.9 / 39.5 - Petroleum Fund: 589 / 512.0 - Source: MOF; Budget Execution Reports of 2007, 2008, 2009 (unaudited). ### Summary assessment — overall - Growth drivers and revenues: - Timor-Leste experienced economic growth rates exceeding 12 percent per year, driven by petroleum production (in production in the Timor Sea only since 2004). - Petroleum revenues are channelled through a Petroleum Fund that limits transfers to the budget to a sustainable level. - Expenditure growth and execution: - Government expenditures grew very fast in the past three years, with growth rates of over 25 percent. - Budget predictability weak: repeated and large supplementary budgets and substantial under-execution historically; major improvement in execution in 2009. - Expenditure arrears are limited but not formally defined in financial regulation. - Improvements measured: 12 of the 29 applicable PEFA indicators improved between assessments. - Notable gains: comprehensiveness of fiscal information, fiscal transparency, funding predictability, timeliness and quality of bank reconciliation and financial statements; legislative scrutiny and external audit improved somewhat. - Remaining substantial weaknesses: absence of constitutionally foreseen independent external auditor, internal audit almost non-existent, incomplete budget coverage, weak budget planning and implementation capacity in line ministries, heavy dependence on foreign international experts, integrity issues in procurement and tax administration. ### Main findings — budget formulation, execution, and transparency - Budget predictability and execution - Budget is not a good predictor of aggregate expenditure outturn due to supplementary budgets and under-execution (improvements in past two years). - Supplementary budgets often have weaker expenditure impact and detract staff from regular budget implementation. - Expenditure arrears are limited (anecdotal evidence), but definition and recording are lacking; recommend defining arrears in financial regulation. - Composition and revenue projections - Composition of expenditure stable (PI–2 scored A in 2010); conservative estimation of revenues weaker (PI–3 scored C in 2010). - Transfers from the Petroleum Fund comprise most domestic revenues and are government decisions that can be sizable and variable. - Fiscal transparency and budget documentation - Budget documents provide comprehensive information on objectives, strategy, macro assumptions, fiscal balance, funding sources, and classifications; PI–6 scored A in 2010. - Weaknesses: new policy costs not well identified; lack of information on government financial assets, procurement contract awards, and resources available to primary service delivery units. - Coverage of donor-funded expenditure and public sector entities - Donor-funded expenditure reporting is weak; donor-funded expenditure not reported in financial statements; Combined Sources Budget includes donor data but not joint approval or in-year consolidated reporting. - Autonomous agencies and public enterprises oversight weak; fiscal risks not monitored; MOF set up a directorate in 2009 to monitor AGAs and PEs but capacity limited. - Recommendation: develop regulation on agency/public enterprise eligibility, reporting, audit, supervision, own revenues, and profit-transfer requirements; budget documentation should describe State’s financial involvement and risk exposure. - Linkage between policy and budget, and sectoral planning - Program classification exists but is not well linked to line ministry policies; sector investment programs weak or not linked to budget envelopes. - Line ministries have only two weeks to prepare capital submissions and four weeks for recurrent proposals; no capital ceilings in budget circular. - Project proposals lack multi-year recurrent cost projections; maintenance budgets need to be increased. - Recommendation: allot more time for MOF (or planning agency) to review investment proposals and use cost-benefit analysis for larger investments. - Medium-term perspective - Fiscal and budgetary policies lack a solid medium-term perspective; no medium-term fiscal framework; recommendation for MOF macro unit to provide medium-term macrofiscal projections. - Tax transparency and compliance - Tax information availability improved; MOF website posts tax legislation in multiple languages. - Compliance and tax audit capacity weak: no annual work programs, limited risk-based selection, low technical/staff capacity; no audits in Petroleum Tax Directorate for over two years. - Priority actions: access to petroleum companies incorporated in Australia; coordination and information sharing with the National Petroleum Authority (ANP). - Cash flow planning and virement - Cash flow planning improved; treasury prepares annual cash flow plans updated quarterly. - Treasury able to release full budget appropriations at start of year due to Petroleum Fund transfers. - New flexible virement framework introduced; PEFA virement sub-indicator still scored low; risk of less disciplined budget preparation and legislative policy control. - Treasury, accounting systems, and payroll - Payments supported by a functioning Treasury Single Account (TSA); priority to consolidate commercial bank accounts of line ministries. - FreeBalance IFMIS expansion progressed; reconciliation timeliness and financial statement quality improved, but IFMIS reporting functionality needs strengthening. - Payroll integrity concerns persist due to uncertain data inputs from line ministries. - Procurement - Procurement institutional setting in flux; competitive bidding prevalence not centrally monitored; use of less competitive methods reportedly increasing and often legitimized by ad hoc decrees. - Appeals regime lacks an independent arbiter. - Audit and legislative scrutiny - Internal and external audit are largest gaps: internal audit scored lowest possible; external commercial auditor useful but not a substitute for constitutionally independent audit institution. - Recommendation: prioritize audit capacity building; MOF to lead internal audit development with cross-ministry responsibility. - Legislative scrutiny improving slowly; review of government audit report remains marginal and should be given a separate slot in parliament. ### Government reform agenda and strategic priorities - PEFA assessment timed with MOF review of multi-donor PFM capacity building program (PFMCBP). WB tasked to develop Strategic Action Plan for MOF; PEFA can feed into that plan and the fiscal ROSC. - Recommended reform approach: - Prioritize, sequence, and consolidate current achievements rather than attempting to address all weaknesses simultaneously. - Make capacity transfer a priority; acknowledge weak past capacity transfer. - Address internal and external audit gaps in reform program. - Consolidate existing reforms to reap benefits; build local staff capacity while maintaining international advisors for the foreseeable future. - Adapt reforms to new political priorities (e.g., decentralization) and select a few essential new reforms cautiously. - Donor role and PFMCBP: - PFMCBP (World Bank administered) is a five-year technical assistance program (started late 2006; scheduled to end July 2011); program was US$6.4 million in 2009, of which US$5.6 million is international consultants’ fees. - PFMCBP achievements: MOF reorganization; treasury systems strengthening and increased delegation; improved revenue management and petroleum tax administration; gradual macro planning improvement. - Concern: most international advisors focus on daily management rather than capacity building; heavy reliance on external support persists. - Key reform risks: - Initiation of reforms lacking stakeholder support; - Underfunded reforms without adequate staff complements; - Inadequate training for new functions; - Failure to align business processes with new information systems. ### Key PEFA indicator outcomes (selected, Annex I summary) - PI–1. Aggregate expenditure out-turn compared to original approved budget: 2007 Score = D; 2010 Score = D. - PI–2. Composition of expenditure out-turn compared to original approved budget: 2007 Score = N/A; 2010 Score = A. - PI–3. Aggregate revenue out-turn compared to original approved budget: 2007 Score = A; 2010 Score = C. - PI–4. Stock and monitoring of expenditure payment arrears: 2007 Score = D; 2010 Score = D+. - PI–5. Classification of the budget: 2007 Score = D; 2010 Score = B. - PI–6. Comprehensiveness of budget documentation: 2007 Score = B; 2010 Score = A. - PI–7. Extent of unreported government operations: 2007 Score = A; 2010 Score = D+. - PI–9. Oversight of fiscal risk from other public sector entities: 2007 Score = A; 2010 Score = D. - PI–10. Public access to key fiscal information: 2007 Score = C; 2010 Score = B. - PI–11. Orderliness and participation: 2007 Score = C; 2010 Score = C+. - PI–12. Multiyear perspective: 2007 Score = B+; 2010 Score = D+. - PI–16. Predictability in availability of funds for commitment: 2007 Score = D+; 2010 Score = B+. - PI–19. Procurement: 2007 Score = B; 2010 Score = C. - PI–21. Internal audit: 2007 Score = D; 2010 Score = D. - PI–22. Timeliness and regularity of accounts reconciliation: 2007 Score = D; 2010 Score = B. - PI–24. Quality and timeliness of in-year budget reports: 2007 Score = C+; 2010 Score = C+. - PI–25. Quality and timeliness of annual financial statements: 2007 Score = C+; 2010 Score = C+. - PI–26. Scope, nature and follow-up of external audit: 2007 Score = D+; 2010 Score = C+. - D–2. Donor financial information for budgeting and reporting: 2007 Score = D; 2010 Score = D+. - D–3. Proportion of aid managed through national procedures: 2007 Score = D; 2010 Score = D. ### Priority recommendations (derived from findings) - Establish and operationalize an independent external audit institution as constitutionally foreseen. - Prioritize development of internal audit capacity across MOF and line ministries; MOF to lead work-programs, standards, and capacity-building. - Define and record expenditure arrears in financial regulation and adapt IFMIS to record invoices and due dates. - Consolidate and centralize commercial bank accounts into the TSA; integrate off-Treasury accounts into consolidated balances. - Strengthen medium-term fiscal framework: macro unit in MOF to provide medium-term macrofiscal projections and link sector strategies to medium-term budget envelopes. - Strengthen tax audit capacity and implement regular risk-based audit plans; improve penalties administration and link taxpayer databases (TIN) with other registries. - Improve procurement transparency and monitoring of competitive bidding; establish independent oversight for procurement complaints. - Enhance reporting on donor-funded projects: require joint evaluation/approval and include donor flows in in-year financial reports and financial statements. - Sequence reforms with focus on capacity transfer and consolidation; build local staff while retaining international advisors for transition. *Source: _cr10341 - PEFA assessment extract (IMF staff report content from the provided PDF excerpt).* ### Preface ................................................................................................................ ### _cr10341 - Preface ### Document scope and structure - Preface appears on page "6". - "Summary Assessment" appears on page "7". - Main sections and page starts: - "I. Introduction" — page "13". - "II. Country Background Information" — page "14". - "III. Assessment of PFM Systems, Processes, and Institutions" — page "19". - "IV. Government Reform Process" — page "51". ### Subsections under "II. Country Background Information" - "A. Country Economic Situation" — page "14". - "B. Budgetary Outcomes" — page "15". - "C. Legal and Institutional Framework for PFM" — page "18". ### Subsections under "III. Assessment of PFM Systems, Processes, and Institutions" - "A. Budget Credibility" — page "19". - "B. Comprehensiveness and Transparency" — page "23". - "C. Policy-based Budgeting" — page "30". - "D. Predictability and Control in Budget Execution" — page "33". - "E. Accounting, Recording, and Reporting" — page "43". - "F. External Scrutiny and Audit" — page "46". - "G. Donor Practices" — page "49". ### Tables listed in the content unit - Table 1. Overall Budgetary Trends (2007–09) — appears in table list. - Table 2. Government Expenditures by Economic Classification — appears in table list. - Table 3. Comparison Between Original and Actual Budget Expenditure — appears in table list. - Table 4. Comparison Between Original and Actual Budget Revenue — appears in table list. - Table 5. Comprehensiveness of Budget Documentation — appears in table list. - Table 6. Access to Fiscal Information — appears in table list. ### Boxes and annexes - Box 1. The Public Financial Management Capacity Building Project — appears on page "52". - Annexes Tables: - Table 7. Fiscal Years for Assessment — page "59". - Table 8. Data for 2007 — page "59". - Table 9. Data for 2008 — page "60". - Table 10. Data for 2009 — page "61". *Source: _cr10341 - Preface (IMF PDF content unit table of contents).* ### 11. Results Matrix ..................................................................................................... ### 11. Results Matrix ### Preface - In 2009 the Ministry of Finance of Timor-Leste (TLS) requested the IMF Fiscal Affairs Department (FAD) to lead a Public Expenditure and Financial Accountability (PEFA) assessment to evaluate strengths and weaknesses of the Public Financial Management (PFM) system and provide a performance benchmark. - The PEFA assessment was part of a diagnostic package that included a fiscal ROSC against the IMF’s Code of Fiscal Transparency. - The assessment used the standardized PEFA indicator set developed by a multi-donor group including the World Bank (WB), the IMF, the EU, and several bilateral donors. - The PEFA exercise was led by the IMF with full participation of the MOF, the WB, and the Asian Development Bank (ADB). The PEFA team visited Dili in May–June 2010. ### Summary assessment (overall) - Timor-Leste experienced economic growth rates exceeding 12 percent per year, driven by petroleum production (in production in the Timor Sea only since 2004). - Petroleum revenues are channeled through a Petroleum Fund that limits transfers to the budget to a sustainable level. - Government expenditures grew very fast in the past three years, with growth rates of over 25 percent. - The PEFA assessment focuses on PFM performance over the period 2007–10. An initial assessment led by the EC took place in 2007. - Improvements were measured in 12 of the 29 applicable indicators. - Notable gains: comprehensiveness of fiscal information, fiscal transparency, funding predictability, timeliness and quality of bank reconciliation and financial statements; legislative scrutiny and external audit improved somewhat. - Substantial weaknesses remain: no independent external auditor as constitutionally foreseen, internal audit almost non-existent, incomplete budget coverage, weak budget planning and implementation capacity in line ministries. - Dependence on foreign international experts remains large; issues of integrity in procurement and tax administration remain a concern. ### Main findings — budget formulation, execution, and transparency - Budget predictability and execution - The budget is not a good predictor of aggregate expenditure outturn due to repeated and large supplementary budgets and substantial under-execution of the budget (major improvement made over the past two years). - Supplementary budgets tend to have weaker expenditure impact than thoroughly planned budgets and detract MOF and line ministry staff from effective implementation of the regular budget. - Expenditure arrears are limited, indicating credible budget planning and well-controlled execution; a definition of expenditure arrears in financial regulation is recommended. - Composition and revenue projections - Indicator for stable composition of expenditure scores quite well; indicator measuring conservative estimation of revenues does not. - Transfers from the Petroleum Fund comprise most domestic revenues; these transfers are government decisions and can change and be sizeable. - Fiscal transparency and budget documentation - The budget document provides comprehensive information on government objectives, development strategy and programs, basic macroeconomic assumptions, fiscal balance, funding sources, and expenditure and revenues in various formats, including administrative, economic, and functional classifications. - Weaknesses: new policy and its costs are not well identified; lack of information on government financial assets, contract awards resulting from procurement processes, and resources available to government primary service delivery units (e.g., schools). - Coverage of donor-funded expenditure and public sector entities - Reporting on donor-funded expenditure is weak: donors provide estimates but there is no joint evaluation and approval of state and donor funded expenditure, and in-year government reporting on donor-funded expenditure is lacking; donor-funded expenditure is not reported in the financial statements. - Autonomous agencies and public enterprises: relatively few in number, oversight is weak, fiscal risks are not monitored, MOF receives no regular reporting; a department within MOF has recently been set up for this purpose. - Recommendation: develop regulation on agency/public enterprise eligibility, reporting, audit, supervision, own revenues, and profit-transfer requirements; budget documentation should describe the State’s financial involvement and risk towards this sector. - Linkage between policy and budget, and sectoral planning - Program classification exists but is not well linked to line ministry policies; sector investment programs are no longer developed or are weak and not linked to future budget envelopes. - Line ministries have only two weeks to prepare capital expenditure submissions and four weeks for recurrent budget proposals, and no ceilings are set for line ministry capital expenditure in the budget circular. - Project proposals lack projections of recurrent cost implications for multiple years; maintenance budgets need to be increased given pressures on the recurrent budget. - MOF (perhaps with the planning agency under the prime minister’s office) should be allotted more time to review investment proposals and use cost-benefit analysis for larger investments (possibly outsourced). - Medium-term perspective - Fiscal and budgetary policies lack a solid medium-term perspective: macroeconomic projections are not extended to the medium term and there is no medium-term fiscal framework to frame medium-term expenditure plans. - Recommendation: the macro unit in MOF should start providing medium-term macrofiscal projections as a starting point. - Tax transparency and compliance - Transparency of taxpayer obligations has improved; MOF website provides domestic and petroleum tax legislation in multiple languages including in some cases Tetum and English. - Compliance and tax audit capacity remain weak: no annual work programs, limited to no risk-based selection criteria, low technical and staff capacity. - No audits have been carried out in the Petroleum Tax Directorate for over two years. - Priority actions: access to petroleum companies incorporated in Australia, coordination and information sharing with the National Petroleum Authority (ANP). - Cash flow planning and virement - Cash flow planning and predictability of funding for line ministries and agencies have improved considerably; a cash flow plan is prepared annually and updated quarterly or when needed. - Treasury has been able to release full budget appropriations at the start of the year due to assured transfers from the Petroleum Fund. - A new flexible virement framework replaced very tight item-level controls; the PEFA sub-indicator for virement (in PI - 16) still scored quite low. - Concern: the new framework may lead to less disciplined budget preparation and less policy control by the legislature. - Treasury, accounting systems, and payroll - Payments system is supported by a well-functioning Treasury Single Account (TSA); further consolidation of commercial bank accounts of line ministries should have high priority. - Future decentralized spending should be executed through an expanded but still centralized payment and accounting system facilitated by the treasury. - Solid progress in expanding functionality of the treasury system including the FreeBalance system (IFMIS). Timeliness and regularity of accounts reconciliation have improved markedly in the past three years. - Quality and timeliness of in-year fiscal reports and financial statements have steadily improved; further strengthening of reporting functionality of IFMIS (FreeBalance) is needed. - Payroll integrity remains a concern; uncertainty on what and when data is inputted by line ministries provides risk to accounting and payment processes. - Procurement - Procurement has been in flux for many years; capacity has been built in MOF and line ministries, but new institutional setting at the vice prime minister’s office raises challenges for coordination, supervision, and implementation. - Use of competitive bidding as standard instrument is not measured; less competitive instruments such as single sourcing and quotations are reportedly becoming more prevalent, often legitimized by ad hoc decree legislation. - Appeals regime lacks an independent arbiter. - Audit and legislative scrutiny - Internal and external audit are the largest gaps in the PFM system. - External commercial auditor performing a financial audit of government accounts is useful but has serious limitations: limited examination of processes in line ministries and is not a substitute for a truly independent audit process as foreseen in the Constitution. - Internal audit (PI-21) scores the lowest score possible; internal audit processes have hardly been set up. - Recommendation: make audit capacity building a priority; MOF should lead internal audit development with cross-ministry responsibility for work programs, standards, and capacity building. - Legislative scrutiny of the budget is slowly improving with more ministers defending expenditure proposals; review of the government audit report remains marginal and should get a separate slot on parliament’s agenda. ### Government Reform Agenda and strategic priorities - The PEFA assessment coincides with MOF reviewing its major multi-donor funded PFM capacity building program; the WB has been asked to develop a Strategic Action Plan for MOF. - The assessment can feed into the Strategic Action Plan and the fiscal ROSC. - PFM reform should be broader than MOF alone; line ministries have not fully participated to date. - Reform approach recommended: - Focus on prioritization, sequencing, and consolidation of present achievements rather than attempting to address all weaknesses at once. - Make capacity transfer a priority; acknowledge that capacity transfer has been weak to date. - Address major gaps such as internal and external audit in any reform program. - Consolidate existing reforms to reap full benefits; build local staff capacity while maintaining international advisors for the foreseeable future. - Adapt to new political priorities (e.g., decentralization) and cautiously select a few new essential reforms. - For the government, buy-in and long-term commitment from development partners is essential; PFM development is a process measured in decades. *Source: _cr10341 - 11. Results Matrix (PEFA assessment content provided in the supplied PDF excerpt).* ### 1. The purpose of this PEFA assessment is to evaluate the performance of the PFM ### The purpose of this PEFA assessment is to evaluate the performance of the PFM system in TLS based on the PEFA indicators ### Purpose and scope - Evaluate performance of the public financial management (PFM) system in TLS using the PEFA indicators. - Measure progress since the previous PEFA assessment in February 2007. - Support understanding of the budget process environment and identify PFM areas needing reform. - Provide a common pool of information for the government of TLS and international donors. - Part of a broader diagnostic framework including a fiscal ROSC assessment covering transparency aspects with respect to the IMF’s Fiscal Transparency Code. - Diagnostic work to inform IMF input to the government’s comprehensive PFM reform strategy. ### Methodology and missions - IMF FAD Team visited TLS in January–February 2010 for two weeks to: - collect information for the fiscal ROSC and the PEFA; - prepare the ROSC report; - train MOF and donor staff on the PEFA methodology; - set up a PEFA working group among MOF staff to conduct a self-assessment. - A second mission in May–June 2010 for two weeks to: - finalize the PEFA assessment with the PEFA working group; - present results to stakeholders; - discuss inputs to a PFM reform strategy based on draft PEFA and ROSC reports. - Information gathered via in-depth interviews and analysis of publicly available data and reports; meetings with MOF, line ministries, international agencies, civil society, and parliament. ### Country background — demographics and economy - TLS became a state on May 20, 2002. - Population: around 1 million; about half below the age of 17; demographic projections indicate the population will triple by 2050. - Non-oil real GDP growth reached almost 13 percent in 2008. - 50 percent of the population living in poverty in 2007. - Agriculture: - makes up 30 percent of non-oil GDP; - 80 percent of the population is dependent on agriculture, forestry, and fisheries for their livelihoods. - Petroleum Fund: - accumulated financial assets of US$5.3 billion by the end of 2009. ### Policy challenge and strategic planning - Key policy challenge: manage petroleum wealth sustainably to stimulate non-oil growth and support poverty reduction. - Vision 2020 reviewed after 2007; government defined annual priorities for 2008–2010 (six priorities for 2008; seven for 2009 and 2010). - Strategic Development Plan (SDP) covering 2011–30 defined early 2010, addressing: - urban-rural and regional imbalances; - shortage of skilled human resources; - fragile institutions of the state; - post-conflict mentality. - SDP key objectives by 2030 include: - Every child has access to free, compulsory and mandatory education through Grade 12; - All Timorese are literate; - All citizens have access to primary health care; - No child perishes because of inadequate water supply, malnutrition, or lack of health care; - Every citizen has the opportunity to acquire new skills based on 21st-century technologies; - Extreme poverty is eradicated through universal access to public services, ample job opportunities, and economic development in all regions. ### Budgetary outcomes — trends and fiscal sustainability - Total government spending: - increased from 23 percent of non-oil GDP in 2004 to 103 percent in 2009. - Net present value of proven petroleum wealth (Petroleum Fund balance + discounted future revenue streams): about US$16.7 billion, i.e., about US$15,500 per capita. - Estimated Sustainable Income (ESI): - increased from US$103 million (30 percent of non-oil GDP) in the 2005/06 budget year to US$512 million (about 87 percent of non-oil GDP) in 2009. - In 2009 withdrawals were for the first time above ESI (permitted if parliament approves as long-run beneficial). - Since 2002 total expenditure increased from US$61 million to US$681 million in 2009 (increase of 1016 percent). - Central government domestic revenues: - grew from 5.8 percent to 14.6 percent of non-oil GDP between 2007 and 2009. - Expenditure composition and execution: - recurrent expenditure constituted more than 98.9 percent in 2007, 82 percent in 2008, and 72 percent in 2009 of central government expenditure; - trend toward relative increase of capital expenditure: from 1.1 percent of total expenditure in 2007 to 28.4 percent in 2009; - capital spending execution performance remained low due to limited capacity in planning, budgeting, implementation, and procurement. - 2010 budgetary note: initial 2010 budget did not propose an increase of expenditure; a recent supplementary budget will increase the original budget by more than 30 percent. ### Selected budget figures (memo and execution) - Memo item: Non-oil GDP: - 2007: 398,000 - 2008: 499,000 - 2009: 590,000 - Table 3 — Comparison between original and actual budget expenditure (in US$ million): - 2007 (July 1-Dec 31) - Recurrent Expenditure: Budget 107.7; Actual 63.6 - Capital Expenditure: Budget 8.7; Actual 0.7 - Total Expenditure: Budget 116.4; Actual 64.3 - Deviation (%) -44.8 - 2008 - Recurrent Expenditure: Budget 280.1; Actual 397.4 - Capital Expenditure: Budget 67.6; Actual 86.5 - Total Expenditure: Budget 347.8; Actual 483.9 - Deviation (%) 39.1 - 2009 - Recurrent Expenditure: Budget 475.5; Actual 433.6 - Capital Expenditure: Budget 205.4; Actual 171.7 - Total Expenditure: Budget 680.9; Actual 605.3 - Deviation (%) -11.1 - Source for table: MOF; Budget Execution Reports of 2007, 2008, 2009 (unaudited). ### Legal and institutional framework for PFM - Budget covers general government (GG) almost entirely consistent with IMF Government Finance Statistics (GFSM) principles. - Only one level of government currently exists; subnational governments not yet formally established. - Budget and Financial Management Law (BFML) of 2009: - State budget includes all revenues and expenditures of government departments without administrative and financial autonomy, and autonomous services and funds. - BFML covers organization, preparation, presentation, implementation of the budget and accounts of the state, and rules and procedures for financial management. - State audit function absent: - High Administrative, Tax and Audit Court (HATAC) and parliament shall monitor execution, but HATAC has not yet been set up. - Currently a commercial external auditor is contracted by the MOF. - Petroleum Fund Law of 2005: - roles divided among parliament, government, and Banking and Payment Authority (BPA); - BPA manages the fund under MOF supervision; - fund has no authority to spend or borrow; - subject to regular auditing by an independent external auditor; - management costs accounted for in the budget document. ### Assessment of PFM systems — Budget credibility - PI–1. Aggregate expenditure out-turn compared to original approved budget - Scoring methodology: M1 - Score 2007: D - Score 2010: D - Key findings: - Actual primary expenditure deviated from budget estimates by more than 15 percent in two of the three years reviewed. - Donor-funded project expenditure and debt service payments excluded per PEFA guidelines (TLS presently has no outstanding debt). - Deviations driven by in-year budget increases and low execution rates: - 2007: low execution after preparing two budgets (2007 transition period budget passed in October 2007). - 2008: supplementary budget of US$440.6 million approved; main additional item US$240 million for Economic Stabilization Fund; final outturn US$262.3 million higher than the original budget per a Court of Appeal decision regarding transfers from the Petroleum Fund. - 2009: no supplementary budget; actual expenditure 11 percent below original budget. - Comparison with 2007 PEFA: indicator scored D in 2007; overall performance did not increase notably, though 2009 execution rate represented improvement. - 2010: a new, large supplementary budget expected to result in continued deviations between original budget and actual out-turn. - PI–2. Composition of expenditure out-turn compared to original approved budget - Scoring methodology: M1 - Score 2007: Not Assessed - Score 2010: A *https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10341.pdf* ### 20. The variance in expenditure composition exceeded the overall deviation in ### _cr10341 - 20. The variance in expenditure composition exceeded the overall deviation in ### Expenditure composition variance (PI–2 excerpt) - Finding: The variance in expenditure composition exceeded the overall deviation in primary expenditure by less than 5 percent in the last three years. - Score: A. - Explanation: Although there have been substantial in-year modifications of budgeted amounts, compositional variation is minimal and generally follows the original budget. - Note: Annex III contains the calculation of variances in expenditure composition in excess of the overall deviation in primary expenditure for the years 2007–09. - Comparison with 2007: This indicator was not assessed in 2007 due to a lack of disaggregated information by administrative units. ### Aggregate revenue out-turn compared to original approved budget (PI–3) - Dimension: Actual domestic revenue collection compared to domestic revenue estimates in the original, approved budget. - Scores: 2007 = A; 2010 = C. - Key findings: - Actual domestic revenue collection was below 92 percent of budgeted domestic revenue estimates in only one of the last three years, qualifying the indicator for a C. - The indicator focuses on over-estimation of revenues because overestimation leads to an underfunded, non-credible budget. - Analysis is based on domestic revenue and receipts from the Petroleum Fund, excluding donor funding. - Petroleum Fund transfers: - Transfers are calculated on the basis of the ESI concept and are contingent on the government providing parliament with a report specifying the ESI amount and a certification by an independent auditor. - The system allows recalculation of ESI for a supplementary budget: in 2008 transfers from the Petroleum Fund were increased during the fiscal year to finance additional expenditure; in 2009 the transfer from the Fund was considerably lower than planned, causing the indicator to score C. - The score would be A if transfers were not considered (i.e., if only real domestic revenues were evaluated). - Improvements in 2009 (excluding Fund transfers): - Actual execution is only 5 percent below estimates for fiscal year 2009. - Improvements attributed to simplification of tax revenue collections and introduction of new practices for projecting non-tax revenue using recent execution data, surveys on future economic activity, and monthly discussions with line ministries. - Comparison with 2007: In 2007 this indicator scored an A because actual revenue collection exceeded budget amounts in all three years. - Table: Comparison Between Original and Actual Budget Revenue (in US$ million) - 2007 (July 1-Dec 31) — Budget / Actual - Tax revenues: 15.5 / 14.5 - Non-tax revenues: 7.0 / 8.7 - Petroleum Fund: 40.0 / 40.0 - Total Revenues: 62.5 / 63.2 - 2008 — Budget / Actual - Tax revenues: 11.5 / 37.3 - Non-tax revenues: 15.5 / 33.2 - Petroleum Fund: 294.0 / 396.0 - Total Revenues: 321.0 / 466.5 - 2009 — Budget / Actual - Tax revenues: 49.3 / 46.7 - Non-tax revenues: 41.9 / 39.5 - Petroleum Fund: 589 / 512.0 - Total Revenues: 680.2 / 598.2 - Domestic Revenue Actuals as percent of Estimates: 2007 = 101.2; 2008 = 145.3; 2009 = 87.9. - Source: MOF; Budget Execution Reports of 2007, 2008, 2009 (unaudited). ### Stock and monitoring of expenditure payment arrears (PI–4) - Dimensions and scores (Scoring methodology M1): - (i) Stock of expenditure payment arrears (as a percentage of actual total expenditure for the corresponding fiscal year) and any recent change in the stock. — 2007 = N/A; 2010 = D - (ii) Availability of data for monitoring the stock payment arrears. — 2007 = D; 2010 = D - Overall 2010 score: D+. - Findings: - Anecdotal information indicates the stock of payment arrears has generally been very low (below 2 percent of total expenditure), which would support an A for dimension (i) though some uncertainty remains. - Virtual absence of arrears is linked to generally high balance of the Consolidated Fund (CF), facilitating prompt payment by the treasury. - At the end of 2009 the balance of the Consolidated Fund was US$162.3 million, or roughly 23.8 percent of annual government expenditure. - Line ministries/agencies are not cash restrained; treasury releases the budget in full at the start of the fiscal year via centralized IFMIS. - Payment delays can occur for administrative reasons or delivery inspections; anecdotal evidence suggests delays are not significant. Some vendors require upfront payment; companies report occasional need to pay “incentives” to get payments executed. - Arrears are not defined by financial regulation, not recorded in IFMIS, and no reliable data or periodic surveys exist; therefore dimension (ii) is scored D. - Given scoring methodology M1, overall score for the indicator is D+. - Recommendations / good practices noted: - Define arrears according to international good practice (e.g., invoices outstanding longer than thirty days where there is not a dispute). - Adapt IFMIS to force line ministries to enter invoices when received or enter the due date into the system. - Treasury should pay penalty interest on all late payments of line ministries and agencies (charged to their budgets) to incentivize timely payment and avoid implicit vendor markups. - Comparison with 2007: Indicator scored D in 2007 (based on one subindicator). Progress could be made without much effort via definition, recording, and IFMIS enhancements. ### Classification of the budget (PI–5) - Scores: 2007 = D; 2010 = B. - Findings: - Chart of accounts contains organizational, economic, and a partial functional classification — hence score B. - Recurrent budget combines administrative and economic classifications; capital budget identifies unique projects under administrative level, then economic specification. - Economic classification aligned with IMF’s GFSM 1986 cash-basis economic classification. - Functional classification consists only of the ten main functions of the UN COFOG classification and is used for reporting, not formulation. - Chart of accounts also contains classifications by funding source, geographic location, and program. - Program classification: - Not well developed and not used for budget management. - Fully linked to administrative classification, describes activities of administrative units rather than policy objectives. - Lacks comprehensive logical hierarchy of programs, subprograms, and activities. - Donor reporting: - Donors invited to report to MOF on commitments, expenditures, and disbursements by first-level spending unit and highest economic category; many donors only indicate the line ministry under which their activities fall. - Multilateral donors generally report according to the MOF classification scheme. - Donor funding comprised some 23 percent in 2010 of the Combined Sources Budget (State budget and donor funded projects). - Comparison with 2007: In 2007 separate economic classifications were used for preparation and execution; harmonization since then raised the score from D to B. ### Comprehensiveness of information included in the budget documents (PI–6) - Scores: 2007 Assessment = B; 2010 Assessment = A. - Finding: Recent budget documentation fulfils 6 of the 8 information benchmarks used for assessment. - Key points: - Annual budget and supporting documents submitted to the legislature allow a complete picture of central government fiscal forecasts, budget proposals, out-turns of previous years and line ministries’ objectives, programs, and expected results. - Budget speech outlines government priorities and contains the macroeconomic framework. - Budget documentation currently does not include information on financial assets or financial statements informing on assets and liabilities of the GG. - No explanation of budget implications of new policy initiatives or estimates of budgetary impact of major revenue policy changes and/or changes to expenditure programs is presented. - More explanatory materials in the budget would help parliamentary policy-oriented discussions. - Table: Comprehensiveness of Budget Documentation (summary of included items) - 1 Macroeconomic assumptions (estimates of aggregate growth, inflation, exchange rate): Yes (Book 1 of General Budget of the State and State Plan for 2010). - 2 Fiscal deficit defined according to GFS or other international standard: Yes (Book 1). - 3 Deficit financing composition: Yes (Book 1). - 4 Debt stock details for beginning of current year: N/A (There is no public debt). - 5 Financial assets details for beginning of current year: No (Information on financial assets is included in the final reports). - 6 Prior year’s budget outturn in same format as budget proposal: Yes (Book 1). - 7 Current year’s budget (revised or estimated outturn) in same format: Yes (Book 1). - 8 Summarized budget data for revenue and expenditure by main classifications for current and previous year: Yes (Book 1). - 9 Explanation of budget implications of new policy initiatives with estimates: No. - Comparison with 2007: 2007 scored B because previous year’s outturn data was excluded; budget documentation is more comprehensive in 2010. ### Extent of unreported government operations (PI–7) - Scores: Dimension (i) unreported extra-budgetary expenditure = A (2007 and 2010); Dimension (ii) income/expenditure information on donor funded projects included in fiscal reports = 2007: A, 2010: D; overall 2010 score = D+. - Findings: - Level of unreported extrabudgetary expenditure appears low and does not exceed 1 percent of budget expenditure — supports A for dimension (i). - TLS has one extrabudgetary fund—the Petroleum Fund—and a limited number of public sector entities not included in the budget. - Information on Petroleum Fund revenues and expenditures is extensively available in budget documents; transfers from the fund are identified in the fund’s quarterly and annual reports, which are regularly published. - Other public sector entities not included in the budget are mainly (quasi) public corporations and generally not part of central government; ANP and the Lottery Service are parts of central government not covered in budget documents, but their expenditures in 2009 were less than 1 percent of government expenditures. - Some unreported bank accounts held by line ministries and public entities were discovered; transactions have been very limited; opening of accounts under new BFML requires treasury approval and public entities must report on them regularly. - Donor funded expenditure is reflected in the Combined Sources Budget by recurrent and capital expenditures and line ministries, but donor projects are not evaluated or approved jointly with State budget expenditure nor included in other government financial reports — dimension (ii) scored D. - NDAE within MOF collects annual commitment and expenditure data from donors for budget formulation; most donor execution is done through separate commercial bank arrangements and projects are neither recorded nor included in government financial reports, though the treasury receives information on balances monthly. - Comparison with 2007: 2007 score was A because unreported extra-budgetary expenditure was below 1 percent and complete income/expenditure information for 90 percent of donor funded projects was included; with hindsight the 2007 assessment for dimension (ii) may not have been warranted. ### Oversight of Aggregate Fiscal Risk from Public Sector Entities (PI–9) - Scores: (i) Extent of central government monitoring of AGAs and PEs — 2007 = A; 2010 = D. (ii) Extent of central government monitoring of SN governments’ fiscal position — N/A in both years. - Findings: - Several AGAs and one prospective PE are fully included in the budget and remain managed as ministerial departments of the ministry of infrastructure. - Entities mentioned: Electricity of Timor-Leste (EDTL), Port Authority (APORTIL), National Authority for Aviation, Institute of Equipment Management — established by decree law as autonomous agencies but decrees not fully implemented. - Radio and Television of Timor-Leste (RTTL) is to be developed into a public corporation. - Postal Services (Correios) and the Communication Agency Authority have not had decree laws issued and remain fully part of the ministry of infrastructure. - Although law/regulation indicates autonomy and board management with audited reports, these entities are not operating as autonomous in practice and therefore do not fall under scope of PI-9. *Source: Excerpt from IMF document _cr10341 (selected sections on PI indicators and fiscal reporting).* ### 34. A few other public sector entities are in fact autonomously managed and are not ### _cr10341 - 34. A few other public sector entities are in fact autonomously managed and are not ### Autonomously managed public entities and monitoring - Entities not reported in the budget documentation: - Two public corporations: the Autonomous Service for Drugs and Health Equipment (SAMES) and the Microfinance Institution (IMfTL). - One public institution: the ANP, classified as a self-financed public institution and financed by transfers from the budget and fees paid by the petroleum companies operating in the Joint Petroleum Development Area (JPDA) in accordance with the Timor Sea Treaty. - The BPA (central bank of TLS) classified as a monetary public corporation, autonomous, and not included in the budget. - A lottery service that responds to the ministry of commerce and tourism, not included in the budget and which does not deposit its revenues in the consolidated fund of government. - Monitoring, supervision, and consolidation of fiscal risks: - There is neither annual monitoring, supervision nor consolidation of overall fiscal risks for entities managed autonomously and not included in budget documents. - BPA and ANP publish annual reports and are audited; the other concerned entities do not publish annual reports nor are audited. - A new MOF directorate established in 2009 to monitor AGAs and PEs is still building up its capacity. - There is no system to collect and review year-end fiscal reports from these entities and consolidate fiscal information. - Governance: None of these entities except SAMES are governed by an independent board. - Overall assessment: "A D score is warranted for the dimension whether adequate monitoring of AGAs and PEs takes place." - Subnational government: "Currently only one level of government exists in the country. Dimension two should not be scored in the current context." - Comparison with 2007: "The A score awarded in the 2007 evaluation does not seem justified ... a considerable number of them should not be considered for the evaluation of PI-9." ### Public access to key fiscal information (PI–10) - Scores: - Score 2007: C - Score 2010: B - "Recent budget documentation fulfils 4 of the 6 information benchmarks." - Key findings on availability and dissemination: - MOF publishes draft budget documents on its website directly after submission to parliament; the approved budget is usually published within a couple of months after approval. - Hard copies of approved budget are available for sale to the public; printing all three volumes occurs with considerable delay. - Website information is in Portuguese and English; majority of the population does not have internet access nor speaks English or Portuguese. - Budget documents are technical and detailed; there is no summary guide in simple language. - Public hearings take place very rarely; parliamentary sessions are not open to the public; the budget is not broadly discussed in the media. - Some NGOs disseminate budgetary information in the local language. - Timeliness of reports: - Quarterly reports to parliament: presented two months after the end of each quarter; fourth quarterly report within three months. - Audited financial statements: within eight months after end of the year; "As of 2010 this last limit has been widened to nine months." - All reports are published on the MOF’s website after submission to parliament. - External audit: - External audit reports are available to the public within six months of the completed audit on the MOF webpage. - A state audit institution reporting to parliament has not been set up; MOF has outsourced the function to a commercial external auditor. - The 2008 audit report was presented to parliament in a timely manner; management letters are kept within the executive and recent letters have not been published on the MOF’s website. - Procurement transparency: - Information on contract awards over US$100 thousand is not systematically published. - Legal framework requires tender awards above US$250 thousand to be published. - From 2010 onwards, the procurement unit in the vice prime minister’s office intends to publish all tender awards in the local newspaper and on the MOF website. - Resources to primary units: - "Information on resources from the state budget allocated to primary units such as schools and clinics is not published in the budget documents." - Table 6. Access to Fiscal Information (summary of items): - 1 Annual Budget Documentation: Included — "All draft budget documents are published on the website of the MOF directly after the submission to the parliament; the approved budget is published a couple of months after the approval by the legislature: www.mof.gov.tl" - 2 In-year execution reports: Included — "All reports are available to the public after the presentation to the parliament on the website of the MOF within one month of their completion: www.mof.gov.tl" - 3 Year-end financial statements 6 months after end of fiscal year: Included — "The annual budget execution report is available to the public after the presentation to the parliament on the website of the MOF within one month of its completion: www.mof.gov.tl" - 4 External audit reports: Included — "The audited final accounts are made available to the public in a timely manner." - 5 Contract awards: Not included — "Information on tender awards is not published systematically." - 6 Resources available to primary service units: Not included — "Information on resources received by primary service providers is not available." - Comparison with 2007: "The change of score seems to adequately reflect an improvement in performance." ### Policy-based budgeting (PI–11 Orderliness and participation; PI–12 Multiyear perspective) - PI–11 Scores (dimension-level): - (i) Existence and adherence to a fixed budget calendar. Score 2007: B. Score 2010: C - (ii) Guidance on the preparation of budget submissions. Score 2007: A. Score 2010: C - (iii) Timely budget approval by the legislature. Score 2007: C. Score 2010: B - Overall PI–11 score: 2007 C; 2010 C+ - PI–11 key findings: - A clear annual budget calendar exists and is generally complied with, but some delays experienced and insufficient time for line ministries to complete capital budget submissions; dimension one qualifies for C. - Budget preparation commences in January; due date for submission of draft budget to parliament is fixed in the BFML (October 15). - Budget circular usually issued by MOF in May; calendar allows two weeks for detailed capital estimates and four weeks for recurrent expenditure — time for capital is insufficient. - Budget circular prescribes ceilings for the recurrent budget but no ceilings for the capital budget; dimension two scores C. - During two of the last three years the legislature approved the budget before the start of the fiscal year; qualifies dimension three for B. 2007 and 2008 approved on time; 2009 approved in the beginning of the fiscal year (in February 2009). - Comparison: In 2007 this indicator scored a B; overall 2010 is C+. - PI–12 Scores (dimension-level): - (i) Multiyear fiscal forecasts and functional allocations. Score 2007: A. Score 2010: C - (ii) Scope and frequency of debt sustainability analysis. Score 2007: B+. Score 2010: D+ (note: text states "Currently there is no public debt ... dimension two cannot be scored" — table shows N/A in header but paragraph indicates no debt) - (iii) Existence of cost sector strategies. Score 2007: A. Score 2010: C - (iv) Linkages between investment budgets and forward expenditure estimates. Score 2007: C. Score 2010: D - PI–12 key findings: - Multiyear perspective is at an initial stage; no top-down multiyear estimation of fiscal aggregates. - Budget document presents a four-year (budget year plus three years) bottom-up forecast, but forecasts obtained by incremental approach lacking robust macroeconomic support; dimension one scores C. - No public debt in TLS; "no debt sustainability analysis needs to be undertaken" — dimension two cannot be scored. - Some sectors have broadly costed sector strategies (health, education) but are not integrated into government priorities or SDP and not costed within medium-term forecasts; dimension three scores C. - Dual budget process: capital and recurrent budgets developed separately with no calculation of recurrent cost of public investment; dimension four scores D. - Comparison with 2007: In 2007 indicator scored B+; "there does seem to be some slippage in the sophistication of budget preparation." ### Predictability and control in budget execution (PI–13 Transparency of taxpayer obligations and liabilities; PI–14 Effectiveness of measures for taxpayer registration and tax assessment) - PI–13 Scores (dimension-level): - (i) Clarity and comprehensiveness of tax liabilities. Score 2007: C. Score 2010: C - (ii) Taxpayers’ access to information on tax liabilities and administrative procedures. Score 2007: D+. Score 2010: C - (iii) Existence and functioning of a tax appeals mechanism. Score 2007: D. Score 2010: C - Overall PI–13 score: 2007 C; 2010 C - PI–13 key findings: - Determination of tax liabilities reasonably clear, but revenue collection procedures are complex and allow discretionary powers of customs officers. - Self-assessment is a major feature; petroleum sector tax legislation is complex and hard to understand. - Taxes and Duties Act of 2008 modernized legislative basis for tax rates and duties, but revenue administration still relies on old UNTAET regulations. - Customs is increasing accountability via documentation of work plans, monitoring, and training. - Most revenue legislation (except customs) is available on the MOF website; tax information brochures posted in four languages (English, Tetum, Portuguese, and Indonesian); critical differences exist between Portuguese and English versions of many laws and regulations. - Petroleum tax legislation available on the Petroleum Revenue Directorate website; Directorate advises taxpayers monthly; FAQ is under preparation. - Tax collection and recovery legal regime not fully addressed by the Tax and Duties Act of 2008; UNTAET regulations remain but do not meet international standards; a new draft decree law on collection and recovery is being prepared. - Tax appeals mechanism established in UNTAET Regulation No. 2000/18 but Board and High Court not yet set up; administrative appeal processes hampered by lack of capacity and reported corruption; taxpayers may need personal relationships or political intervention to contest assessments. - Overall PI–13 score: C. - Comparison with 2007: Performance progressed from D+ to C in taxpayer access to information. - PI–14 Scores (dimension-level) (as presented): - (i) Controls in the taxpayer registration system. Score 2007: C. Score 2010: C+ - (ii) Effectiveness of penalties for non-compliance with registration and declaration obligations. Score 2007: C. Score 2010: D+ - (iii) Planning and monitoring of tax audit and fraud investigation programs. Score 2007: B. Score 2010: C - PI–14 key findings: - Determination of detailed scores reflects mixed performance across registration controls, penalties, and audit planning/monitoring. *Source: _cr10341 - 34. A few other public sector entities are in fact autonomously managed and are not* ### 54. Controls in the taxpayer registration system are improving but still need to be ### _cr10341 - 54. Controls in the taxpayer registration system are improving but still need to be ### Taxpayer registration and penalties - A unique Taxpayer Identification Number (TIN) has been introduced and is shared within revenue administration; it is described as "fairly efficient". - TIN accuracy and completeness benefit from third party checks and occasional surveys. - The TIN is not yet linked with other databases, such as for business registration. - Score for the first dimension: C. - Penalty system exists for non-compliance with registration and tax declaration but is "not very effective". - In TLS, tax payment and tax declaration happen at the same time. - Penalty for late lodging of a tax return: US$100 plus 5 percent after one month plus 1 percent more every month. - Penalties are "not sufficiently well administered and followed-through". - Compliance in payment of domestic taxes is "very low". - Petroleum sector: some tax penalties do not seem sufficiently high to impact behavior, but tax declaration compliance is "very high". - For customs the penalty regime is of less importance. - Score for the second dimension: C. ### Tax audits and fraud investigations - Audits and investigations are conducted on a limited basis. - Basic audit checklists, technical reference manuals, and other material are maintained on the shared directory of the revenue administration information network. - Insufficient tax, administrative, and audit expertise within the MOF General Directorate of Revenue and Customs (GDRC) to provide an appropriate audit service. - No comprehensive and documented audit plan; audits are conducted only to a limited extent according to clear risk criteria. - Sector-based audit plans for small and large businesses have been developed but are not operational. - GDRC plans to strengthen its audit unit in each of the three National Directorates (Petroleum Revenue, Customs, and Domestic Tax). - Petroleum Tax Directorate: - Responsible for audits on companies in the petroleum sector. - Since 2007 audits on Australian soil have not been possible due to a dispute over sovereignty rights with Australia. - Directorate appears to have adequate powers to oblige companies to provide records in TLS, but access to accounting systems and personnel is sought during audits making on-site access desirable. - Transactions in the Production Sharing Contracts in the JPDA, jointly administered with Australia, are audited on a regular basis. - Score for the audit dimension: D. - Overall score of this indicator: D+. - Comparison 2007 vs 2010: - Score lower in 2010: D+ against C+ in 2007, mainly due to lower performance of tax audits and decreased effectiveness of the penalty regime. - "Tax audits seem to be at present a major weakness in the tax administration system." ### PI-15 Effectiveness in collection of tax payments — key scores - Dimensions (Scoring methodology M1) — Score 2007 / Score 2010: - (i) Collection ratio for gross tax arrears: D / D+ - (ii) Effectiveness of transfer of tax collections to the treasury: A / A - (iii) Frequency of complete accounts reconciliation between tax assessments, collections, arrears records and receipts by the treasury: D / D ### PI-15 supporting findings and figures - Data for calculating the collection ratio for tax arrears is not produced routinely. - SIGTAS shows total amount of tax arrears remains insignificant: less than 1 percent of annual total revenue collection, i.e., around US$3 million, of which US$800,000 are considered uncollectible. - These arrears are all in the area of domestic taxes; excluding petroleum taxation (where there are no arrears) the level is "quite high". - Score of dimension one: A. - Revenue collections are transferred to the treasury’s main account daily. - Domestic tax and customs revenues are swept daily from the commercial banks to the TSA. - Petroleum revenues are paid into the BPA on a monthly basis by petroleum companies. - Score for transfers: A. - Reconciliation practices: - Complete reconciliation on tax assessments, collections, arrears, and transfers to (and receipts by) the treasury is done manually every month with up to six weeks delays for Domestic and Petroleum Tax Directorates. - Customs conducts monthly reconciliation with up to four months delay. - Customs represents more than a third of all domestic revenue collections; dimension score: D (would be B if only Domestic and Petroleum tax were considered). - Overall PI-15 score remains: D+. - Improvement in dimension one between 2007 and 2010 due to considering all taxes for the arrears ratio. ### PI-16 Predictability in the Availability of Funds for Commitment of Expenditure - Dimensions (Scoring methodology M1) — Score 2009 / Score 2010: - (i) Extent to which cash flows are forecast and monitored: D / D+ - (ii) Reliability and horizon of periodic in-year information to MDAs on ceilings for expenditure commitments: B / B+ - (iii) Frequency and transparency of adjustments to budget allocations, which are decided above the level of management in MDAs: C / A - Treasury practices: - Treasury, in consultation with the BPA, prepares a cash flow forecast for the fiscal year at the beginning of the year; reviewed every quarter and changes made if necessary. - Since most revenue inflows are certain due to assured transfers from the Petroleum Fund, treasury allows MDAs to commit expenditures for the entire year via Expenditure Authorization Notices sent early in the financial year. - Government does not present more than one supplementary budget in a year; in fiscal year 2009 no supplementary budget was presented but there will be one in 2010. - Supplementary budgets are presented in the same basic format as the overall budget; some supplementaries have the nature almost of a second budget. - Comparison 2007 vs 2010: - Overall score improved from D+ to B+, reflecting improved performance. ### PI-17 Recording and Management of Cash Balances, Debt, and Guarantees - Dimensions (Scoring methodology M1) — Score 2007 / Score 2010: - (i) Quality of debt data recording and reporting: N/A / A - (ii) Extent of consolidation of government’s cash balances: N/A / C - (iii) Systems for contracting loans and issuance of guarantees: N/A / N/A - Findings: - Government had not contracted any debt until the end of the financial year 2009; dimension one should not be scored (but Score 2010 shows A for (i) in the table). - Government operates a TSA at the BPA where cash balances are consolidated and calculated daily; BPA can provide details of cash balances each day. - Substantial government cash balances are retained in commercial bank accounts outside consolidation; these accounts should be integrated into the TSA and balances retained as claims on the treasury if authority to spend has not lapsed; activity on these accounts should be reported in fiscal reports. - Dimension two scored: C. - Government had not contracted loans nor issued guarantees till end of financial year 2009; dimension three should not be scored. - Comparison 2007 vs 2010: - Evidence that 2007 assessment underestimated amounts kept outside MOF management, scoring dimension two too generously. ### PI-18 Effectiveness of Payroll Controls - Dimensions (Scoring methodology M1) — Score 2007 / Score 2010: - (i) Degree of integration and reconciliation between personnel records and payroll data: C / D+ - (ii) Timeliness of changes in personnel records and the payroll: D / D+ - (iii) Internal controls of changes to personnel records and the payroll: A / B - (iv) Existence of payroll audits to identify control weaknesses and/or ghost workers: D / D - Findings: - Treasury has requested MDAs periodically to reconcile personnel databases with the payroll; reconciliation by MDAs had not been done until end of financial year 2009, except by three ministries. - Personnel records are reportedly not complete in many ministries. - Treasury makes payroll changes only on basis of inputs from MDAs or the Public Service Commission; because personnel records and payroll database are not reconciled systematically, dimension one scores a D. - Anecdotal evidence of payroll change delays up to three months; dimension two scores a B. - Authority to change records and payroll is restricted and subject to internal controls; IFMIS has control and error correction mechanisms; all payroll changes effected by director of the treasury on advice of the Public Service Commission; dimension three scores an A. - No audit of payroll for many years; PEFA 2007 indicates last payroll audit by Inspector General’s Office in 2001/02 in the districts. - External auditor conducted only a test audit of payroll in a few ministries. - Public Service Commission in process of reconstructing and updating personnel records of all employees. - Dimension four scores a D. - Comparison 2007 vs 2010: - Overall score remains D+, but major improvements occurred in the payroll process within treasury and through the Public Service Commission. ### PI-19 Competition, value for money and controls in procurement - Dimensions (scoring method M2) — Score 2007 / Score 2010: - (i) Use of open competition for award of contracts that exceed the nationally established monetary threshold for small purchases: D / B - (ii) Justification for use of less competitive procurement methods: D / C - (iii) Existence and operation of a procurement complaints mechanism: B / B - Findings: - Legal framework recommends competitive bidding but allows many non-competitive methods: competitive bidding, prequalification followed by a limited tender, restricted tender by direct invitation, tender by negotiation, request for quotation, direct appointment, and simplified procedure. - Latest legal amendments allow construction works up to US$250 thousand to be executed by district level companies using special procedures without a requirement for competition or comparison of proposals. - Other provisions reduce competition: restriction to national bidders for contracts less than US$100 thousand; awards to district-level firms with no competition; no separate procedures for selection of consultants; complicated evaluation processes (two envelopes and quality evaluation for simple works/goods); possibility for some agencies to have their own procedures. - Institutional responsibilities have been in flux: decentralization, centralization, then decentralization; 2006–07 procurement nearly dysfunctional. - 2008 MOF centralized procurement; since then decentralization with capacity building and accreditation of procurement departments in line ministries. - Early 2010: full delegation of procurement responsibility to all ministries for contracts up to US$1 million. - Contracts > US$1 million: supervised/administrated by the vice prime minister’s office (on behalf of the prime minister). - Awards for contracts above US$3 million will be approved by the Council of Ministers (COM). - Procurement technical secretariat and procurement monitoring commission being set up in vice prime minister’s office. - Directorate of Procurement at MOF retains policy formulation, regulation, capacity building, and data management roles. - Significant coordination, resource and capacity issues arise; many ministries struggle to carry out newly delegated functions. - Despite turbulence, competitive bidding reportedly takes place in the majority of cases, but no central monitoring mechanism to track use of competitive bidding. - Line ministries have neglected reporting to MOF Procurement Directorate; government-wide monitoring reports are not being prepared. - First dimension (prevalence of open competition) scored D due to lack of monitoring data. - Justification for use of less competitive methods is not always strongly argued; legislation and decrees have increased non-competitive scope; argumentation often said to be weak. - Decrees have designated exceptions for large packages on an ad hoc basis (examples cited in footnote regarding emergency allocations). - Second dimension scored: C. - Complaints mechanism: - Articles 96 to 102 of decree law 10/2005 define procedures; bidders can address complaints during bidding or within five days from announcing decision to award. - Limits set for procurement service unit to act on complaints, assess validity, suspend process, and decide. - Complainant can appeal to higher authority within five days; appeal options include direct managers, minister/heads of autonomous agency, or prime minister for cases concerning ministers or heads of autonomous agencies. - Decree requires written documentation on each complaint and decisions. - Weaknesses: no external, independent oversight body over complaints; initial complaint lodged to procurement service which may be the implementing procurement committee; no process information on number of complaints and resolutions. - Supervision tasks to be fulfilled by new procurement monitoring commission. - Administrative complaints process exists, is used regularly, and leads to timely administrative resolution. - Third dimension scored: B. - Overall PI-19 indicator assessed as: C. - Comparison 2007 vs 2010: - 2007 score given was D+ but should have been B according to scoring methodology M2; dimension two in 2007 may have been scored on legal/regulatory framework rather than practice. ### PI-20 Effectiveness of Internal Controls for Non-Salary Expenditure — key scores - Dimensions (Scoring methodology M1) — Score 2009 / Score 2010: - (i) Effectiveness of expenditure commitment controls: C / D+ - (ii) Comprehensiveness, relevance and understanding of other internal control rules/procedures: A / C+ - (iii) Degree of compliance with rules for processing and recording transactions: D / B ### 76. Rules and procedures for effecting payment are generally followed strictly in the ### _cr10341 - 76. Rules and procedures for effecting payment are generally followed strictly in the ### Treasury payment procedures and commitment controls - Under normal circumstances no commitments can be entered in FreeBalance system by line ministries unless adequate appropriation for the purpose exists. - Instances of release of funds using emergency procedures for specific purposes involving significant amount of funds, especially in 2009, have been observed. - Adequate controls exist in the treasury system to ensure that even in the case of emergency situations payment is not effected unless approvals from the authority competent to do so are obtained. - Dimension one is scored an A. - Staff in the MDAs is still not very conversant with rules and procedures for internal control; financial regulations need updating with respect to internal controls. - There seems to be a tendency to rely extensively on the IFMIS system to provide controls for the expenditure process, especially at the commitment level. - Dimension two scores a C. - Despite training on use of the IFMIS system by line ministries for data entry, quite a few errors are still made; emergency or simplified procedures are not often used. - Treasury staff spend considerable time correcting Commitment and Payment Vouchers (CPVs) from MDAs and requesting correct documentation for processing CPVs. - This dimension is scored a B. - Comparison 2007 to 2010: The increase in the overall score from D+ to C+ is attributed to development of the IFMIS system in the MOF. ### PI-21 Effectiveness of Internal Audit — institutional capacity and performance - Internal audit department in the MOF consists of only four staff and is just starting to deploy activities; hampered by capacity issues. - All personnel in the department were sent abroad for short term specialized training to improve capacities. - An annual audit plan has not been prepared so far. - Internal audit units exist in some line ministries, but generally engage in simple inspection activities not systemic audits. - Reporting by internal audit units is very irregular and usually case-specific; there are no annual internal audit reports of MDAs and reports are generally not sent to the MOF. - Follow-up on internal audit recommendations seems minimal. - The Inspector General Office (IGO) was created in 2000; responsibilities expanded by Decree-Law No. 22/2009 providing a mandate of four years for the Inspector General and broader inspection/audit access. - IGO reports to the prime minister; an annual audit plan has not been prepared; staff is limited and capacity is weak; incidental reports are prepared but there is no IGO annual report. - Internal audit units in ministries respond technically to but are not subordinate to the IGO. - All dimensions on internal audit are scored D resulting in an overall score of D. - Comparison 2007 and 2010: Scores and performance are identical in both assessments. ### PI-22 Timeliness and Regularity of Accounts Reconciliation - Dimension (i) Regularity of bank reconciliations: Bank reconciliations for the TSA held at the BPA take place within two weeks of the close of every month. - Bank reconciliations which were in arrears from the financial year 2005 were brought up to date during 2009 and since then the process has been formalized. - Reconciliation of government accounts held in commercial banks does not take place. - There are some 197 commercial bank accounts held by line ministries and agencies with holding of US$72 million. - Dimension one is scored a B. - Dimension (ii) Regularity of reconciliation and clearance of suspense accounts and advances: Reconciliations and clearance are conducted regularly. - Advances are given to MDAs for operational expenditures in districts and embassies; details of expenditures furnished to the treasury during the year. - MDAs are given a period of a month after the end of the financial year to furnish details of expenditure against advances made in the last quarter. - Accounting and reconciliation against advances is completed within two months of the end of the financial year. - There are instances of uncleared balances which are brought forward, but these balances are not very significant. - Dimension two is scored a B. - The overall score is B. - Comparison 2007 and 2010: Improved from D to B indicating substantial improvement in bank reconciliation. ### PI-23 Availability of information on resources received by service delivery units - The MOF releases funds to MDAs for expenditures by the concerned service delivery units but does not maintain a record of the service delivery units to whom funds have been released. - Responsibility for maintaining such records rests with the concerned ministries. - The IFMIS has the capacity to monitor such details, but is not being used for this purpose at the moment. - Budget entities like schools are provided resources from line ministry programs without duly accounting for the financial or in-kind transfer; some hospitals present more comprehensive budget information. - Score and performance are D in both 2007 and 2010. ### PI-24 Quality and timeliness of in-year budget reports - Dimension (i) Scope of reports in terms of coverage and compatibility with budget estimates: Budget execution reports allow direct comparison to the presentation of expenditures in the budget; data presented by appropriation category, budget entity and line item; both commitment and expenditure budget execution data is presented. - Dimension one is scored an A. - Budget reports are prepared on a quarterly basis and presented to COM and parliament within 8 weeks of the end of the quarter. - Within the MOF aggregate monthly budget execution reports are generally available within 2-3 days of the end of the month; distribution to line ministries and COM could be expanded to within say 10 days, but is not currently done. - Dimension (ii) Timeliness of the issue of reports is scored a C. - Dimension (iii) Quality of information: Treasury carries out regular reconciliations and error corrections; transactions are subject to internal control in the treasury and audited by a commercial external auditor. - Errors at input stage in line ministries are usually detected when payment requests are made to the treasury; treasury performs paper-based verification of each transaction. - Strengthening internal control and audit in line ministries would enhance data integrity. - Dimension three is scored a B. - The overall score for this indicator remains at the level of C+. - Comparison 2007 and 2010: Lack of apparent progress may reflect an overly optimistic 2007 assessment; further action needed to fully utilize FreeBalance functionality by all system-users. ### PI-25 Quality and timeliness of annual financial statements - Financial statements are prepared by the treasury for the whole of government and include full information on revenues and expenditures; not all financial assets are reported on, and the accounting period is not fully in line with the duration of budget execution. - Treasury maintains the accounts of all budget entities included in the budget. - A budget execution report for the budget year is presented to parliament in preliminary form as the fourth quarterly budget report; final accounts and a full budget execution report are submitted around September with the external auditor’s report. - Financial statements report on government expenditure and revenue in several formats, including budget classification and functional classification. - State’s cash balances and holdings of the Petroleum Fund are presented; equity holdings are not reported nor are accounts payable and receivable. - Financial statements cover cash expenditures during the calendar year; budget year is kept open longer for execution (2009 budget remained open till end of February 2010; 2008 budget remained open till end-May 2009). - For the 2010 budget situation will be improved by closing of the budget year by end of January 2011; intention to fully align budget execution with the calendar year by 2012. - Completeness indicator is scored a C. - Financial statements are reported in a timely manner and conform to IPSAS cash basis accounting standards. - Financial statements are presented to parliament within three months of the end of the fiscal year as required by the BFML; submitted to the external auditor within 6 months of the end of the fiscal year. - Timeliness of submission is scored an A. - Accounting standards used dimension is scored an A. - Comparison 2007 and 2010: Overall score remains a C+. Dimension three on accounting standards showed significant improvement, but completeness decreased due to gradual conversion to full cash accounting. ### PI-26 Scope, nature and follow-up of external audit - There is no independent external audit institution in TLS; MOF has engaged a commercial external auditor to audit government accounts. - Audit is a financial audit of all expenditure and revenue transactions over accounts held by the treasury; auditor investigates process and systems issues and reports on these and on compliance issues in an annual report and management letter. - Auditor does not perform performance or proprietary audits and does not audit financial management processes in line ministries and agencies (internal control, procurement, payroll). - External auditor complies with public sector audit standards for commercial auditors in Australia, which are not equivalent to INTOSAI standards and do not provide the same level of assurance for independence. - Given the scope, first dimension is scored a C. - The Petroleum Fund is audited separately by a commercial auditor; auditor’s report is made public as an appendix to the Petroleum Fund annual report. - Most autonomous agencies have no separate audit reports; the only independent entities undergoing external audit are the BPA and the ANP (for activities under the Timor Sea Treaty); the only public enterprise, SAMES, is not audited. - Audit report and final accounts have been submitted to parliament within 8 months of the end of the budget year in past years; legal limit widened to 9 months. - New BFML sets submission of financial statements to the HATAC (provisionally, in its absence to the Court of Appeals) to 6 months; these new time limits will apply for the first time to the final accounts of the 2010 budget. - The audit report is followed by a management letter to the minister of finance summarizing main findings; the letter is not shared with parliament (it was published on the MOF website in 2007 and 2008). - Timeliness dimension is scored a B. - There has been a serious effort to follow up on external auditor recommendations within MOF, evidenced by work plans and subsequent work programs of MOF departments. - It would be good practice for MOF to send the management letter to parliament and indicate how government plans to follow-up on recommendations; the external auditor should monitor and keep track of implementation and publish these in the audit report. - Evidence of follow-up in practice within MOF allows the follow-up dimension to be scored an A. - Overall score improved from D+ to C+ between 2007 and 2010. - Recommendation: For substantial further improvement, consider broadening the audit mandate and establishment of an independent auditor. ### PI-27 Legislative scrutiny of the annual budget law - Scope of the legislature’s scrutiny covers fiscal policy, aggregate and detailed estimates of revenue and expenditure for the coming budget year but mainly at the concluding stage of the budget process. - The draft budget is accompanied by background information providing an overview of the economic and financial environment, revenue and expenditure projections and AAPs of line ministries. - Analytical material in budget documents could be expanded and the legislature could be involved earlier in debate on macro-fiscal aggregates and expenditure priorities. - Dimension (i) Scope of the legislature’s scrutiny is scored C. - Dimension (ii) Extent to which the legislature’s procedures are well established and respected is scored A. - Dimension (iii) Adequacy of time for the legislature to provide a response to budget proposals is scored A. - Dimension (iv) Rules for in-year amendments to the budget without ex ante approval by the legislature is scored C. *Source: IMF staff report content from the provided PDF extract.* ### 94. Procedures for legislature review are firmly defined in the constitution and ### _cr10341 - 94. Procedures for legislature review are firmly defined in the constitution and ### Legislature review and budget scrutiny - Procedures for legislature review are firmly defined in the constitution and parliament’s internal regulations and are generally respected; dimension two scored A. - A specialized budget committee (“Committee C”) exists and plays a key role in the review of the draft budget. - The committee has some support staff, but capacity for research and analysis to support reviews is limited. - According to committee interviews, budget documentation from the MOF has improved in recent years, and the committee can pose questions and receive more detailed information on demand. - Parliamentary review is a two-step process: Committee C reports to parliament, and only after that is a plenary discussion held with prime minister and minister of finance. - The budget timetable leaves enough time for parliamentary scrutiny; dimension three scored A. - According to the BFML, parliament has 2.5 months to review budget proposals (from October 15 to December 31). - Rules for in-year budget amendment are clearly defined in the BFML and implicitly in Petroleum Fund Law, but have not always been respected; dimension four scored C. - Supplementary budgets must be approved by the parliament before moneys can be spent. - Transfers from the Petroleum Fund can only exceed the ESI of the year if parliament is provided with estimates for the effect on ESI for coming years and a detailed explanation of long-term interest to TLS; formal approval is then required of the additional transfer. - In 2008 the supplementary budget approved by the parliament envisaged the additional transfer of US$392.8 million from the Petroleum Fund; however, the Court of Appeals decided that not more than US$102 million could be additionally transferred to the Consolidated Fund. - The original budget included a US$294 million transfer from the Petroleum Fund. ### Comparison with 2007 - The overall score remained C+. In 2007 the legislature reportedly had only about one month to review the budget proposal. ### PI-28 Legislative scrutiny of external audit reports (scoring snapshot) - Timeliness of examination of audit reports by the legislature. - Score 2007: D+ - Score 2010: A - Extent of hearing on key findings undertaken by the legislature. - Score 2007: D - Score 2010: D - Issuance of the recommended actions by the legislature and implementation by the executive. - Score 2007: D - Score 2010: C ### Audit report handling and parliamentary follow-up - Parliament discusses audit report findings only as part of the annual budget discussion; these discussions take place within three months of receiving the audit report—timeliness scored A. - There are no separate hearings on the audit report; extent of hearings scored D. - Parliament sometimes sends written queries to line ministries and agencies; prime minister, minister of finance, and line ministries can discuss issues during plenary or committee meetings in the context of the annual budget. - Only in a few cases has parliament requested action based on audit findings; such requests are sometimes, but not systematically, acted upon. - In 2009 the government was requested to conduct a separate audit of expenditure incurred by the government during the period January to May 2009 against the budget allocations of 2008; this request was acted upon. - Issuance/implementation dimension scored C. - Overall PI-28 indicator remained at D+, with a modest improvement in the composite score. ### Donor practices and aid management - D-1: In 2007 D-1 scored D+. In 2010 D-1 was not rated because of the absence of budget support from donors in the period under review. - D-2. Financial information provided by donors for budgeting and reporting on project and program aid (selected scores) - (i) Completeness and timeliness of budget estimates by donors for project support. - Score 2007: D - Score 2010: C - (ii) Frequency and coverage of reporting by donors on actual donors flows for project support. - Score 2007: D - Score 2010: D - Donor funding is adequately reflected in the budget documents for the budget year; overall score C. - Donor funding is generally reflected in the Combined Sources Budget by recurrent and capital expenditures of line ministries, but is not approved by the parliament as part of the budget year appropriation. - These data are compiled at stages consistent with the government’s budget calendar by the NDAE created in 2008; they are comprehensive but not fully consistent with the government’s budget classification. - Reporting of donors on actual flows is weak; overall score D. - In 2009 donors were asked to provide quarterly reports on actual disbursements but timeliness, regularity, and usefulness of data breakdown proved difficult; most donors did not report satisfactorily. - In 2010 the NDAE asked donors to report on a six monthly basis. - The overall score for the indicator is D+. - D-3. Overall proportion of aid funds to central government that are managed through national procedures - (i) Overall proportion of aid funds to central government that are managed through national procedures. - Score 2007: D - Score 2010: D - External grants are managed through donor procedures; execution of donor-funded projects is mostly done through separate banking arrangements because most donors are unwilling to use domestic systems and view procurement as non-transparent. - Government lacks mechanisms meeting donors’ requirements for management of projects through national procedures. - A better score than D would require that at least 50 percent of aid funds were managed through national procedures, which is not the case. - Comparison between 2007 and 2010: score and performance for D-3 were the same in 2007. ### Government reform process and PFM reform - The government of TLS relies heavily on external support to sustain PFM systems and improve performance. - The MOF introduced important reforms over the last three years through the WB administered Public Financial Management Capacity Building Project (PFMCBP). - The program was US$6.4 million in 2009, of which US$5.6 million is international consultants’ fees. - The program is co-financed by an IDA grant and a Multi Donor Trust Fund. - PFMCBP is an important element in the government’s overall PFM reform process and has achieved results mainly in treasury functioning, the Budget Directorate, the Tax and Customs Directorates, and Procurement. - Most international advisors funded through PFMCBP are focusing more on daily management of PFM functions than on reform or capacity building. - IFMIS implementation and requirements - Considerable resources were allocated to the purchase and development of a FreeBalance-based IFMIS system in MOF. - IFMIS has provided the ministry a reliable tool for budget planning, execution, accounting and reporting with necessary accuracy, timeliness and controls. - IFMIS will be key to roll out budget management responsibilities to line ministries and, under planned fiscal decentralization, to districts while retaining process controls, accounting functionality and supervision. - IFMIS needs to become more client-friendly and more focused on system users’ needs; currently the IFMIS configuration seems to be driving business processes instead of business processes guiding IFMIS configuration. - Leadership, ownership, and coordination - MOF has taken a leadership role in PFM reform but overall government ownership needs broadening. - MOF asked WB and IMF to undertake diagnostic and analytic work to support formulation of a comprehensive multi-year PFM reform strategy covering all PFM systems. - WB was tasked to draft a reform strategy for MOF based on the mid-term review of the PFMCBP and other diagnostics. - MOF tasked the IMF to provide an evaluation of transparency through a fiscal ROSC, a PEFA assessment (conducted jointly with WB and ADB), and a strategy development for treasury functions expected to be conducted in August of 2010. - The government lacks a coordination mechanism to lead the overall reform process and set objectives, direction and pace; there is no PFM reform committee with representation of all stakeholders under the leadership of the minister of finance to liaise with donors. - While the minister of finance is very engaged, other stakeholders appear more passive. - Donor coordination in PFM is weak and mainly occurs as part of PFMCBP management. - PFMCBP involves WB, AusAid, the EC, Irish Aid, Norway, and New Zealand and concerns only the MOF. - Other PFM-related activities by donors occur across MOF, other ministries and institutions, with a lack of overall coordination among donors. ### Box: The Public Financial Management Capacity Building Project (PFMCBP) - PFMCBP is a five-year technical assistance program supported by an IDA grant and a co-financing multi-donor trust fund. - The program started in late 2006 and is scheduled to end in July 2011. - PFMCBP provides technical assistance to “sustainably strengthen planning, budgeting, public expenditure management and revenue administration for growth and poverty reduction, with emphasis on efficiency, effectiveness, accountability, integrity, service culture and transparency”. - Key achievements of PFMCBP include: - Implementation of a major reorganization of the ministry of finance. - Strengthening public expenditure management through simplification and strengthening of treasury systems and processes and increased delegation of authority to line ministries. - Improved revenue management, including increased transparency in tax administration and reinforcing petroleum tax administration. - Gradual improvement in macroeconomic planning. - Governance of PFMCBP: - MOF is responsible for strategic management through its Senior Management Committee chaired by the minister. - A dedicated program implementation unit is responsible for day-to-day management and has been integrated into the directorate general of corporate services. - A supervisory committee of PFMCBP donors, also chaired by the minister, provides regular oversight on program implementation and achievements. - All technical advisors recruited to PFMCBP are contracted by, and accountable to, the minister of finance. - Source of Box 1: World Bank. ### Capacity constraints and risks to reform - Capacity building issues are hampering further PFM reform and consolidation of achievements: lack of adequate numbers of well-trained civil servants with PFM skills is the main bottleneck. - Any future PFM reform program will have to heavily focus on staff development. - Government-identified risks to PFM reform: - initiation of reforms that have limited support among key stakeholders; - initiation of reforms that are underfunded and not supported by adequate staff complements; - inadequate training of staff to perform new functions; - failure to upgrade business processes to fully benefit from new information systems and capacities. *Source: _cr10341 - 94. Procedures for legislature review are firmly defined in the constitution and* ### Annex I. PFM-PR Summary Table ### Annex I. PFM-PR Summary Table ### A. PFM-OUT-TURNS: Credibility of the Budget - PI–1. Aggregate expenditure out-turn compared to original approved budget - 2007 Score: D - 2010 Score: D - Explanation: Actual primary expenditure deviated from budget estimates with more than 15 percent in two of the three years considered. - PI–2. Composition of expenditure out-turn compared to original approved budget - 2007 Score: N/A - 2010 Score: A - Explanation: The variance in expenditure composition exceeded the overall deviation in primary expenditure by less than 5 percent in any of the last three years. - PI–3. Aggregate revenue out-turn compared to original approved budget - 2007 Score: A - 2010 Score: C - Explanation: Actual domestic revenue collection was below 92 percent of budgeted domestic revenue estimates in one of the last three years. - PI–4. Stock and monitoring of expenditure payment arrears - 2007 Score: D - 2010 Score: D+ - Explanation: Anecdotal information indicate that the stock of payment arrears has generally been very low (below 2 percent of total expenditure), but no reliable data exist, nor are periodic surveys carried out. ### B. KEY CROSSCUTTING ISSUES: Comprehensiveness and Transparency - PI–5. Classification of the budget - 2007 Score: D - 2010 Score: B - Explanation: The chart of accounts used for budget management contains an organizational, economic, and a partial functional classification. The program classification is not well-developed and not used for budget management. - PI–6. Comprehensiveness of information included in budget documentation - 2007 Score: B - 2010 Score: A - Explanation: The budget documentation does include neither information on financial assets nor explanation of budget implications of new policy initiatives. - PI–7. Extent of unreported government operations - 2007 Score: A - 2010 Score: D+ - Explanation: The level of unreported extra-budgetary expenditure appears to be low and does not exceed one percent of the budget expenditure. Few donor funded projects implemented via the line ministries’ accounts in the commercial banks are neither recorded nor included in the government financial reports. - PI–8. Transparency of inter-governmental fiscal relations - 2007 Score: N/A - 2010 Score: N/A - Explanation: There is currently no subnational government in TLS. - PI–9. Oversight of aggregate fiscal risk from other public sector entities - 2007 Score: A - 2010 Score: D - Explanation: Public entities which are in fact autonomously managed (SAMES, IMfTL, Lottery, ANP) are not reported in the budget documentation and there is neither annual monitoring, supervision nor consolidation of overall fiscal risks. - PI–10. Public access to key fiscal information - 2007 Score: C - 2010 Score: B - Explanation: The government publishes the annual budget on the MOF website at the time of presentation to parliament. External audit reports are posted on the website as they are presented to parliament. Tender awards and resources available to primary service units are not published systematically. ### C. BUDGET CYCLE C(i) Policy-Based Budgeting - PI–11. Orderliness and participation in the annual budget process - 2007 Score: B - 2010 Score: C+ - Explanation: There is a clear and widely known budget calendar and a budget circular to guide MDAs in preparing budget submissions, however it does not allow a reasonable amount of time to complete the capital budget submissions and no ceilings are included for the capital budget. The budget has been approved before the start of the financial year during the two of last 3 years. - PI–12. Multiyear perspective in fiscal planning, expenditure policy, and budgeting - 2007 Score: B+ - 2010 Score: D+ - Explanation: Multi-year perspective of fiscal planning is at an initial stage. A few sector strategies which are costed are not integrated into strategic plans, and are not consistent with medium-term forecasts. Investment decisions are not based on sector strategies, and there is no link between capital expenditure and medium-term recurrent estimates. C(ii) Predictability and Control in Budget Execution - PI–13. Transparency of taxpayer obligations and liabilities - 2007 Score: D+ - 2010 Score: C - Explanation: Determination of tax liabilities is clear, but tax collection procedures are still complex and gives tax officers a fair amount of discretionary powers. Taxpayers have some access to information on tax liabilities, but access to information on administrative procedures is much more difficult. Administrative procedure for tax appeals is in place but is not efficient and independent enough. - PI–14. Effectiveness of measures for taxpayer registration and tax assessment - 2007 Score: C+ - 2010 Score: D+ - Explanation: The taxpayer registration system has been introduced, but has not yet been linked with other databases. Penalties for non-compliance exist, but substantial changes are necessary to have a real impact. There is no comprehensive and documented audit plan and audits are not conducted according to clear risk criteria. - PI–15. Effectiveness in collection of tax payments - 2007 Score: D+ - 2010 Score: D+ - Explanation: The overall amount of tax arrears is fairly insignificant. Revenue collections are transferred to the treasury’s main account daily. Aggregate reporting on tax assessments, collections, arrears and transfers to (and receipts by) the treasury is done with more than three months delay and is not reconciled. - PI–16. Predictability in the availability of funds for commitment of expenditures - 2007 Score: D+ - 2010 Score: B+ - Explanation: Cash flow forecasts are made at the start of the year and reviewed every quarter. Changes are generally as a consequence of an increase in the budget outlay because of a midyear supplementary budget. - PI–17. Recording and management of cash balances, debt, and guarantees - 2007 Score: A - 2010 Score: C - Explanation: Cash balances are consolidated and calculated daily. However, substantial government cash balances, both under treasury or line ministry control, are retained in bank accounts in commercial banks which do not form part of the consolidated cash balances of government. - PI–18. Effectiveness of payroll controls - 2007 Score: D+ - 2010 Score: D+ - Explanation: The treasury makes changes to its payroll database only on the basis of inputs received from MDAs or the Public Service Commission, because personnel records and payroll database is not reconciled in any systematic way. Occasionally, changes are made with a delay of up to three months. No audit of payroll has taken place for many years now. - PI–19. Competition, value for money and controls in procurement - 2007 Score: B - 2010 Score: C - Explanation: While the legal framework for procurement recommends the use of competitive bidding processes, there is much leeway in practice for use of less competitive methods, and however no functioning monitoring mechanism at the center of government to track the relative use of competitive bidding. There is no external oversight body, but reasonable administrative appeals process exists. - PI–20. Effectiveness of internal controls for non-salary expenditure - 2007 Score: D+ - 2010 Score: C+ - Explanation: Comprehensive expenditure commitment controls are in place and effectively limit commitments to actual cash availability and approved budget allocation. Staff in the MDAs is still not very conversant with rules and procedures for internal control. - PI–21. Effectiveness of internal audit - 2007 Score: D - 2010 Score: D - Explanation: The internal audit capacity is weak, and reports are infrequent. C(iii) Accounting, Recording and Reporting - PI–22. Timeliness and regularity of accounts reconciliation - 2007 Score: D - 2010 Score: B - Explanation: Bank reconciliations with the TSA with the BPA take place within two weeks of the close of every month, but reconciliations and clearance of suspense accounts advances are completed within two months of the end of the financial year. - PI–23. Availability of information on resources received by service delivery units - 2007 Score: D - 2010 Score: D - Explanation: Information regarding further release of funds by line ministries to service delivery units is not maintained by the MOF. The IFMIS has the capacity to monitor such details, but is not being used for this purpose at the moment. - PI–24. Quality and timeliness of in-year budget reports - 2007 Score: C+ - 2010 Score: C+ - Explanation: Budget execution reports allow direct comparison to the presentation of expenditures in the budget both on commitment and expenditure basis. Budget reports are prepared on a quarterly basis and presented to COM and parliament within 8 weeks of the end of the quarter. MDAs, however, are not able to monitor their budget execution data on-line in user-friendly formats. - PI–25. Quality and timeliness of annual financial statements - 2007 Score: C+ - 2010 Score: C+ - Explanation: Financial Statements include full information on revenues and expenditures; not all financial assets are reported on and the accounting period is not fully in line with the duration of budget execution. The financial statements have been prepared in accordance with IPSASB cash basis accounting standards. - PI–26. Scope, nature, and follow-up of external audit - 2007 Score: D+ - 2010 Score: C+ - Explanation: There is no independent external auditor, but a commercial external auditor audits the government accounts. The audit performed is a financial audit of all expenditure and revenue transactions over the accounts held by the treasury. The auditor does investigate process and systems issues, and reports on these, and on compliance issues, in an annual report and through a management letter. - PI–27. Legislative scrutiny of the annual budget law - 2007 Score: C+ - 2010 Score: C+ - Explanation: The scope of the legislature’s review covers fiscal policy, and aggregate and detailed estimates of the revenue and expenditure for the coming budget year, but at the concluding stage of the budget process. Procedures for legislature review are firmly defined and leave enough time (2.5 months) for parliamentary scrutiny. In-year budget amendments are clearly stated in the BFML, but they have not always been respected. - PI–28. Legislative scrutiny of external audit reports - 2007 Score: D+ - 2010 Score: D+ - Explanation: Parliament discusses the findings of the audit report only as part of the discussion on the annual budget. Only in a few cases has parliament requested action on the basis of audit findings. These request are sometimes, but not systematically acted upon. ### D. Donor Practices - D–1. Predictability of direct budget support - 2007 Score: D+ - 2010 Score: N/A - Explanation: No direct budget support from donors in the period under review. - D–2. Financial information provided by donors for budgeting and reporting on project and program aid - 2007 Score: D - 2010 Score: D+ - Explanation: Donor funding is reflected in the combined sources budget by recurrent and capital expenditures of line ministries, but reporting of donors on actual disbursements is weak. - D–3. Proportion of aid that is managed by use of national procedures - 2007 Score: D - 2010 Score: D - Explanation: Currently the execution of donor funded projects is mostly done through separate banking arrangements. ### Annex II. Background Documents and Previous Analytical Work (listed items) - Budget documentation in English for 2007, 2008, 2009, and 2010. - Budget Execution Reports for 2007, 2008, and 2009. - Various legal documents: the Budget and Financial Management Law, the Taxes and Duties Act, Procurement Decree Laws, Petroleum Act, Internal Regulations of Parliament, Constitution of 2002. - Summary of Strategic Development Plan, 2010. - Strategic Plan of the MOF. - Website of the MOF: www.mof.gov.tl. - Quarterly Project Management Report of the PFMCBP, World Bank. - Various IMF document: Timor-Leste Fiscal ROSC (pending); Democratic Republic of Timor Leste: Article IV Consultation – Staff Report 2007, 2008, and 2009. ### Annex III. Calculation Sheet for PFM Performance Indicator PI-2 — Key data and results - Fiscal years used for assessment: - Year 1 = 2007 - Year 2 = 2008 - Year 3 = 2009 - Table 11. Results Matrix (PI-1 and PI-2 results by year) - 2007: Total exp. deviation 44.8% | Total exp. variance 44.8% | Variance in excess of total deviation 0.0% - 2008: Total exp. deviation 39.3% | Total exp. variance 40.0% | Variance in excess of total deviation 0.6% - 2009: Total exp. deviation 11.1% | Total exp. variance 11.2% | Variance in excess of total deviation 0.1% - Selected totals from Tables 8–10: - 2007 Total expenditure: 116,229 Budget; 64,177 Actual; Difference -52,052; Absolute 52,052; Composition variance 44.8% - 2008 Total expenditure: 347,753 Budget; 484,485 Actual; Difference 136,732; Absolute 136,732; Composition variance 40.0% - 2009 Total expenditure: 680,873 Budget; 605,038 Actual; Difference -75,835; Absolute 75,835; Composition variance 11.2% _ _cr10341 - Annex I. PFM-PR Summary Table_ --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10341.pdf_