Opinion and Analysis
Public finance law must ensure new practices are transparent
Posted Monday, August 20 2012 at 19:56
- One of the best sections of the new law relates to government loan guarantees. Article 59 of the act requires The Treasury to report to the National Assembly, and to publicly disclose, a statement detailing any loan guarantees that have been entered into by government within 14 days of entering into it.
- One advance in the PFM Act is that it requires extensive financial reporting by state corporations (Article 89).
- The PFM Act allows the government to engage in derivatives transactions.
On July 23, President Kibaki signed the new Public Financial Management Act into law. The bill was heavily debated and revised before Parliamentary approval, with grumbling on all sides.
But now that it is passed, it is time to understand its implications and engage with the process of drafting regulations.
Some of the provisions of the new law have been discussed elsewhere, and most of these discussions have focused on the impact of the law on the budget process.
But the PFM law also has a number of new and important requirements for other fiscal matters. In general, these provisions are a major step forward, although, as I explain below, the law does not do enough to ensure public disclosure and this should be addressed in the implementing regulations.
One of the best sections of the new law relates to government loan guarantees. Article 59 of the act requires The Treasury to report to the National Assembly, and to publicly disclose, a statement detailing any loan guarantees that have been entered into by government within 14 days of entering into it.
This statement must include a risk assessment, as well as the basic details of the guarantee. This is exactly the kind of disclosure that should be more common within the Act.
Other areas of the new law mandate better reporting than in the past, but they fall somewhat short on public disclosure. For example, consider the section dealing with tax waivers.
Article 82 requires an annual report within three months of the end of the financial year that will describe all tax waivers, the beneficiaries, and the reasons for the waiver.
The regulations could be tightened to ensure that this report includes all tax expenditures, and a full costing of the loss in revenues associated with each (this may be intended by 82:5b, but it is not specific enough).
The language of the act is not entirely clear with respect to when the report should be published, and this should be remedied.
In line with other reports, there is no reason that it should not be published immediately upon tabling in the National Assembly or within seven days.
The PFM Act allows the government to engage in derivatives transactions. This is not necessarily problematic, but international evidence suggests that derivatives are complex, risky, and opaque instruments and that governments (and private actors) have not always handled them well. It is, therefore, a positive step that Article 56 requires publication of “derivative transactions entered into.”
However, no further instructions are given for how or when this information should be published, and this opens the door for government to engage in risky operations without disclosure until it is too late for effective oversight from the National Assembly or the public.
To manage the risk associated with these instruments, the regulations should state that if the government is to engage in derivatives transactions, it should produce a strategy document that explains why and how it will use these derivatives on an annual basis, and it should report to the National Assembly and the public on the use of derivatives on a monthly basis.
An alternative would be to follow the reporting requirements for loan guarantees specified in Article 59, which, as mentioned above, requires that these be reported to the National Assembly within 14 days of entering into the guarantee.