MoF misled Parliament by providing bogus figures

Sumanthiran's Committee flays Mangala's Ministry 

Continued from yesterday

By C. A. Chandraprema-May 15, 2019, 7:59 am

The Committee on Public Finance (CoPF) is among other things, mandated with the task of tabling a report on the Budget Estimates, examining among other things whether the money is well laid out within the limits of government policy. The CoPF bases its assessment on three sources, the draft Budget Estimates for 2019, the 2019 Budget Speech; and revised estimates and further documents provided by the Ministry of Finance. The CoPF observes that Article 148 of the Constitution reposes with Parliament the ultimate power and responsibility with regard to the control of public finance. Therefore, what is set out in a budget, which is finally adopted, is not only of critical importance to the country, it is amongst the most serious business of Parliament.

In this context, an entrenched set of problems in informational standards and due diligence is illustrated through the line item on vehicle acquisition expenditure. The CoPF Report II on the 2018 Budget noted that capital expenditure for the acquisition of vehicles purchases has also increased dramatically in 2017 and for the following year as well. The outlay for acquisition was about 1.4 billion a year in 2015 and 2016, and it has increased to over 16 billion in 2017 – an increase of 12 times. This is despite the increase in expenditure on the Operational Leasing Method as well. This constituted a perturbing increase in what was allocated to the acquisition of vehicles.

When the CoPF noted this anomaly and asked for a response, the Ministry of Finance provided explanations for the inordinate increase in this particular budget line stating firstly, that in 2017 and 2018 a large number of utility vehicles were procured, mainly for the defence and railway sector, and secondly that the treatment of costs was affected by the exemption and reinstatement of excise duties on vehicles procured through the Consolidated Fund. These explanations themselves help to illustrate one of the entrenched problems of budget information provided to Parliament.

Expenditure estimates are not intelligibly summarized or explained. The first explanation for the 12 fold increase in the cost of vehicle acquisition came in the form of information provided to the CoPF to corroborate the claim that the budget variance was based on extraordinary purchases of utility vehicles. The very large deviation occurred due to the vehicle acquisition for public services (health care and public transport) and for security purposes (police and military), being added and aggregated with the acquisition of vehicles for administrative purposes. It took the CoPF significant time and effort to receive the information that was needed to make sense of these budgetary estimates and allay concerns about the extraordinary variations.

This problem would not have arisen, however, if the MoF exercised due diligence in ensuring that the summary estimates are broken down in a more intelligible manner, and reported in sensible categories that enable Parliament to make better decisions, in order that the consent of Parliament to the budget allocation is properly informed, rather than consent based on being poorly informed, or being uninformed. The MoF explained that budgeted estimates had also varied because: during the period 25.10.2014, - 21.11.2015 vehicles procured by the government, utilizing the Consolidated Fund, were exempted from excise duty. This was another reason for the drop of vehicle purchasing cost in 2015 and 2016.

The fact that the government is able to engage in such ‘gimmicks’ to change what Parliament observes in terms of changes in costs, makes it all the more important that the MoF follows higher standards of disclosure, so that Parliament is not misled with regard to the meaning of the budget allocations that it approves. These large extra allocations for military vehicles are particularly puzzling as they are taking place in a peace-time context, and at a time when the public finances of the government is facing challenges on many fronts with low growth, debt increases, high interest costs and lack of budgetary space for developmental activities. Therefore, the value of improved informational standards and due diligence is also that it would allow Parliament to probe such allocative decisions in terms of budget priorities. Would such financing be better allocated in improving the buses used for public transport, for instance? The opportunity to ask such questions and improve budget allocations has been missed in the previous years due to the relevant information being difficult to access within the overall reporting on the budget.

Misuse of discretionary budgeting

The CoPF, in Report II on the 2018 Budget, found that the government submitted supplementary budget estimates with regard to the purchase of vehicles in 2017 that were not disclosed transparently in the budget estimates provided to Parliament in November 2016. The concern is heightened by the fact that allocations to be used under such circumstances are placed under a budget subheading called, ‘Supplementary Support Services and Contingent Liabilities’ which is in Section 6 of the Appropriation Bill, under the budget head of Development Activities of the National Budget Department, which is explicitly authorised to be expended in a discretionary manner by the government (with very wide scope), regardless of the original stated purpose of the allocation. The rules under which this budget head has been defined allow transfers from it to be made to any other Programme under any other Head, with the authorization of the Treasury Secretary, a Treasury Deputy Secretary, or the National Budget Director General. The only condition is that Parliament must be notified of the transfer, its amount, and its reasons after the fact, within two months of the date of transfer. This allows for the abuse of the budgeting process, which has taken place in the past.

The MoF has accepted that drawing from this budget head has been the standard practice for funding the purchase of vehicles and explained to the CoPF the reasoning as follows: "In the preamble of the budget estimates 2017 that was submitted to Parliament in November 2016, it has been clearly mentioned that budgetary provisions for the procurement of vehicles has not been included under the budget estimates of each spending unit and therefore such allocation would be provided on requirement from the ‘Supplementary Support Services and Contingent Liabilities’ project under the national budget."

The MoF has also asserted that the practice is beneficial for better management of public finances, explaining that providing allocation for procurement of vehicles on case by case basis, is more transparent as the details of such allocations are submitted to Parliament within two months of the provision of allocations and thereby get exposed to the media and become the subject of wide discussion.

The Committee appreciates the transparency value of the allocation of vehicles getting exposed to the media and becoming the subject of wide discussion. However, it rejects the claim that providing wide discretion to MoF officials, which is not subject to the approval of Parliament (but only requires Parliament to be informed two months after the fact) can be a basis for such greater transparency and accountability, as opposed to providing Parliament the power to scrutinize and pre-approve such expenditure in advance, as is the case with normal budgeting discipline.

The CoPF in its previous year’s report highlighted the problematic practice of using the discretionary budget to purchase large numbers of vehicles without the approval of Parliament. The CoPF recognizes the need for issuing Supplementary Appropriation Bills (Supplementary Estimates) for unanticipated expenditure requirements. Utilization of such a measure should be under exceptional circumstances, and not as a standard practice – it should be the rare exception, and not the planned norm for any category of spending.

The investigations on the expenditure on vehicles has revealed to the CoPF a serious issue with regard to the misuse of discretionary budgeting, where the oversight function of Parliament is also partially subverted. Tightening the rules around the use of discretionary budgeting will be an important step in improving the informational standards and due diligence of budgeting in Sri Lanka.

Misstatement of Foreign Loan Interest Cost

The CoPF observes that estimates provided in the budget on interest payments on foreign loans have been egregiously incorrect over many years. The actuals have been under-estimated by 61.2% and 33.8% in 2016 and 2017 respectively. The report submitted by the CoPF to Parliament on the previous budget (Budget 2018), noted that "Such large discrepancies need a valid explanation as foreign debt and interest payment commitments are large, known in advance, the bulk of it accrued over decades, and easily calculated."

It also noted that the MoF explanation provided was that this is a result of unexpected level of treasury bond purchases after the budget estimates are prepared, that count as foreign debt. The CoPF held that this explanation lacks credibility because it requires the Committee to accept that interest payments on foreign debt built up over decades, which is about 35% of GDP at present, are hugely overshadowed by the unexpected changes in interest payments on very short-term foreign debt taken and paid within a single year.

The CoPF went on to state that the very large and systematic error in projecting foreign interest payments also deserves a written explanation that is tabled in parliament. Such a written explanation has not been received to-date. This year, to guard against such repeated errors in estimates, the CoPF has requested the MoF to share with the CoPF the schedule that it maintains on foreign debt and interest payments. It is only in May 2020, after the Central Bank Annual Report is published for 2019, that the CoPF will be in a position to make a fresh assessment about the integrity of the information that has been provided in the current budget cycle.

CoPF also notes that in two out of the last 5 years, (under the yahapalana government) the MoF financial reports deviated by a large margin from the Central Bank in the foreign interest payments reported. This too requires an explanation. The CoPF stated that the huge discrepancies in estimates provided to Parliament, against actuals, reflects the very serious failure by the MoF to adhere to reasonable standards in the provision of information, and lack of due diligence in responding to the issues highlighted through CoPF reports.

(Concluded)