Country Financial Accountability Assessment Ethiopia

[Pages:82]Report No. 26092-ET

Ethiopia Country Financial Accountability Assessment

(In Two Volumes) Volume I: Main Report

June 17, 2003

A Collaborative Exercise By the Federal Government of Ethiopia and a Multi?Donor Task Team

Document of the World Bank

Public Disclosure Authorized

Public Disclosure Authorized

Public Disclosure Authorized

Public Disclosure Authorized

ACCA

AIA

ASC

BDA

BI

BIS

BoFED

CAD

CAS

CBE

CBO

CFAA

CIDA

CPAR

CPPR

CRDA

CSRP

DAP

DBS

DFID

DPPC

DSA

EAFA

EBF

EFY

EMCP

EPAAA

FGE

GAAP

HIPC

IAS

IFMS

'

IIA INTOSAI ISA

LAN

MEDaC

MoE

MoF

MoFED

MoH

MoU

MTEF

NGO

OECD

OFAG

PAC

PEM

PEP

PER

PESA

PIP

PRSP

RAG

SNNPR

SQL WAN

~_____

ABBREVIATIONS AND ACRONYMS Association of Chartered Certified Accountants Association of Internal Auditors Audit Services Corporation Budget, Disbursements and Accounting System Budgetary Institutions Budget Information System Bureau of Finance and Economic Development (Region) Central Accounts Department Country Assistance Strategy Commercial Bank of Ethiopia Community Based Organisation Country Financial AccountabilityAssessment Canadian International Development Association Country Procurement Assessment Review Country Portfolio Performance Review Christian Relief and Development Association Civil Service Reform Programme Development Action Plan Direct Budgetary Support Department for International Development Disaster Prevention and Preparedness Commission Decentralization Support Activity Ethiopian Accountancy and Finance Association Extra Budgetary Funds Ethiopian Financial Year Expenditure management and Control Programme Ethiopian Professional Association of Accountants and Auditors Federal Government of Ethiopia Generally Accepted Accounting Principles Highly Indebted Poor Countries International Accounting Standards Integrated Financial Management System Institute of Internal Auditors International Organization of Supreme Audit Institutions International Standards on Auditing Local Area Network Ministry of Economic Development and Co-operation (now part of MoFED) Ministry of Education Ministry of Finance (now part of MoFED) Ministry of Finance and Economic Development Ministry of Health Memorandum of Understanding Medium Term Expenditure Framework Non-Governmental Organization Organisation for Economic Co-operation and Development Office of the Federal Auditor General Public Accounts Committee Public Expenditure Management Public Expenditure Programme Public Expenditure Review Public Enterprises Supervision Authority Public Investment Programme Poverty Reduction Strategy Programme Regional Auditor General Southern Nations, Nationalities and Peoples Region Structured Query Language Wide Area Network

TABLE OF CONTENTS

PREFACE............................................................................................................................................... 2

EXECUTIVE SUMMARY.................................................................................................................... 4

DEVELOPMENT ACTION PLAN.................................................................................................... 10

1. INTRODUCTION.................................................................................................................. 17

2. PUBLIC SECTOR -FEDERAL GOVERNMENT............................................................ 18

2.1 BUDGET PREPARATION.IMPLEMENTATIONAND MONITORING............................ 18 2.2 ACCOUNTING AND FINANCIAL REPORTING................................................................ 22 2.3 INTEGRATED FINANCIAL MANAGEMENT SYSTEM.................................................... 26 2.4 INTERNAL CONTROLS AND RECORD MANAGEMENT ............................................... 28

3. PUBLIC SECTOR - OVERSIGHT ARRANGEMENTS.................................................. 29

3.1 INTRODUCTION ................................................................................................................... 31

3.2 EXTERNAL AUDIT ........... .........................................................

........................... 31

3.3 PARLIAMENTARY OVER HT ...................................................

........................... 34

3.4 FEDERAL ETHICS AND ANTI-CORRUPTION COMMISSION.. ........................... 36

3.5 PUBLIC ACESS TO INFORMATION ..............................................

........................... 38

4. ASSESSMENT OF FIDUCIARY RISK .FEDERAL LEVEL ......................................... 40 5. PUBLIC SECTOR- REGIONALGOVERNMENTS....................................................... 42

5.1

........................................................................................... 42

5.2

...................................................................................

5.3 TIGRAY REGION.

............................................................................................ 48

5.4 SOMALI REGION

.............................................................................................. 52

5.5

........................................................................................... 55

6. ASSESSMENT OF FIDUCIARY RISK - REGIONAL LEVEL ...................................... 60

7. NON-GOVERNMENTAL ORGANISATIONS................................................................. 61

8. PRIVATE SECTOR.............................................................................................................. 63

9. THE ACCOUNTANCY PROFESSION.............................................................................. 65

9.1 STRUCTUREOF THE PROFESSION..........................................................................

9.2 EDUCATION AND TRAINING ......

.........................................................

ANNEX ANNEX ANNEX

I I1 I11

........ COMPARATIVE MATRIX WITH OTHER SUB-SAHARANCOUNTRIES 69

BLIIBSLTIOOGF RPEARPSHOYN..S....M....E...T....A..N...D.....C...O....N...T...A...C...T..E...D.................................................................................................................

72 75

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PREFACE

1. The Country Financial Accountability Assessment (CFAA) for Ethiopia was undertaken between April 2001 and November 2002, culminating in the in-country mission carried out over a three-week period in September and early October 2002 b y a joint team o f Federal Govemment o f Ethiopia officials, World Bank staff, and a number o f donor-funded consultants. The exercise covered nine modules set out in Section 2 o f the Initiating Memorandum prepared and distributed in May 2002 to establish the groundwork for this exercise. Areas covered included those in the public sector at both Federal and Regional level, the private sector including the accountancy profession, and non-governmental organisations.

2. An Inventory Study consultancy was commissioned by the European Union, as the first step to the C F A A information gathering, to take stock o f the current knowledge on budgeting, reporting and accounting processes in the public sector in Ethiopia. In particular, due to the Public Expenditure Reviews (PERs) that have been carried out continuously for eight years in cooperation between the Ethiopian Government and the donor community, much was known o f the strengths and weaknesses o f public expenditure management in the public sector. In addition, a comprehensive reform o f the budgeting, reporting and accounting procedures had been embarked on b y the Govemment since 1997 with the objective o f improving the effectiveness and transparency o f financial management.

3.

Against this background, the main task o f the C F A A was to assess how effective the

reforms were at both Federal and Regional level and how far they have gone in addressing

weaknesses identified in previous assessments. The C F A A exercise also had to take stock,

albeit in a short and transitional period, o f the impact o f the Government's decentralization

plan to transfer responsibility for service delivery, as well as very large financial resources,

from Regional Governments to the next lower tier - the Woreda.

4. The Govemment Counterpart Team was led b y W/o Almaz Abebe and consisted of W/o Aster Haile Sellasie, Ato Getachew Negera, Ato Taddese Birbirsa, Ato Alem Kifle, W/o Senait Melesse and W/t Konjit Zeleke. Other Government officials who worked with the teams, which travelled to the regions, were A t o Degu Lakew and A t o Negussie Teferra.

5.

The multi-donor mission comprised o f Brighton Musungwa (Task Team Leader,

World Bank), Eshetu Yimer (World Bank), Mike Frazer (DFID Consultant), Edna Elliot-

McColl (DFID Consultant), Giovanni Caprio (EU Consultant), Ian Bolton (EU Consultant),

Jens Claussen (NORAD Consultant), Jerker Thorvaldsson (SIDA Consultant), Albert de

Groot (Royal Netherlands Embassy Consultant), Anthony Bennett (Ireland Aid Consultant),

Stewart Maugham (Ireland Aid Consultant). There were also national consultants from the

firm o f Getachew Kassaye and Co. These were Ato Akalu Nuriye, Ato Abraham Meshesha,

Ato Tesfaye Gashaw, Ato Fikremariam Ada1 and Ato Tesfaye Alemu.

6. A one-day meeting was held on November 26, 2002 to discuss the draft findings and recommendations and to provide further inputs prior to the preparation and finalization o f the draft report. The meeting was chaired b y Ato Getachew Gebre, the State Minister, Ministry o f Finance and Economic Development and was attended by about twenty-five stakeholders (including donors).

7.

The work o f the draft C F A A was validated in March 2003, during a two day

workshop involving more than one hundred and twenty officials from all levels of

Government and attended b y the State Minister o f MoFED, Ato Getachew Gebre, and donor

representatives. T h i s workshop confirmed the acceptance o f the CFAA by the Government

and all other partners in the process and helped to lend additional shape, prioritisation and

substance to the actions, which w i l l follow the completion o f the CFAA process. These

initiatives include a drill down and refinement o f the Development Action Plan (DAP) to

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further prioritise initiatives in more detail, including initial bench marking and timetabling. This refined DAP will be brought before the Public Institutions Committee and the Public Management Group who w i l l then address the moving forward o f the initiatives in consultation with the Government. 8. Peer Reviewers were Brian Falconer, Iraj Talai, Edward Olowo-Okere (AFTQK, World Bank); David Shand (Financial Management Anchor, World Bank); Michael 0. Stevens, Navin Girishankar (AFTPR, World Bank), Duvvuri Subbarao, William James Smith (AFTP2, World Bank), Nicola Smithers (PRMPS, World Bank), Simon Gill (DFID,London) 9. Ishac Diwan (Country Director, World Bank, Ethiopia), Oliver Blake (Governance Advisor, DFID London), and Anthony M. Hegarty (Financial Management Manager, World Bank) supported the process throughout and provided the major guidelines. 11. The team wishes to pay special thanks to the Federal Government o f Ethiopia, and particularly Ato Getachew Gebre, W/o Almaz Abebe and members o f the counterpart team who worked closely with the mission. Special thanks are also extended to the representatives in Ethiopia of the EU, SIDA, NORAD, Ireland Aid, NORAD, the Netherlands for their active involvement in the CFAA process. The team also wishes to thank staff o f the World Bank Country Office in Ethiopia, DFID, and, in particular, Ato Menbere Tesfa, for logistical support during the mission.

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EXECUTIVE SUMMARY

1.

A Country Financial Accountability Assessment (CFAA) i s a diagnostic tool

designed to enhance knowledge o f financial accountability arrangements in the public and

private sectors in client countries, to be usedb y the govemment o f the country concerned, and

other donors. I t supports both the exercise of fiduciary responsibilities and the achievement

o f development objectives - fiduciary responsibilities, b y identifying the strengths and

weaknesses o f accountability arrangements in the public sector and the risks that these may

pose to the use o f government own funds as well as those provided b y donors; and

development objectives, b y facilitating a common understanding b y the govemment, and

development partners o f the country's financial management arrangements in both the public

and private sectors, thus facilitating the design and implementation o f capacity building

programs. However, i t i s not intended to, and does not, provide assurance on the specific uses

to which govemment, and donor funds have been or may be applied.

2.

The Ethiopia C F A A was carried out against a backdrop o f a number o f initiatives

being undertaken b y the Federal Government which have significant impact on financial

management and accountability arrangements. At the heart o f this transformation i s a

Woreda' decentralisation policy that transfers financial and human resources to the local

government sphere in an attempt to encourage democratic decentralisation, downward

accountability, and more responsive service delivery consistent with the broad fiduciary

objectives o f Ethiopia's expenditure management system. While ambitious and rapid, the

Woreda decentralisation strategy i s being managed pragmatically, primarily through

commonsense approaches undertaken b y Regions.

3.

The CFAA, and specifically i t s Development Action Plan, has attempted to provide a

strategic analysis o f how devolution i s in effect providing the lens through which public

sector capacity building and Ethiopia's institutional development prospects should be viewed.

As part o f the assessment, visits were made to four regions, Amhara, Tigray, Somali and

SNNP Region. The work focused on the effects o f this devolution program and identified

measures, in particular training and capacity building programs that could help to strengthen

the accountability environment. These findings with regard to the devolution process are o f a

tentative nature as the process i s s t i l l ongoing.

4.

The overall conclusion i s that considerable progress has been made in the

rationalisation and strengthening o f budgeting processes at the Federal level. The activities

carried out in SNNP Region under the Budget Reform Program have made some progress,

thanks to the determination o f the management team at the Regional Bureau of Finance and

Economic Development (BoFED), the effectiveness o f the Decentralisation Support Activity

(DSA) Project and the training programs organized in conjunction with the Regional

Management Institute in Awasa and other locations. However, the rollout to other regions i s

s t i l l underway and support for this initiative i s essential.

5.

In spite o f the foregoing, more needs to be done and a number o f prioritised

recommendations are highlighted in the Development Action Plan, which has been developed

mainly within the context o f reform initiatives already in existence or planned. These include

the Expenditure Management Control Programme (EMCP), the Public Service Delivery

Capacity Building Program (PSCAP), the Capacity Building for Decentralised Service

Delivery (CBDSD) and the Civil Service Reform Program (CSFW). As detailed plans are

developed, there may also be a need for additional `stand-alone' initiatives.

' A Woreda i s the lowest full-time govemment covering roughly 100,000 people and consist of an elected council and a set of

sectoral offices.

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6. However, in all o f these initiatives i t i s critical that the Federal Government of Ethiopia maintain ownership and work together in a more harmonised approach with donors to establish realistic and achievable targets for implementation. There are many models for doing this and one o f the encouraging aspects o f this CFAA process was the willingness o f donors to work together with the Government in establishing common ownership o f this report. The work o f the Strategic Partnership for Africa (SPA) mission in September 2002, which overlapped with t h i s CFAA, has already begun to address the harmonisation of budget support for the Poverty Reduction Strategy*. T h i s alignment o f donor approach compliments and enhances many o f the recommendations arising from the CFAA.

Key Issues

7. The following provides, in a summary format, the key issues arising from the modules covered under the CFAA.

Currently, the totality o f Government funds or public money i s not comprehensively covered within the existing financial reporting structures. Some progress has been made, but issues with regard to medium term financial planning, completeness, sequencing o f the budget calendar and resourcekapacity constraints in budget preparation and monitoring need to be quickly addressed if momentum previously gained in budget preparation i s not to be reversed.

I t was too early in the process to determine completely the success o f preparation o f financial information under the new chart o f accounts, and while there have been improvements, current accounting and reporting systems are weak in terms o f delay and their incomplete nature. The focus on accurate end-of-year figures needs to be balanced with management accounting and in-year information. Initiatives for information systems may mitigate some o f these concems, but the existing planned I T initiatives should also be reviewed in the context of an overall InformationSystems Strategy.

The organisational and financial devolution to RegionsWoredas has the potential of reducing the previous `above average' evaluation for financial integrity. There i s urgent need to ensure that internal audit and other functions o f internal control start to operate effectively at both the Regional and Federal level in this changing environment.

There i s currently a backlog in the presentation o f audited accounts. T h i s needs to be addressed along with the role o f the various institutions in public oversight, including Parliamentary committees. The capacity and reach o f the Federal Ethics and Anticorruption Commission needs to be strengthened. Proposed legislation to enhance public access to information needs to be translated into practice.

With regard to Regional Governments, the present devolution process i s currently posing short-term challenges in the practical implementation. There appears to be a trade-off between devolution o f spending on the one hand and a strong financial accountability environment on the other. The problems are amplified by staff s k i l l shortages at Woreda level, which need to be resolved. While innovative aspects o f `block grant' application have been introduced during implementation, fiscal decentralization s t i l l poses important challenges for informed expenditure management. A common feature o f all Regions visited was that there was pressure on the timeliness o f accounting and reporting information creating a potential problem in the financial management system. There was

Ethiopia i s one of the two pilot countries identified for harmonisation of donors' procedures using govemment systems. The introduction of a harmonisedsystem of aid administration would reduce the burden of fulfilling conditionality by implementing agencies, and enhance transparency and trust in accounting for the support provided.

5

considerable variation in the fiduciary risk status in the four Regions visited demonstrating the importance o f not creating a generalised view o f Regions in Ethiopia.

With regard to the private sector and Non-Governmental Organisations (NGOs), there i s a shortage o f resources for enforcing the law and monitoring compliance for NGO's. The development o f the private sector financial accountability i s relatively l o w but the regulatory framework i s extensive enough to provide for good corporate governance, with the exception o f the Commercial Code o f 1960. On the issue of the audit/accountancy profession, there i s no national accountancy body or `standard setting' body and the academic and practical training capacity in the Private Sector needs to be enhanced.

As part o f the implementation and follow-up o f the CFAA and Development Action Plan, an integrated three-year rolling plan for Public Expenditure Management indicators should be identified.

Risk Assessment

8.

The diagrams on the next two pages have been created to illustrate in a composite

way the current levels of fiduciary risk and the impact that intervention may have. The

`darkness'/depth o f the shading reflects the seriousness o f the perceived risk; consequently,

the goal i s to make the right hand side, or third year, as `light' as possible. The diagrams

demonstrate that, with sufficient impetus given to the planned and proposed interventions,

most o f the elements of weaknesses identified from the CFAA assessment could be reduced

to the Moderate Risk (or lower) classification within a three-year time horizon. T h i s should

obviously take into account the absorption capacity for this level of initiative b y the

Government at both Federal and Regional levels. Also, the analysis only addressed the four

Regions examined in the CFAA process, and while there were crosscutting issues common to

all, there were also those specific to particular Regions. T h i s may be the case with those

Regions not covered by the CFAA. The nature o f such diagrams makes them partially

subjective and they cannot be a direct interpretation of the conclusions in the main text o f the

C F A A report; nevertheless, they do give a snapshot o f the situation. The descriptions used to

= quantify the risk are as follows KEY

High Fiduciary Risk

p7A

n

Substancial Fiduciary Risk Moderate Fiduciary Risk Negligible or Low Fiduciary Risk

This also helps to place the evaluation in an international benchmark context and, while similar diagrams do not exist for other countries in sub-Saharan Africa, Ethiopia i s above the modal point3in nearly all areas in comparative terms.

9. Underpinning these diagrams i s the Development Action Plan (DAP) that follows them. The second bar chart diagram i s cross-referenced to the various initiatives in the Development Action Plan and how they should impact on the situation. These initiatives and actions are drawn from the work undertaken b y the C F A A team and existing plans in the documentation supplied. Further details of the analyses are in Volume Two o f the report. The two diagrams, Development Action Plans and the detailed text in the two volumes of this report provide some basis for the implementation b y the Federal Government o f Ethiopia,

See Annex 1

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