Country Financial Accountability Assessment

September 5, 2003

Document of the World Bank

Report No. 29155-MX

MexicoCountry Financial Accountability Assessment

Mexico Country Management UnitFinancial Management, Operations Support UnitLatin America and Caribbean Region

Report N

o. 29155-MX

Mexico

Country Financial A

ccountability Assessm

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MCxico Country Financial Accountabi l i tv Assessment i

ADEFAS APF ASF BANCOMEXT BANOBRAS

BANSEFI

CAFESP

CFE CFAA CLC CMH CNDH COMPRANET

COTEIP

DECLARANET DGCP DGPOP DGPyP

DGPyPS

DOFI

FARAC

IFE IMSS INEGI

IPAB

LCE’s NAFIN OIC PBI PEDIREGAS

PEMEX PND RFT SAT SECODAM

SEGEPLAN SEV

Acronyms

Adeudos de Ejercicios Fiscales Anteriores Administraci6n Pdblica Federal Auditoria Superior de la Federaci6n Banco de Comercio Exterior Banco Nacional de Obras y Servicios Pdblicos S.N.C. Banco de Ahorro Nacional y Servicios Financieros Comisi6n Asesora de Financiamientos Externos del Sector Piiblico Comisi6n Federal de Electricidad Country Financial Accountability Assessment Cuenta por Liquidar Certificada Contaduria Mayor de Hacienda del Congreso Comisi6n Nacional de Derechos Humanos Sistema Electr6nico de Contrataciones Gubernamentales ComitC TCcnico para la Instrumentacih del Plan Especial de CrCdito Extern0

Sistema Electr6nico de Declaraci6n Patrimonial Direcci6n General de CrCdito Pliblico Direcci6n General de Programaci6n Direcci6n General de Programaci6n y Presupuesto Direcciones Generales de Programaci6n y Presupuesto Sectoriales Direcci6n de Organismos Financieros Internacionales Fideicomiso de Apoyo para el Rescate de Autopistas Concesionadas Instituto Federal Electoral Instituto Mexican0 de Seguridad Social Instituto Nacional de Estadistica, Geografia e InformBtica Instituto de Protecci6n al Ahorro Bancario

Lineas de CrCditos Especificas Nacional Financiera S.N.C. Organos Internos de Control Product0 Interno Bruto Proyectos de Infraestructura Productiva de Largo Plazo Petr6leos Mexicanos Plan Nacional de Desarrollo Registro Federal de TrQmites Sistema Administracibn Tributaria Secretaria de Control y Desarrollo Administrativo (hasta Abril 10 de 2003), ahora es la SFP Sistema General de Planeaci6n Sistema de Evaluaci6n

Outstanding from previous fiscal years Federal Public Administration Supreme Audit Office of the Federation Foreign Trade Bank National Bank of Public Works and Services National Savings and Financial Services Bank Advisory Committee on Public Sector Foreign Financing Federal Electricity Commission AnBlisis de l a Gesti6n Financiera Pliblica Certified Account Payable Audit Office (Congress) National Human Rights Commission Electronic Government Procurement System Technical Committee for the Implementation o f the Special Foreign Credit Plan Electronic Financial Disclosure System General Directorate o f Public Credit General Directorate o f Planning General Directorate o f Planning and Budget General Directorates o f Sectorial Planning and Budget Directorate o f International Financial Agencies Trust Fund to Support the Maintenance o f Highways under Concession Federal Electoral Institute Mexican Institute o f Social Security National Institute o f Statistics, Geography and Information Technology Institute for the Protection o f Bank Savings Specific Credit Lines National Financial Agency Internal Control Units Gross Domestic Product Long Term Productive Infrastructure Projects Mexican Oil Company National Development Plan Federal Registry o f Procedures Tax Administration System Administrative Development and Control Secretariat (until April 10,2003), now SFP General Planning System Evaluation System

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SHCP SIAFF

SICG

SICOM

SIP SFP

TESOFE UCEGP

UCGIGP

UIDEP

UNAM

UPP UR USC

Secretaria de Hacienda y Crtdito Publico Sistema Integrado de Administracih Financiera Federal Sistema Integral de Contabilidad Gubernamental

Sistema de Compensacih de Adeudos entre Dependencias del Sector Pliblico Sistema Integral de Pagos Secretaria de la Funci6n Pdblica (antes SECODAM) Tesoreria de la Federaci6n Unidad de Control y Evaluaci6n de la Gesti6n Pliblica Unidad de Contabilidad Gubernamental e Informes de la Gesti6n Pliblica Unidad de Inversiones de Desincorporaci6n de Entidades Estatales Universidad Nacional Aut6noma de Mtx i co

Unidad de Politica Presupuestaria Unidades Responsables Unidad de Servicio C iv i l

Ministry of Finance Federal Integrated Financial Management System Integrated Government Accounting System System for the compensation o f debts between public sector agencies Integrated Payment System Civi l Service Secretariat (previously SECODAM) Treasury o f the Federation Public Management Control and Evaluation Unit Government Accounting and Public Management Reporting Unit Investment Unit for the decentralization o f State Entities Mexico's National Autonomous University Budgetary Policy Unit Responsible Units Civi l Service Unit

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TABLE OF CONTENTS

Executive Summary ............................................................................................ v

I . OBJECTIVES. SCOPE AND INFORMATION SOURCES ...................................... 1 Objectives and Scope of this Document ................................................................. 1 Procedure Used for Information Gathering ................................................................. 2 Sources of Information Used ................................................................................... 2 I1 . FEDERAL PUBLIC SECTOR BUDGET MANAGEMENT ...................................... 3 Summary and Conclusions on Budget Management ........................................................ 3 Strengths and Weaknesses of Budget Management Affecting the Financial Management of the Federal Public Sector ................................................................................... 4 I11 . FEDERAL PUBLIC SECTOR TREASURY MANAGEMENT ............................. 8 Summary and Conclusions on Treasury Management ............................................... 8 Strengths and Weaknesses of Treasury Management ............................................... 9 I V . ACCOUNTING AND FINANCIAL REPORTING OF THE FEDERAL PUBLIC SECTOR ......................................................................... 10 Summary and Conclusions on Accounting ................................................................ 10 Strengths and Weaknesses o f Accounting ................................................................ 11 V.FEDERAL INTEGRATED FINANCIAL MANAGEMENT SYSTEM ................... 14 Summary and Conclusions on the SIAFF ................................................................ 14 Background and Description of the SIAFF ................................................................ 14 Strengths and Weaknesses o f the SIAFF ................................................................ 15 V I . PUBLIC DEBT MANAGEMENT ................................................................ 20 Summary and Conclusions on Public Debt Management .............................................. 20 Management Strengths and Weaknesses ................................................................ 21 VI1 . PUBLIC INVESTMENT MANAGEMENT ....................................................... 22 Summary and Conclusions on Public Investment Management ..................................... 22 Management Strengths and Weaknesses ...................................................................... 23 VI11 . INTERNAL CONTROL MANAGEMENT OF THE FEDERAL PUBLIC SECTOR ........................................................................................... 26 Summary and Conclusions on Internal Control Management ...................................... 26 Management Strengths and Weaknesses ................................................................ 27 I X . AUDIT IN THE FEDERAL PUBLIC SECTOR .............................................. 30 Summary and Conclusions on Audit Management in the Federal Public Sector .................... 30 Management Strengths and Weaknesses ................................................................ 31 X . PARLIAMENTARY OVERSIGHT OF THE FINANCIAL MANAGEMENT OF THE FEDERAL PUBLIC SECTOR ................................................................. 33 Summary and Conclusions on Parliamentary Oversight ............................................... 33 Background ..................................................................................................... 33 Strengths and Weaknesses ................................................................................... 34 X I . TRANSPARENCY AND PUBLIC ACCESS TO THE FINANCIAL INFORMATION OF THE FEDERAL PUBLIC SECTOR Summary and Conclusions on Transparency and Public Access to Information Standards and Codes Compliance Report (ROSC) Fiscal Transparency Module

...................................... 35 .................... 35 .................... 35

Strengths and Weaknesses ................................................................................... 36

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XI1 . FIDUCIARY RISK ASSESSMENT ................................................................ 38 ................................................................ 38

Framework for fiduciary risk assessment ................................................................ 39 Results o f assessment .......................................................................................... 40 Summary o f Fiduciary Risk Assessment ............................................................... 43

ANNEX 1 - SPECIFIC OBJECTIVES AND SCOPE OF THE REVIEW OF EACH SECTOR ........................................................................................... 45

The need for fiduciary risk assessment

I . Budget Management o f the Federal Public Sector I1 . Treasury Management o f the Public Sector

V . Public Debt Management ................................................................................... 47

VI11 . Audit Management in the Federal Public Sector

X . Transparency and Public Access to the Financial Infordat ion of the Federal Public Sector .. . . S O

.............................................. 45 ....................................................... 45

I11 . Accounting and Financial Reporting Management o f the Federal Public Sector ........ 1 . 46 IV . Federal Integrated Financial Management System (SIAFF) ..................................... 46

V I . Public Investment Management ......................................................................... 48 VI1 . Internal Control Management o f the Federal Public Sector ...................................... 48

............................................... 49 IX . Parliamentary Oversight of the Financial management\pf the Federal Public Sector .......... 50

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EXECUTIVE SUMMARY

General Background

1. In the last seven years, the Government of Mexico has been developing a series of measures intended to improve the financial management of the federal public sector. This report has been prepared to summarize the status of implementation of such measures, highlighting those areas where strengths were observed, as well as mentioning those where additional attention may be required.

2. The report essentially covers the financial management at the federal level. I t reflects the contributions of the input received from the officials responsible for each area of public management that was covered (Annex 5), both in the preparation of the text and in the final review, with the aim of ensuring the relevance o f the observations made in each case.

Main Conclusions

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The Government of Mexico has adequate mechanisms in place to record and report public expenditures. The budget management of the Federal Government has several management instruments and defined objectives, standards and procedures, fostering an accountable and transparent management of State expenditures. The main strength observed was the existence of clear and complete rules that govern the Federal Government's administrative financial transactions. The gaps in the information received relating to budget execution, which have hindered the projection of cash requirements, were not fully corrected after the implementation of the Federal Integrated Financial Management System (SIAFF). The development and implementation of the SIAFF began in 1997. The slow pace at which this process has occurred i s evidence of the difficulties encountered due to the existence of multiple sub-systems in virtually a l l Government areas. Although the SIAFF i s not conceived as an integrated management process, i t would generate more effective control elements and supply outputs that wi l l improve the process of result evaluation. Particular attention should be given to t h i s limitation of the SIAFF to ensure the interest of i t s users and therefore i t s sustainability. The federal public administration has rigorous internal control systems that evidence the Government's decision to fight against corruption and improper administrative practices. The Civi l Service Secretariat or SFP (previously SECODAM) i s the entity that provides integration and guidance to the internal control systems, enabling a comprehensive vision of internal control problems, as well as the development o f common solutions for the entities of the Federal Government. The SFP i s a control and development entity founded on the recognized experience and effectiveness of the SECODAM. Its top-level professionals are continuously trained on disciplines related to their fields. The main weaknesses of SECODAM were associated with the relatively persecutory and punitive than preventive character of its procedures; however, the new SFP intends to redirect i t s efforts to supporting improved public management. The responsible of independent public audits i s the Supreme Audit Office of the Federation (ASF), a branch of the legislative which started its operations in January o f 2001. I t s institutionalization i s not fully completed, and there i s not enough evidence yet to make an adequate evaluation of i t s management. Given the traditional involvement o f the SECODAM in

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the area o f governmental auditing, the continuity o f the SFP wi l l be of vital importance to comply with the Agreement o f Technical Cooperation and Exchange entered into by the C M H (now ASF) and SECODAM (now SFP).

BUDGET MANAGEMENT

8. The main strengths of the budget system are associated with the existence of a well-defined, regulated and documented mandatory procedure for all its execution phases. The Federal Public Administration has a Classifier of Expenditures per Objective that allows for the integration and consolidation of institutional financial statements to produce the Financial Statements of the Federation. I t represents the structure o f the chapters, descriptions and entries that define the expenditures according to their nature: current or capital. There i s a 34-digit budgetary classification that makes it possible to track 14 components which classify expenditures by administrative, economic and functional information. A public information system on the Internet reports on legal and administrative procedures, budget execution and government procurement processes, which facilitates management and interaction with the community. From September to December o f 2002, the Manual of Budget Rules for the Federal Public Administration was significantly updated, in order to simplify and expedite the processing procedures.

9. Among the weaknesses of the budget system, i s the complexity of procedures resulting from the large number o f documents, laws, rules, decrees, circulars and instructions that, diminish the efficiency and effectiveness o f budget management. Many of these regulations are issued on an annual basis or are regularly updated or revised within each fiscal year. The budget law in force since 1977 has become outdated in some aspects and this requires the inclusion of some items in the Federation's Decree o f Expenditures Budget that should be part of the law, thus unnecessarily complicating this document that i s issued on an annual basis. On the other hand, the process of modernization and decentralization of financial management requires a more appropriate legal framework, providing continuity to the process of modernization of administration and control procedures so as to achieve the expected effectiveness and efficiency. The integration of information technology to the budget system of the Federal Government i s performe6 through multiple IT instruments, each with its own database. Although the systems allow for the exchange of information whenever required, none of them contains the entirety of the updated information and increasingly more decision making and other powers have been given to the executing agencies, so the information i s available at different levels o f aggregation (these levels correspond to the institutions executing the programs and resources, as well as those that integrate, consolidate and globalize).

TREASURY FUNCTION

10. The greatest strength o f the TESOFE i s the systematic internal order under which i t performs its functions of custody, concentration, oversight and application of federal funds, which i t projects and i s perceived by al l areas and entities of the Federal Public Administration.

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11. As the budget management systems do not have al l the information required by the TESOFE (commitments and accruals), this body does not have the information allowing i t to determine the status of budget execution nor what commitments have been entered into.

ACCOUNTING AND FINANCIAL REPORTING FUNCTION OF THE FEDERAL PUBLIC SECTOR

12. Federal government accounting registers and reports a reliable and reasonably timely position of the public accounts. I t s main strengths are associated with a well-defined, regulated and documented mandatory procedure for all i t s phases. I t i s supported by a sound legal and regulatory framework. I t makes use o f advanced technical instruments, such as the accounting manuals that include, among other aspects, accounting principles, charts of accounts, accounting guides, and account management instructions. The accounting rules are homogeneous for the entire Federal Public Sector.

13. Although the Integrated Government Accounting System (SICG) performs all the accounting functions that are required to record transactions, as by design i t was configured in the form of independent modules, the consolidation and reconciling of accounts must be performed in a semiautomatic fashion, which gives rise to a cumbersome, complex and risky procedure.

Parliamentary Oversight

14. The present government administration was preceded by a majority political party with limited effective opposition, for more than 50 years. The current government started of f in Congress with a multiparty arrangement with no prevailing majority, and has thus encountered a still-developing process of analysis, debate and critique of the Executive’s proposals. In this manner, the political transition i s showing a greater and more convenient separation and balance between the three Powers, and the function of Parliamentary oversight i s gaining a degree of force for which it was not prepared, neither politically nor administratively. The Legislative i s empowered to change the annual Budget bill submitted to it by the Executive, but it only has the month of December o f each year to do it, and 15 additional days every six years whenever there i s a change o f government. These conditions restrict the scope of the oversight function.

Transparency and Public Access to Financial Information

15. The current government i s significantly encouraging actions oriented at promoting transparency in the public administration, and to create instruments fostering both the population’s interest in reviewing public finances, and simple and up-to-date access. This i s new for the Government and the public, and at present can only be evaluated on the basis of actions being taken rather than on their results. The main strengths o f the system are the Government’s decisive interest and commitment in this respect, and the fact that a special permanent and inter-secretarial committee has been commissioned to lead on these matters (Inter-Secretarial Committee for Transparency and Anti-Corruption). I t s main weakness lies

in the lack of experience on the subject that thus requires an upfront development of a legal, operational and awareness foundation to support effectively the instruments to be proposed.

One of the strategic goals of the National Program Against Corruption and Development of Transparency and Administrative Development 2001-2006 i s oriented to “Preventing and dismantling practices of corruption and impunity, and promoting quality improvement in public management”.

Activities of the World Bank in the Area of Financial management

16. At the request of the Mexican Government, in July 2003 a mission of the World Bank from the areas of PRMPS and PEFA began talks with representatives from the Ministry of Finance focused on the possible provision of technical assistance in the field of public expenditure. The Government would be interested in assistance to improve the structure o f mid-term expenditures, performance management and budgeting, and transparency and fiduciary responsibility. These tasks would be performed b y members of PRMPS and PEFA, with whom the team of this CFAA has met to coordinate the exchange of information already obtained from the government and possible future activities.

Main Recommendations

a. The Under-Secretariat of Expenditures o f the SHCP should coordinate a comprehensive review of the legal framework regulating the financial management of the federal public sector, in order to simplify said management and make i t compatible with the new concepts of objective and results-based administration that the Government i s implementing. The Under-Secretariat of Expenditures of the SHCP should promote the integration of the budget management systems into a single database, designed to establish a single system allowing all transactions to be sufficiently seen and followed in all their phases. Likewise, i t should define the minimum level of IT automation required by the entities of the Federal Government to optimize the benefits that a government information system may contribute to their management. The definition of results, goals and indicators i s usually a complex task. The Under- Secretariat of Expenditures of the SHCP should promote the use of an appropriate number of indicators reflecting how the planned results and goals are being achieved. These indicators should allow for the follow up of multi-annual investment processes. The GoM should promote a greater simplification of the regulatory framework for budget management. In addition to the progress made with the implementation of the Manual of Information Requirements for the Departments and Entities of the Federal Public Administration and the Attorney General’s Oflice of the Republic, and considering the participation o f the SFP, the SHCP and the Central Bank in the meetings o f the Technical Information Committee (which administers the requirements of the Integrated Information System of Public Revenues and Expenditure), the SHCP and other agencies, such as the SFP, should promote a greater simplification o f the regulatory framework for budget management to facilitate the management of processes in a more fluid manner and to propose the rationalization of systems and reporting needs so as to have relevant and timely information, to reverse the proliferation o f information

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of doubtful practical application and scant usefulness in the management of public entities. A correct and timely flow of budget execution information i s essential to plan and keep the budgetary needs coordinated with cash availabilities. The full implementation of the S IAFF wi l l make i t possible to reduce this deficiency to the extent the budget execution information from al l the institutions affecting the federal treasury i s available in the time frame required by the TESOFE. The Government Accounting and Public Management Reporting Unit (UCGIGP) should promote the integration of the different systems presently in use into a single database. In this way, b y using unique records for transactions, reconciling and consolidation of accounts could be performed automatically. In turn, this would make i t possible to have information updated on an ongoing basis. To such end, i t i s of fundamental importance to completely implement the SIAFF. The new needs for automated and integrated management require a comprehensive review of the organizational structures, functions and operations o f the SHCP. For such purpose, a study should be undertaken on this matter to avoid delays in the implementation of the systems. The TESOFE should promote the proper documentation of the SIAFF, defining it clearly in terms o f i t s scope, design, objectives, partial indicators, implementation plan and procedures of institutional interaction, and establishing its interaction with the existing management and control systems.

i. The SHCP should establish mechanisms for the executing entities to evaluate investments based on cost-benefit criteria considering different alternatives. This w i l l make it possible to prioritize investments and improve the efficiency with which State resources are allocated. A modern vision of internal controls assigns preference to exerting control on management procedures as opposed to control enforced on public officials. The SFP should promote this type of control that may be exercised more efficiently and effectively through IT management tools.

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1. OBJECTIVES, SCOPE AND INFORMATION SOURCES

A. Objectives and Scope of this Document

1.1 This report i s a diagnostic tool designed to contribute to a better understanding of the financial management o f the Federal Government o f the Republic of Mexico, enabling the identification o f i t s strengths as well as the areas requiring improvement to achieve a more efficient, effective and transparent public sector. The report identifies the possible r isks that may affect the management o f the funds administered by the Federal Government, and it w i l l be used as the basis to recommend the actions to counteract them and to help various parts o f the Federal Government succeed in the achievement of their objectives.

1.2 A report i s also planned on the evaluation of the financial management at the state level. The conclusions of this work should be considered along with this report at the Federal level, so it w i l l then be possible to have a more comprehensive understanding of the conditions observed globally in the United Mexican States. Likewise, the conclusions reached through other fiduciary studies, such as the Report on the Observance of Standards and Codes (ROSC), the Fiduciary Risk Assessment (FRA) and the Public Expenditure Review (PER), should provide for an integrated analysis, leaving us with a global tool providing guidance on the areas requiring strengthening.

1.3 The scope of the review performed has included:

0 The financial management of the Federal Government in the following areas: a) budget; b) accounting and financial reporting; c) treasury; d) public debt management; and e) internal control systems including the administration o f accounting records and the use of IT tools. The control o f the public accounts o f the Federal Government for: a) the ex-ante and ex- post audit management performed by the Supreme Audit Office o f the Federation (ASF) and the Public Management Secretariat (SFP); b) Parliamentary oversight o f public finances; and c) public access to information on public finances.

0

1.4 The review has only included the administration of the Federal Government. Information has also been analyzed on the possible impact on the federal financial management o f autonomous and decentralized institutions, state-owned companies, the municipal level, and in general all the institutions mentioned in the Budget Law. This has made i t possible to produce a global picture of the financial management of the Federal Government.

1.5 Special attention has been given to the following aspects:


The most important current developments in relation to the SIAFF; The management of the Budgetary Policy Unit (UPP of the SHCP); the General Directorates of Sectorial Programming and Budget (DGPyPS o f the SHCP); the General Directorate of Programming (DGPOP of the Responsible Units); the Treasury of the Federation (TESOFE of the SHCP); the Government Accounting and Public Management Reporting Unit (UCGIGP o f the SHCP); the Public Credit Under- Secretariat; the ASF; the SFP; and the accounting procedures of the public and private sectors; The methodology used in the production and execution o f the budget; Cash flow management; Content and timing of financial reports; How effective and binding the control framework i s in financial management; The ASF and SFP’s role and influence in the supervision of the financial management and procurement procedures of the public sector in general; and, The level of implementation of the recommendations made by auditors in the public sector.

B. Procedures Used for Information Gathering

17. The work program has included: Reviewing previous research on the actual situation, organization, procedures of the Federal Government and its institutions in relation to their handling of financial management; Discussion and understanding of current management procedures, by means of visits to the institutions and meetings with key personnel there and high-ranking officials of the Federal Government; Review and analysis of the documentation provided by our contacts in the Government and the institutions surveyed; Joint preparation by representatives of the G O M and Bank staff of documents on the Federal Government’s financial management.

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C. Sources of Information Used

1.6 reviewed, are included in ANNEXES 4 and 5 of this document.

The list of the institutions visited and the officials interviewed, as well as the documents


2. FEDERAL PUBLIC SECTOR BUDGET MANAGEMENT

A. Summary and Conclusions on Budget Management

2.1 A.l. Conclusion. The general conclusion to be drawn i s that the budget management of the Federal Government functions with management instruments and defined objectives, strategies, rules and procedures fostering an accountable and transparent management o f public expenditures. I t s main strength comes from the detailed and comprehensive rules that govern it, as well as the budgeting procedure that ensures i t s connection with the Government’s regional and sectoral plans. I t s main weakness l ies in the limited impact that the Federal Government has on the definition of the relation between current and investment expenditure, since over 93% o f the annual budget i s previously committed (salaries, constitutional transfers, debt service, and other obligations of the Federal Government of a permanent nature).

2.2 A.2. Legal Framework. The legal framework for the budget system i s complete, complex and detailed, apparently regulating all aspects o f budget management. The legal framework i s well coordinated and there would seem to be no substantial differences with the actual practice or contradictions between i ts rules. Although substantial improvements were introduced in 2002 to the manual of Budget Rules for the Federal Public Administration, and considering the obsolescence of some of i t s basic rules, the Annual Budget Decree includes items and updates (that might be better defined in other documents) that make i t unnecessarily complex. In addition, the great number of legal rules applicable to budget management, as well as i t s ongoing updating and rigorous control, create a complex and rigid legal environment for public servants that puts them in a defensive position and reduce their decision-making capacity.

2.3 As the Budget Law provides, i t i s only permitted to spend the Public funds that are approved in the budget. Likewise, further indebtedness or the granting of guarantees by the State are only allowed if expressly approved by Congress. Therefore, any extra budgetary funds, new indebtedness or the granting of guarantees by the State must be formally approved and entered in the budget to be permitted. The budget includes an explicitly defined and quantified item for emergencies and contingencies. In th i s way, no financial expenditure or commitment of the State i s free from budgetary control.

2.4 The link between the management of budget, treasury and accounting i s fully regulated in all phases and provides a satisfactory, planned and controlled flow o f funds, along with the reporting of reasonably adequate information-though with some deficiencies from the treasury point of view. This w i l l be substantially improved with the full implementation of the SIAFF (its partial implementation started in 2003 with the treasury operation) that w i l l produce this automatic and


permanent link, and that w i l l allow, among other aspects, improvements on the planning and coordination of the budgetary needs with the availability of fiscal funds.

2.5 Although the budget i s reasonably well executed, the evaluation process o f goals and results that i s currently applied should be improved, emphasizing a more significant and substantial definition of budget indicators and goals. In this respect, the National Budget, the annual Government’s report on the situation of the Nation and the implementation o f the National Development Plan, the Federal Public Account, the quarterly reports to the Lower House of Congress on the conditions of the economy, public finances and public debt, as well as the performance agreements, among the most important ones, include the evaluation o f goals and results of the public budget. At present, the evaluation goes into excessive detail generating very large volumes of information mostly related to actions performed; however, this information does not necessarily represent a clear picture of the status of sector programs. Similarly, this evaluation does not look at the effectiveness of spending, but mostly limits itself to verifying that the expenditure was made and the related procedures. The SFP wi l l continue with the actions begun by SECODAM to develop an evaluation process enhancing the comprehensive knowledge of the problems faced by public institutions and to improve the evaluation of the financial/ physical goals with the intention of verifying spending effectiveness.

2.6 The implementation of the SIAFF supports the updating and standardization o f budget and accounting definitions and procedures, as well as the creation o f a streamlined and integrated platform that wi l l enable more efficient and transparent information management. Among these improvements i s the updating of the Manual of Budget Rules for the Federal Public Sector (which defines the standard budget procedures) and the Classifier of Expenditures per Objective for the Federal Public Sector (which identifies the codes of budget allocations for the entire federal public sector).

B. Strengths and Weaknesses of Budget Management Affecting the Financial Management of the Federal Public Sector

B.l. Strengths

2.7 The following are the main strengths o f the budget system:

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There i s a well-defined, regulated and documented mandatory process for al l execution phases. There i s a Classifier of Expenditures per Objective for the Federal Public Sector that allows for the integration and consolidation of the institutional financial statements in order to produce the Financial Statements of the Federation. There i s a 34-digit budget key that allows tracing the 14 components that classify expenditures based on administrative, economic and functional information. There are specific contingency items based on lessons from previous experiences (Funds for Natural Disasters and Oi l Revenues Stabilization Fund), which free other budget allocations from the incidence of these items.

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0 There i s an innovative procedure o f Performance Agreements that increases management efficiency and effectiveness and facilitates budgetary execution by the institutions by means o f increased flexibility in control systems, based on predefined and agreed commitments, results and business plans. There i s a well-organized public information system over the Internet providing information on legal and administrative procedures, budget execution and government procurement processes that facilitates management and community relations. The authorities’ progressive approach encourages a process o f continuous improvement in management procedures, evidenced b y the technological improvements, simplifications and innovations that have been implemented in the last few years, and which facilitated an smooth transition to from some old systems to the SIAFF.

0 There are automatic expenditure adjustments in case the revenues obtained are less than the estimates, criteria for the distribution and application o f surplus revenues, l im i ts and control of the deficit and indebtedness levels, definition o f primary surplus for the main parastatal entities with direct budget control, and monthly disclosure of public finance results over the Internet.

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B.2. Weaknesses

2.8 B.2.1. The legal framework for budget management i s complex. Budget management, in i ts various phases from preparation to execution, i s regulated b y some twenty documents, laws, rules, orders, circulars and instructions (see Table 1 in Annex 2) that create a complex and regulated procedure that decrease efficiency and effectiveness from budget management. Many of these regulations are issued on an annual basis or have updates or revisions; one representing a significant advance i s the revision o f the manual of Budget Rules for the Federal Public Administration (carried out in 2002).

2.9 The Budget Law in force since 1977 has become outdated in many aspects and requires the inclusion in the Federal Budget Decree o f some items that should be part o f said law, thus complicating unnecessarily this annual document. On the other hand, the process of modernization and decentralization o f financial management requires a more adequate legal framework providing continuity to the process o f modernization of administration and control procedures making it possible to achieve the expected effectiveness and efficiency.

2.10 Recommendation: The Under-Secretariat o f Expenditures o f the SHCP should coordinate a comprehensive review o f the legal framework regulating the financial management o f the federal public sector, in order to make management simpler and compatible with the new concepts o f objectives and results based administration that the Government i s putting into practice. This should be supported by actions such as the updating o f the Manual of Budget Rules for the Federal Public Administration carried out in 2002.

2.1 1 B.2.2. Incomplete integration of information technology into the Federal Government’s budget system. Budget management i s performed by means o f several IT tools, each o f which uses i t s own database. Although the systems enable the exchange o f information whenever required,

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none o f them has all of the updated information. This detracts from the systems efficiency and might be a source of confusion. On the other hand, as it i s not mandatory for Government entities to be electronically integrated into the SHCP information system, some entities cannot receive the information consolidated by the SHCP in relation to budget follow-up and evaluation. These entities experience an unnecessary reduction o f their efficiency and lose opportunities to f ix management errors. The effectiveness of information systems i s based upon system universality and information sharing capabilities. Because they do not fully participate, they do not have such advantages some institutions reduce the efficiency of the entire system.

2.12 Recommendation: The Under-Secretariat of Expenditures of the SHCP should promote the integration of budget management systems into a single database, and if possible into a single system that allows one to see and monitor al l transactions in all their phases. Likewise, i t should define the minimum level of IT automation required at the entities of the Federal Government to optimize the benefits that a government information system may have for public sector management.

2.13 B.2.3. Goals and results of budget management and their follow-up. The main objective of the definition of budget goals and results i s to verify the effectiveness of public spending, i.e. if the public funds have been used to attain the foreseen ends and if they have produced the expected impact. Therefore, i t i s necessary to make a very clear distinction between objectives, results, goals and actions. In the case of budgets, definitions should make it possible to understand if the expenditure was timely, i f the expenditure was for the intended purpose, and if the expenditure has created the expected benefit. The system of results-based management requires a clear definition of goals, results and objectives; otherwise i t w i l l not be possible to make an evaluation of implementation, and even less of the effect of the investment made. This aspect could be improved at the time o f preparing the budget.

2.14 Recommendation: The definition of results, goals and indicators i s always complicated; for this reason the Under-Secretariat o f Expenditures o f the SHCP should promote the use o f a few but significant indicators reflecting how the planned results and goals are being achieved. These indicators should allow for monitoring of multi-annual investment processes.

2.15 B.2.4. The excessive control over spending and management complexity limit the efficiency of budget execution. Budget execution management -from the point of view of the executing entities- i s subject to: a) a diversity o f rules and regulations on spending that are included in over twenty documents (laws, decrees, regulations, rules, instructions, circulars and their respective updates); and b) a diversity o f control procedures on results, management procedures and institutional and personal performance. As a result, management i s excessively complex as officials are required to be highly knowledgeable and are easily exposed to making mistakes. On the other hand, such a rigorous and extended control system applied on such complex procedures tends to intimidate officials because of the numerous possibilities o f error they are exposed to. As a result the combination of these factors, limited management efficiency may be expected, and this might also affect the effectiveness of public expenditure.

Mkxico Countrv Financial Accountability Assessment 7

2.16 The SHCP, as it i s responsible over planning, programming and budgeting, in coordination with the SFP as the department thatthat supports public sector management, should support a simplification of the framework regulating budget execution so that processes w i l l be more agile management o f processes. Similarly, the SFP should adopt a control methodology more oriented to the evaluation of results than to a thorough control of procedures and individual actions. The application o f Performance Agreements as put into practice with some entities should be encouraged across the entire federal system.

Recommendation:

2.17 B.2.5. Excessive volume of reports on budget management. There i s an endless number of reports on budget execution that are required to comply with regulations, routine controls, regular performance evaluations, partial account rendering, etc.; they include information that i s not necessarily reconciled or that does not match without, and which in many cases may only comply with formal presentation objectives without providing any real information. Reporting i s an activity that consumes resources and time that in many cases are scarce in the public sector. Unnecessary information creates confusion and sources of error.

2.18 Recommendation: The SHCP in coordination with the SFP should propose the rationalization of the reporting systems and information requirements needs in order to work only with useful, certain and current information. This w i l l simplify management, w i l l improve the quality of information and w i l l reduce management costs.

2.19 B.2.6. The information provided by the States i s reflected in the allocations of the federal budget. To understand the financial management of the Mexican Federal Government it i s necessary to consider that in part it reflects the financial management of the States over which it has limited influence. A major part o f the Federal Budget i s planned, budgeted and executed by the States. In some cases, this autonomous management by the States, with their own regulations, i s not consistent with the rules and procedures followed by the Federal Government; this affects all stages of the public spending process as well as the procedures for the registration and reporting of accounts that enable the timely production of the Federal Public Account. In many cases, this deficiency i s due to technological and operational differences, and in other cases, i t i s due to onlypartially compatible rules and procedures. This becomes especially important when deficiencies occur at the time of prioritizing programs and recording and reporting information.

2.20 Recommendation: The SHCP in coordination with the SFP should foster the compatibility between the procedures and operational capacities across the entire Government o f the Republic, so as to allow a timely exchange o f information, and to be able to ensure at least a minimum (but comprehensive) quality level for the administration and the financial information that i s going to be shared.


3. FEDERAL PUBLIC SECTOR TREASURY MANAGEMENT

A. Summary and Conclusions on Treasury Management

3.1 As a general conclusion, i t may be said that the Treasury o f the Federation (TESOFE) -which performs ,the treasury function of the Federal Government- operates with management instruments, objectives, strategies, rules and procedures that have allowed i t to meet the cash needs resulting from the execution of the Federation’s budget. I t s main strength stems from the systematic internal order with which it performs i t s functions of custody, concentration, surveillance and application of federal funds. I t s main current weakness relates to the lack of and/or untimely information on the status of budget execution, which makes it difficult to project the cash needs and coordinate them with cash availability. This weakness i s in the process of being overcome with the implementation of the SIAFF.

A.l. Conclusion.

3.2 A.2. Legal Framework. The legal framework o f the treasury system i s complex, and in principle it regulates all aspects of management. The legal framework i s well coordinated and seems to have no divergence with real practice or contradictions among i t s rules.

3.3 The funds administered by the TESOFE are: federal revenues from federal taxes, products and duties; expenditures related to the execution of the federal budget; and public credit federal transactions, al l o f them identified as the administration of federal funds. The TESOFE does not administer the funds related to parastatal companies, nor the funds related to the Legislative and Judicial Powers and autonomous agencies, which because o f their nature, legal personality and own assets, are responsible for the administration of their resources and/or funds.

3.4 The link between the budget, treasury and accounting i s fully regulated in all phases and provides a flow o f information that has enabled a satisfactory administration of funds, but it i s insufficient to project funding needs due to gaps in the information received on budget execution. This would be substantially improved with the full implementation o f the SIAFF that would produce this automatic and permanent link, including information on expenditure commitments, and that w i l l allow, among other aspects, to improve the planning and coordination of the budgetary needs with the availability of funds.

3.5 have been detected that cannot be overcome by the SIAFF.

Treasury management i s reasonably well executed, and no substantial gaps or deficiencies

MCxico Countrv Financial Accountability Assessment 9

3.6 The implementation of the SIAFF (an initiative by the TESOFE) has promoted the updating and standardization o f budgetary and accounting definitions and procedures, as well as the creation o f a uniform and integrated IT platform that w i l l facilitate more efficient and transparent information management. At present, the TESOFE receives very important information from the S IAFF module implemented in 2003. The S IAFF improves quality and timeliness of the information required for the analysis and projection o f cash flows in the Treasury. Presently, the S IAFF has not been linked to accounting and budgeting (the MOF i s analyzing this situation in order to address it).

B. Strengths and Weaknesses of Treasury Management

B.1. Strengths.

3.7 The main strength of the TESOFE comes from the systematic internal order with which i t performs i t s functions of custody, concentration, surveillance and application of the federal funds, which i s projected and i s recognized by all departments and entities o f the Federal Public Administration.

B.2. Weaknesses.

3.8 As the budget management systems do not have all the information required by the TESOFE (commitments and accruals), this agency does not have the information allowing it to determine the budget execution position nor what commitments have been acquired.

The link between budget management and treasury management.

3.9 Recommendation: A correct and timely flow o f budget execution information i s essential to plan and keep the budget needs coordinated with cash availabilities. The full implementation of the SIAFF wi l l allow this deficiency to be reduced to the extent the budget execution information from all the institutions collecting or receiving the federal funds i s available in the conditions required by the TESOFE.

4. ACCOUNTING AND FINANCIAL REPORTING OF THE FEDERAL PUBLIC SECTOR

A. Summary and Conclusions on Accounting

4.1 A.l. Conclusion. As a general conclusion, i t may be said that the federal government accounting registers and reports a reliable and reasonably timely position o f the public account. I t s procedures have been reviewed and updated during the last few years resulting in the standardization of procedures and principles in the federal public sector. Its main strengths are: i t s legal and regulatory basis that provides that the accounting records should be completed 60 days after the transaction, defines a single chart of accounts, and provides for and enforces the mandatory nature of all accounting procedures in the federal public sector; and i t s integration of the assets and liabilities, financial and budget operations of the Federal Government. I t s main weakness l ies in the limited integration o f i t s IT systems making i t difficult to consolidate and reconcile accounts. This weakness i s in the process of being overcome with the implementation of the SIAFF.

4.2 A.2. Legal Framework. The legal framework of the accounting system consists of several laws, regulations and official specialist publications. The legal framework i s up to date, well coordinated and does not seem to have divergence with actual practice or contradictions among its rules. The publication of the SHCP, “Principios Bdsicos de Contabilidad Gubernamental”(“Basic Principles of Government Accounting”), defines the entire conceptual framework o f the federal accounting system and makes it possible to have uniform accounting methods, procedures and practices, and systematic processes for information collection, registration and interpretation. These principles are compatible with international standards and generally accepted principles.

4.3 No substantial divergence has been detected between the current practice and the formal registration and reporting requirements in force. However, the timing o f reporting may be improved reducing the preparation times as well as the frequency of reports. This weakness i s to be overcome with the implementation of the SIAFF.

4.4 The accounting system issues several types of reports, some of a legal nature and others of an operational type that include current and reliable information on public accounts. As the accounting management i s carried out in a decentralized manner, each entity generates as required the necessary reports to support i t s operations (control and follow-up o f public revenues and expenditure) and the decision-making processes.

4.5 The main report issued by the accounting system on an annual basis i s the Public Account of the federal government; this report i s the basis for the Congressional oversight of public finances,


and i t s contents may be accessed b y citizens as i t i s available on the Internet page o f the Under- Secretariat o f Expenditures. The Financial Management Progress Report contains the results obtained in the first semester and i s submitted to the Supreme Audit Office o f the Federation in August each year. The entities issue a quarterly report on their budgetary and financial period for i t s review b y the “Government Accounting and Public Management Reporting Unit”.

4.6 deficiencies have been detected.

The accounting management i s reasonably wel l executed, and no substantial gaps or

4.7 The implementation o f the SIAFF w i l l promote the updating and standardization o f budgetary and accounting definitions and procedures, as wel l as the creation o f a streamlined and integrated platform that w i l l enable more efficient and transparent information management.

B. Strengths and Weaknesses in Accounting

B.l. Strengths.

4.8 The fol lowing are the main strengths and benefits provided by the accounting system:

There i s a well-defined, regulated and documented mandatory procedure in al l i t s phases. The accounting system i s the product o f a long period o f development, as governmental accounting has been virtually always applied in Mexico. There i s a sound legal and regulatory framework. There are advanced technical instruments available, such as the accounting manuals that include, among other aspects, accounting principles, charts o f accounts, accounting guidelines, and accounting management instructions. Specific rules are issued on a regular basis, such as those providing for the presentation o f the Federal Public Finance Account, the recognition o f the effects o f inflation, the recognition o f labor obligations upon the retirement o f employees from semi-state entities, the accounting treatment o f investments in long-term productive infrastructure projects, and others. Accounting rules are homogeneous for the entire Federal Public Sector. Accounting i s carried out on the same accounting bases. There i s a single chart o f accounts for al l the centralized departments o f the public sector. Accounting i s performed in a decentralized manner, with departments and entities responsible for i t s proper application and the maintenance o f the supporting documentation. Financial accounting and budget accounting are linked. All transactions performed by the Federal Government in relation to assets and liabilities, finances and budget, are linked. Accounting i s the basic source for the main reports of the Federal Government, such as the Federal Public Finance Account and the Financial Management Progress Report.


B.2. Weaknesses.

4.9 B.2.1. The SICG is not an integrated system of accounting information and management. Although the SICG performs al l the accounting functions required for the registration of transactions, as it was configured in the form of independent modules, the consolidation and reconciling of accounts must be carried out in a semi-automated manner, which creates a procedure that i s burdensome (because o f the information volume handled), complex (as the modules record different execution phases), and risky (since it might lead to errors).

4.10 Additionally, the process of information reconciling between the Collection and Expenditures Modules and the Federal Funds Module i s complex. The entry of transactions i s performed by different entities that require in each case the entry o f a common transaction description and identification information; this results in duplicated efforts, creates the possibility of error, and makes i t difficult to reconcile accruals and payments.

4.1 1 Recommendation: The Government Accounting and Public Management Reporting Unit (UCGIGP) should promote the integration of the 5 subsystems into a single database. In this way, through the use o f single records for transactions, the account reconciling and consolidation could be automatic. In addition, i t would thus be possible to have updated information at all times. The SIAFF, once it i s fully implemented, might solve this issue.

4.12 B.2.2. The registration of commitments does not occur in all cases. The registration of commitments i s provided by regulations as mandatory only in the cases of purchases and public works. This reduces the possibility of making a comprehensive evaluation both of management and of results and achievements.

4.13 record commitments in all cases. The SIAFF, once i t i s fully implemented, might solve this issue.

Recommendation: The UCGIGP should promote the generalization o f the obligation to

4.14 B.2.3. The information consolidation process i s on a quarterly basis. As a result of the complexity of the current process of account consolidation and reconciling, the production of the consolidated reports consumes much time and effort, and therefore the reports become outdated and are only useful for the purposes o f follow-up and further control o f public revenues and expenditures. Institutions have their own accounting systems that produce independent management reporting.

4.15 Recommendation. The integration o f the accounting subsystems would make i t possible to obtain reconciled and updated information automatically thus facilitating the production of financial reports. The SIAFF, once it i s fully implemented, might solve this issue and w i l l facilitate the production of financial reports.


4.16 B.2.4. Inconsistencies between state and federal accounting records. According to the provisions of the Political Constitution of the United Mexican States and the respective State Constitutions, the governments of the federative entities have management sovereignty, evidenced b y the autonomous definition of their internal organization, legal framework, and administration of financial resources.

4.17 In this context, their accounting systems show diverse characteristics, as by law they are not required to follow a certain model. Significant differences are noted between the approaches used in each State and with respect to the Federal Government.

4.18 The majority of states show serious limitations, such as the lack o f accounting principles expressly established for public sector, and the absence o f adequate technical and regulatory instruments. Besides, there i s no proper linkage between budget and accounting. The structure and information content of state public accounts are heterogeneous, making i t difficult to compare and interpret results.

4.19 In order to solve this situation, the MOF has been implementing since 1995 the Modernization Program of systems for Government Accounting and Public Accounts, with the main purpose of promoting the development of said systems, and attaining technical and regulatory harmonization, and consequently generating compatible information that may be analyzed and interpreted under common criteria.

4.20 I t should be noted that no consolidation i s made of the Federal Public Finance Account with those o f the State Governments. Each government level produces i ts own documents and submits them to the respective Congress. The consolidations that comprise the three government levels (federal, state and municipal) are carried out by the National Institute o f Statistics, Geography and Information Technology (INEGI) to determine economic aggregates, so said consolidations are of an economic nature, not financial or budgetary.

5. V. FEDERAL INTEGRATED FINANCIAL MANAGEMENT SYSTEM

A. Summary and Conclusions on the SIAFF

5.1 The SIAFF i s s t i l l in i t s initial phase of testing and evaluation, having become partially operational in the federal public sector in 2003. I t has been initially designed as an information technology tool that wi l l make i t possible to reach a basic operating level comprising the areas o f budget, treasury and accounting, and it was created with the intention o f providing the treasury system with continuous, timely and reliable information on the position and commitments o f the treasury, as well as better information on the status of public expenditure actions.

5.2 As the system i s s t i l l in i ts pre-operational phase, i t has not been evaluated, so this chapter only includes an analysis of i t s background and possible weak points as detected at the time o f producing the report, which might be overcome at the time o f full implementation.

B. Background and Description of the SIAFF

5.3 The Federal Integrated Financial Management System (SIAFF), as the Mexican Government conceived it, i s a system that w i l l initially enable the oversight o f public resources. The implementation o f an integrated financial management system for the entire Federal Government w i l l consist of several successive stages. In i t s f i rs t stages, the SIAFF wi l l have the following objectives :

0

0

0 Generate electronic payments.

Automate the accounting of budgetary actions; Simplify expenditure related operations; and,

5.4 The SIAFF, in i t s f i rs t stages, i s not conceived as a management system, but only as a tool that w i l l allow the departments to keep records o f expenditure actions; i t w i l l not be a mechanism for expenditure evaluation or of efficiency or effectiveness measurement.

5.5 However, the final SIAFF should be viewed as a management system involving: a) the legal and regulatory framework of public financial management; b) the administrative procedures within and between government institutions; c) policies, strategies, criteria and methodologies applicable to management; and d) the administrative and IT instruments that w i l l make management more efficient. Therefore, the different stages of i t s implementation w i l l have to take these aspects into account in a gradual manner.

Mexico Country Financial Accountability Assessment 15

5.6 The implementation process i s expected to extend to all departments and General Branches of the Federal Executive, the Legislative and Judicial Powers, and the government’s autonomous bodies.

5.7 At the beginning of the S I A F F project (1997), a general and comprehensive analysis and planning process was conducted to identify an initial phase comprising only the expenditure operations; this phase was initiated in 1999. The process was designed as an IT project, not as a managerial or management project, so some of the institutional developments have not been taken into account and limited importance was given to some legal and regulatory aspects. The SIAFF IT tool for the first stage appears to be almost completed.

5.8 Considering the elementary level of implementation foreseen for this phase, as well as the conditions of preparation, standardization and experience o f the institutions in automated budget, accounting and treasury management, no major difficulty should be expected in the implementation o f the SIAFF IT tool in the institutions of the central administration of the Federal Government. However, in the case of those institutions that operate with a certain degree of autonomy from the Executive, the legal framework should be checked for compatibility before proceeding with implementation, as these institutions might be obliged to present accounts to the Executive that might later be considered unacceptable.

5.9 Likewise, as long as the SIAFF i s not conceived and documented as an integrated management process, and the regulatory, legal, organizational, administrative and technological aspects are not properly analyzed and made compatible, the system’s sustainability i s not guaranteed, i t s operation and effectiveness w i l l be limited, and i ts chances o f growth and improvement w i l l be rather improbable.

C. Strengths and Weaknesses of the SIAFF

C.l. Strengths.

5.10 fully operational.

The analysis of the strengths of the SIAFF wi l l be made at a later date, once the system i s

C.2. Weaknesses.

5.11 C.2.1. Operational integration within the SHCP. The SHCP has automated but independent IT management systems for budget production, execution, modification and follow-up. The accounts management i s carried out with 4 independent modules. In the TESOFE, the SIP enters information from seven expenditure components on a daily basis and requires the DGPH (another body within the TESOFE) to perform an additional reading of the same database to get information to track payments (CLCs) entering information from the 14 expenditure components. Databases are only integrated for direct and specific purposes, and such integration i s accessible only for some entities. Each functional entity has been autonomously managing i t s operation

without coordination with the other functional complementary entities. An objective or managerial attitude to share efforts and information, or to develop a coordinated institutional development, process was not found. This not only overload the system with information, duplicates the use of resources and diminishes efficiency and effectiveness, but also shows the limited integration existing between the different departments of the same institution, in addition to the limited leadership to integrate and coordinate institutional efforts.

5.12 Recommendation: The MOF should review i ts organizational, functional and operational principles to check whether they meet the new automated and integrated management needs. Likewise, that they meet the governance requirements of the new integrated systems. The purpose of the regulatory entities i s not simply to regulate procedures or to install new IT systems, but to improve management results, which involves ongoing interaction and coordination with the decentralized entities. In order to ensure an efficient and effective integrated management o f the public sector, i t i s necessary for all management systems of the Federal Government, and in particular the management system of the SHCP, to demonstrate the intention to integrate functions and results.

5.13 C.2.2. The definition of the SIAFF. Although much activity and good intentions are seen in the process of development and implementation of the SIAFF, i t was not possible to find an integrated, clear and well-defined conceptual or functional design (only the f i rs t phase o f the SIAFF has been designed). Neither was it possible to find an integrated implementation plan including a consideration of the institutional, functional, operational and IT aspects. Therefore, i t i s not clear exactly what are the results expected or how developed the implementation process is. Although the entities have already adjusted to a certain degree (see corresponding chapter in Annex 2), i t was not possible to find an analysis o f the impact that the implementation o f the S IAFF w i l l have on the institutions. Restricting the implementation of the S IAFF to the installation of a new IT system i s an over-simplification that might substantially affect the institutions involved.

5.14 The functionality and concept of the SIAFF are established in the S IAFF guidelines that also specify the scope for i t s f i rst stage. Depending on the result of this f irst stage of implementation, and the difficulties to be faced, the additional phases should be defined.

5.15 Recommendation: I t i s necessary and urgent that the TESOFE promote a proper documentation for the SIAFF, with clear definitions in terms o f scope, design, objectives, indicators, implementation plan and procedures for institutional interaction, along with a definition of i t s interaction with the other existing management and control systems.

5.16 C.2.3. Coordination of the S I A F F with the management control and evaluation entities. In the short term, the S IAFF w i l l become the main financial management instrument o f the Government and the main source o f financial information. On the other hand, the implementation of new management procedures always creates some degree of confusion and initial inefficiency that i s usually overcome with time. Finally, an integrated information system provides innovative instruments for the evaluation and control of transactions. It i s important that the agencies


responsible for the control and evaluation of the entities' management should become involved in the process of development and implementation, so that:

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0

The mistakes that might occur at the beginning are understood; Officials are able to verify that the institutional internal control procedures are s t i l l current and effective; Personnel can be trained to obtain the greatest benefits from the new procedures; Constructive opinions may be voiced on the system so as to improve i t and keep i t current; Institutional weaknesses that may reduce the effectiveness o f the Integrated System, can be detected.

5.17 Recommendation: The TESOFE should promote a more active participation of the SFP and the ASF in the design and coordination of actions for the implementation of the SIAFF. These institutions should become the main partners o f the TESOFE and the S I A F F in supporting i t s implementation and promoting the proper use of the system.

5.18 This i s complementary, as the Bank noticed that the internal control body and the General Directorate of Funds and Securities Surveillance have participated from the beginning in the implementation of the SIAFF. There i s already direct involvement by the SFP which w i l l be an advantage. The system wi l l open up various supervision options through the audit trails the system provides, enabling a remote review process that w i l l diminish the pressure on the responsible units for on-site auditing.

5.19 C.2.4. The regulatory framework of financial management. The new integrated financial management may provide, among other things, very powerful instruments to perform an automatic preventive control of transactions, to eliminate discretionality in the public sector, to promote effective results-based management, and to ensure the proper, timely and efficient use of public funds. The new management procedures w i l l render some regulations obsolete, wi l l require new regulatory concepts, and wi l l bring about the simplification of administrative procedures that may be regulated or required by rules presently in force.

5.20 For the f i rs t stage of the SIAFF, the current legislation provides a sufficient legal framework. As the S I A F F evolves, an analysis should be made o f the possible adjustment o f the various legal standards (laws, regulations and administrative agreements).

5.21 Recommendation: The TESOFE should support a comprehensive review of the federal legal framework applicable to financial management systems. A clear definition and observance o f institutional autonomies should be one of the objectives o f the SIAFF'.

The SIAFF wi l l define automatic and generalized accountability procedures in al l i t s affiliate institutions; this might require some adjustments o f current legislation so as not to affect the autonomy o f some institutions.


5.22 C.2.5. The legal basis of the SIAFF. After the implementation of the SIAFF, substantial changes wi l l take place within the institutions in terms o f their management procedures and their inter-institutional relations and dependencies. In many cases, these changes w i l l be irreversible and critical. In the future, institutions wi l l possibly have to assume the operating and updating costs of the system, regardless of their technical or financial capacity. This i s even more complex, when considering that the conceptual aspects of the SIAFF are not yet well documented, and they may be subject to modifications based on circumstances that might unnecessarily change i t s critical aspects. The S IAFF should therefore be adequately formalized, as should the inter-institutional relations i t may generate, in order to ensure i t s existence, efficient operation, the quality and timeliness of i t s information, i t s objectives and the obligatory and universal presence it w i l l have in the federal system.

5.23 Recommendation: The TESOFE should promote the adoption of a SIAFF Act providing, among other aspects, for the following: i t s mandatory nature2, i t s objectives, i t s evaluation and updating procedures, responsibilities of the institutions involved, inter-institutional relations, access and disclosure of institutional financial information, and inter-institutional accountability procedures.

5.24 This i s in addition to TESOFE’s Service Law that allows the provision of treasury services via automated equipment or systems, as well as the use o f electronic identification mechanisms. The House of Deputies instructed the Federal Executive b y PEF 2002 to operate the SIAFF as from 2003 as a mandatory requirement; on the basis o f this mandate, on April 30 of 2002, the DOF published the Guidelines relative to the functioning, organization and operation requirements o f the SIAFF. In accordance with the plan3 this was partially fulfilled.

5.25 I t i s convenient to integrate the provisions of the SIAFF in a single legal instrument.

5.26 C.2.6. The institutions have received limited training. The implementation of the SIAFF wi l l change the entities’ management procedures and instruments, and i t s impact w i l l be a function of the operating capacity, the employees’ technological and professional development, the complexity and volume of operations, etc. Therefore, the impact on each entity could vary greatly. Similarly, the need for improvements wi l l become evident within the institutions, but these changes should be tailored to the needs of each institution. These improvements, adjustments and changes might also require investments or expenses not foreseen in the institutional budgets.

5.27 Recommendation: The TESOFE should have institutional diagnostics on all the entities that w i l l become members of the SIAFF, to be able to recommend in due time the improvements necessary with regard to organization, operation or quality and quantity of human, financial or infrastructure resources. Institutions should also be instructed on the internal control aspects that w i l l be automatically taken over by the SIAFF, and on every other aspect that i s expected to be

At present, i t s use is only defined in the 2004 Budget Decree. This plan i s the result o f the adjustment of the original. This adjustment was based on experience acquired and the

progress made in 2002 and part of 2003.

MCxico Country Financial Accountabilitv Assessment 19

covered b y the institutional internal control systems, so as to address weaknesses and avoid unnecessary problems of coordination in these processes.


6. PUBLIC DEBT MANAGEMENT

A. Summary and Conclusions on Public Debt Management

6.1 The administration of the public debt in the Mexican federal system i s performed by the SHCP through the General Directorate of Public Credit (DGCP), and i t includes the management o f public debt, acquisition and coordination of internal credit, acquisition and coordination of external credit, project financing and foreign trade financing. The DGCP operates with adequate management instruments and clear and adequate objectives, strategies, rules and procedures, promoting a responsible, transparent and coordinated management o f indebtedness and debt management. I t s main strength i s the clear and complete set of regulations that govern it, as well as i ts close coordination with budget management, thus fostering an effective control of indebtedness and i t s linkages with the Government’s plans. I t s main weakness lies in how scattered i t s administration i s with the involvement of institutions such as IPAB, Pemex and CFE, FARAC, Bank of Mexico and the financial agents BANCOMEXT, BANOBRAS, BANSEFI and NAFIN, each in their respective sector.

6.2 The legal framework i s well coordinated and appears to have no divergence with real practice or contradictions among i t s rules. The net external indebtedness ceiling i s authorized by Congress and msut be stated in the Revenues Law of the Federation for each fiscal year.

6.3 Legal rules allow only State institutions only to make use of budget funds. In this manner, the granting o f credits or guaranties or the acquisition o f any kind of debt are subject to the procedures o f approval, use and supervision established by the Budget Law.

6.4 The link between the management of indebtedness and the budget, treasury and accounting functions i s fully regulated in all i t s phases, enabling a satisfactory, planned and controlled debt management, as well as regular and reasonably adequate reporting of i t s information. The DGCP issues a quarterly report on the status of the public debt, including: balances and transactions o f public sector external debt classified by country, currency, creditor, sector and end user, trends, placements in international markets, capital payment projections, balances and transactions o f the Federal Government’s internal debt, as well as obligations guaranteed by the Federal Government.

6.5 Although debt management in Mexico i s reasonably well executed, an attempt could be made to integrate debt administration into a single entity; this would result in more transparent management and make it possible to ensure a homogeneous and continuous analysis o f indebtedness, thus allowing for a more effective decision-making process, which would require modifications o f the existing legal framework. In addition, when the regulation of the General


Public Debt Law i s issued, i t wi l l provide for greater transparency in relation to public debt operations.

6.6 The substantial changes of the Mexican financial system, the growing demand for information exchange, as well as the need to systematize activities involved in the administration of public credits, have set the guidelines for a new Information Technology system that could provide the overall elements to operate and make use of the Federal Government’s debt information.

B. Management Strengths and Weaknesses

B.l. Strengths. See Annex 3.

B.2. Weaknesses.

6.7 B.2.1. The administration of public debt i s not integrated. Although the SHCP plays a highly active role in the coordination o f public debt (together with the Bank of Mexico), there i s an important portion (approximately 40%) that i s not administered by the SHCP. The debts assumed by the State and originated by the IPAB and the FARAC are managed by these agencies.

Recommendation: See Annex 3.

6.8 B.2.2. There is no regulations to accompany the general law of public debt. Although the SHCP has developed the functions and responsibilities indicated in the law o f public debt, coordinating the activities corresponding to each entity, there i s no regulation to organize these practices into a legal document issued by the Executive.

Recommendation: See Annex 3.


7. PUBLIC INVESTMENT MANAGEMENT

A. Summary and Conclusions on Public Investment Management

7.1 The federal public investment system in Mexico is included within budget management, and i t s coordinating entities are: a) the Investment Unit for the Decentralization o f Public Sector Entities (UIDEP) o f the SHCP that checks the consistency o f investments with the National Development Plan and defines the investment criteria and rules; b) the General Directorates o f Sectoral Programming and Budget (DGPyPS) o f the SHCP that make alternative proposals o f programs and projects to be included in the annual budget; and c) the General Planning System (SEGEPLAN) that checks compliance with the processes o f implementation and results o f investments. I t s main strength lies in the rules that govern it, as well as its relation with management o f budget, which support an effective control o f investments and their connection with the Government’s sectoral development plans. I t s main weakness appears in the basically definition o f priorities at each sector that does not necessarily reflect national development needs and priorities in its provisions. O n the other hand, the National Development Plan does not provide sufficient details to produce more appropriate criteria for the definition o f priorities.

7.2 The legal framework for the investment system i s complete and apparently regulates al l aspects o f the administration o f investments. The legal framework i s wel l coordinated and seems to have no divergence with real practice or contradictions among its rules.

7.3 Legal rules allow only State institutions to make use o f budget funds. In this manner, investments, regardless o f their source or kind o f financing or executing body, are subject to the procedures o f approval, expense and supervision established by the Budget Law. The funds used in the implementation o f investments come f rom the treasury in al l cases without exception.

7.4 The funds for projects that come from international financing entities are deposited in Special Accounts established at the Central Bank. To cover the project costs, the implementing agencies use their standard budget f rom fiscal funds and then the reimbursement o f such funds to the national treasury (TESOFE) are requested to the corresponding financial agency. Once the financial agency has checked the eligibility o f the expenditures, i t requests said reimbursement f rom the international financing entity. Then the international financing entity authorizes the financial agency to withdraw approved funds from the corresponding Special Account to reimburse TESOFE and process, if needed, a replenishment o f funds to maintain the authorized balance o f that Special Account.


7.5 The link between the management of investment and the budget, treasury and accounting functions i s fully regulated in al l i t s phases, enabling a satisfactory, planned and controlled investment management, as well as regular and reasonably adequate reporting of i t s information. The SHCP issues a quarterly report to Congress with information on budgetary investments and long-term productive infrastructure projects. The SFP, as part of i t s ongoing internal auditing function, follows up and evaluates the fulfillment of the goals and objectives of public investments. The Inter-Secretariats Commission of Expenditure and Financing- comprised of the Heads o f the Secretariats o f Finance, Control, Economy, Social Development and Labor-sets the guidelines for the startup and execution o f long-term productive infrastructure projects.

7.6 Although investment management i s reasonably well executed, the investment evaluation procedure could be improved by establishing a mandatory external auditing of investments. At the present time this i s not always done. This because although SFP i s responsible of those audits, i t s work i s not always complemented with work done by external audit firms.

7.7

7.8 improve investment management.

There i s no information on the existence of any current initiatives to reform, develop or


B.l. Strengths.

7.9 Investments are established and authorized in the budget, so i t i s possible to know in advance the general framework, priorities, financing sources and executing agency, among other important information, of the planning and execution o f public investments. In addition, their administration has been improved as the SFP i s coordinating the implementation of performance indicators.

B.2. Weaknesses.

7.10 B.2.1 The external evaluation of investments i s not mandatory. The National Institute of Statistics, Geography and Information Technology (INEGI) produces information on the impact of an investment on the National Accounts.

7.11 of the Federation’s Expenditure Budget for 2002 provides that before publishing a bidding notice, the departments and entities should have been granted a favorable expert (third party) opinion on the executive public works project and there should be a technical, economic and environmental feasibility study o f those new investment programs and projects with a total cost exceeding 30 mill ion pesos and o f all long-term productive infrastructure projects in the fields of hydrocarbons, electricity, transportation and water infrastructure. Every quarter, the departments and entities must send to the Inter-Secretarial Commission of Expenditure and

The Decree


Financing information on the projects that have received such opinion, including the content of the opinion, as well as information on the projects that are pending an opinion.

7.12 At present, each department or entity makes available, over the Internet, information on i t s own investments; however, each secretariat or entity evaluates the fulfillment of objectives and results as perceived by the beneficiaries, society, etc. The results o f the investment expenditures are reported in the Public Accounts and the internal control bodies audit that the resources have been used in accordance with the applicable rules. There i s no procedure or rule dictating an external evaluation methodology to be applied after the execution of the project.

7.13 Recommendation: The SHCP should establish a mechanism making i t possible to perform an external evaluation of all investments based on the current process by which the SHCP requests the necessary information related to the investment and refers i t to the Legislative. In addition, guidelines should be defined regarding the minimum information that should be made available, as well as the ex post evaluation criteria.

7.14 B.2.2 Development Plan. Although processes have been defined for public investment planning and programming, there i s no mid and long-term plan defining in further detail the contents of the National Development Plan and the specific Programs arising from it.

7.15 Recommendation: The SHCP should establish an investment planning mechanism with a mid and long-term vision considering a level of detail that goes further than the existing one. This would make i t possible to improve the investment programming, execution and evaluation process, and it may also improve the established mechanisms for investment follow-up and control and decision-making, both for the inclusion and exclusion o f investments in the annual budgets.

7.16 Investment programming i s carried out through the sectoral DGPyPS, the COTEIPs and the UIDEP, among others, before being sent for their authorization by the Legislative Power; however, the investment priorities are not analyzed comprehensively to allocate more investment to one sector and reduce it in another, or to establish priorities within the same sector, secretariat and parastatal entity.

B.2.3 Investment Programming.

7.17 Recommendation: The SHCP should establish mechanisms for the executing entities to evaluate investments on the basis of cost-benefit criteria considering several alternatives. This w i l l allow them to prioritize the investments and thus obtain the respective authorization so that each project may be executed under the best possible conditions.

7.18 B.2.4. Supervision. Not all projects financed by the Bank are submitted to an external evaluation of the investment’s objectives and achievements; in the above mentioned sectors there should be a third opinion i s required but in other cases, the evaluation i s carried out by the department or executing entity.

MCxico Countw Financial Accountability Assessment 25

7.19 Recommendation: For all investment projects financed by the Bank, the SHCP should define a mandatory external evaluation on the financial aspects and the fulfil lment o f the investment objectives.

8. INTERNAL CONTROL MANAGEMENT OF THE FEDERAL PUBLIC SECTOR

A. Summary and Conclusions on Internal Control Management

8.1 The Federal Public Administration (APF) has exhaustive, rigorous and sometimes redundant internal control systems that evidence the Government’s intention to fight against corruption and improper administrative practices. The main strengths o f the internal control system are related to the role of the SFP (previously SECODAM) as integrating and steering entity of the system for the entire APF, which provides an integrated vision of internal control problems, as well as the development o f common solutions for the entities o f the Federal Government. The main weaknesses are associated more with a persecutory and punitive approach than a preventive character of SFP’s procedures, supported by extremely extensive and rigorous legal rules. The SECODAM started the process of implementing the Internal Control Strengthening Program that places emphasis on prevention and prioritizes the control of procedures over the control of individuals, and this w i l l improve the effectiveness of internal control. The SFP wi l l have the responsibility o f providing continuity to the work begun by SECODAM, in addition to improving the public service.

8.2 The internal control function in the APF i s exercised by: a) the SFP, through the follow-up of public expenditure actions by departments and entities, as well as budget goals, checking for compliance within the authorized amounts and timeframes; b) the Internal Control Bodies (OIC), which are the units of control in the institutions that evaluate and supervise the internal control systems of their respective entities; and; c) the Control and Audit Committee of each entity that, among other things, analyzes and evaluates the effectiveness of the internal control systems. The SFP issues the General Internal Control Rules that are compatible with INTOSAI, and produces the General Public Auditing Guide that regulates the practice o f public audits. In the case o f parastatal and state-owned companies that may be audited b y private auditors, the Auditing Rules and Procedures issued by the Mexican Institute of Public Accountants are applicable; these are compatible with international auditing principles.

8.3 The internal control function i s focused on: a) the evaluation of actions of federal public expenditure and their consistency with the expenditure budgets; b) the evaluation o f the effectiveness o f control systems and the fulfillment o f budget goals; c) surveillance in relation to planning, programming, budgetary management, control, evaluation, revenues, financing, investment, debt, assets and liabilities, funds and securities; d) surveillance in relation to recording and accounting systems; personnel hiring and compensation; procurement and contracting, leases, services and execution of public works; e) surveillance in relation to the preservation, use, destination, sale and discharge of personal and real property, other assets and federal resources; f)


the verification of the financial situation -goods, bank accounts, etc.- o f public servants; and g) the management of public servants.

8.4 The SFP has a Public Management Control and Evaluation Unit (UCEGP) that i s responsible for: a) the modernization o f the control and follow-up system; b) the strengthening of the internal control systems in the APF; c) the origination and channeling of strategic information on public management; d) the modernization of the information system; e) the creation o f added value through specific studies, and f) the training o f personnel of the OICs.

8.5 The SECODAM started a modernization process of the internal control management (Internal Control Strengthening Program) that i s based on: a) enhanced transparency in public management; b) process optimization and implementation of self-control mechanisms; c) improvement of evaluation of management and i ts results, fostering an adequate definition of management and results indicators; and d) training for public servants to promote responsible management.

8.6 N o substantial gaps have been detected in the management of internal control.


B1. Strengths.

8.7 follows:

The main strengths of the Government’s internal control system may be summarized as

0 The implementation of strategies promoting the administrative and accounting

Its continuous application across the entire federal public sector which makes it

0

0

0

strengthening of public entities;

possible to integrate and share experiences and development and control solutions; I t s constant concern with technological innovation of management systems; The inter-institutional coordination efforts in the definition o f management indicators; The “electronic government” and services modules provided to the community by the SFP that have become powerful instruments of management efficiency and transparency: (i) COMPRANET. Electronic Government Procurement System - I t consists of programs for procurement, leasing and services, as well as public work bidding; (ii) DECLARANET. Financial Disclosure - I t includes the procedures for financial disclosure, most frequently asked questions, reception, training and technical assistance modules; (iii) SECODAM’s LAWS AND REGULATIONS - They provide the legal and regulatory framework of the Secretariat, as well as the General Working Program and the Tasks Report 99-00; (iv) RFT. Federal Registry of Procedures - I t holds an extensive catalog o f procedures that are carried out at the different deconcentrated and decentralized departments, entities and bodies o f the Federal Public Administration: (v) SECODAM FOR CHILDREN - An educational module for children on the fight against corruption; (vi) SYSTEM OF DISQUALIFIED PUBLIC


SERVANTS - Electronic system that makes i t possible to determine if an individual i s disqualified from holding a job, position or commission in public service, on the basis o f resolutions adopted by the OICs of the APF, PGR, OECs, as well as the Judicial Power; and (vii) Unit responsible for Rules on Procurement, Public Works, Services and Property in (SFP) - Rules, approved suppliers and contractors, bulletins, price lists, register of notaries public, catalog of procurements, real property, personal property and services, general information, etc. The continuous promotion of a control culture, assigning responsibility over the controls to the personnel at all levels of the APF, and providing them with training to such end.

0

B.2 Weaknesses

8.8 B.2.1. The control exercised by the SECODAM i s more reactive than prospective. The internal controls that the SFP promotes and performs in the APF (that were started and carried out for a long time by the SECODAM) have become mechanisms mainly oriented to the fight against corruption and improper administrative practices; they are supported by new very extensive and rigorous legal rules, and are perceived by operational officials as a persecutory program inhibiting their administrative decisions, consequently hindering governmental management. The SFP wi l l soon have a preventive approach, with powers to organize and coordinate the comprehensive administrative development of the departments and entities in the APF; to direct, organize and operate the Professional Career Service System, and to coordinate and manage the Programs of Transparency and Fight against Corruption, that w i l l make it possible to promote honorable and ethical behavior among public servants, and to foster transparency in public management, accountability and access to public information by private citizens.

8.9 scope of the SFP’s powers in relation to those granted to the ASF.

In th i s manner, with this new preventive orientation, i t w i l l be possible to clearly see the

8.10 According to the SFP, one of the main obstacles to transparency and the fight against corruption i s an improperly directed discretion that goes against the public interest and that i s applied in some aspects of the Government’s contracting.

8.1 1 Recommendation: The modern vision of internal control emphasizes managerial controls over the control of officials. The SFP should promote managerial controls that may be exercised with more efficiency and effectiveness by IT management instruments.

8.12 The SFP mentioned that in order to strengthen the control functions and to reorient them to a preventive approach, i t i s implementing the Internal Control Strengthening Program that considers short-term actions such as the identification and improvement o f basic or priority processes, the review and updating of those systems that require modifications, proposals on preventive actions, and the evaluation and follow-up of the results obtained. In addition, a process i s about to be started by means o f which better control and auditing practices w i l l be adopted, an integrated control model w i l l be designed and adopted, guidelines for control evaluation w i l l be produced, risk assessment and management wi l l be encouraged, and the culture of self-evaluation w i l l be promoted.


8.13 B.2.2. The supplementary structure of the SFP and ASF’s functions i s stil l creating confusion. According to the provisions of the legal framework for governmental audit and control, both the SFP and the ASF must audit the accounts of the Federal Government’s institutions. Similarly, both institutions must check and report on the appropriate use o f the federal funds and on the compliance with the budget programs and goals. There i s an agreement between the SECODAM (the SFP’s predecessor) and the ASF promoting the complementary nature of their actions that tries to prevent redundancy in auditing and control processes. This does not seem to be the correct way to formalize these types of institutional commitments.

8.14 the functions o f each institution so as to avoid overlapping functions and redundant audits.

Recommendation. The SFP and the ASF should coordinate and establish in a clear manner

8.15 B.2.3. The orientation given to internal control by the SFP i s not compatible with the SIAFF. The implementation of the SIAFF wi l l change several aspects of the internal control systems of the institutions, w i l l eliminate some management processes, and in many cases w i l l eliminate the documentary evidence of transactions. In addition, the implementation of the S IAFF wi l l follow a gradual process both for the institutions and in terms of the scope of the SIAFF management; this wi l l create a diversity of new andor temporary issues in the management o f internal control and the interpretation criteria used in the management of audits. In the same way, as there w i l l be updated information on transactions available in a data network, there w i l l be new options for management control that should be specifically analyzed and designed so that they may be fully utilized.

8.16 According to the personnel of the SFP, simultaneously with the implementation o f the Internal Control Strengthening Program (started by the SECODAM) that i s focused on the optimization of processes and the establishment of self-control mechanisms, the SFP, in the fulfillment o f its mission and objectives concerning the control and evaluation of public management, w i l l perform substantial actions to evaluate the process o f programming and budgeting; public expenditure verification; and execution of programs and investment projects to achieve certain goals.

8.17 In addition, i t holds a substantial role in audit, administrative modernization, responsibilities, control over federal real property and issuance o f rules on matters o f procurement, public works, real property and training, among others.

8.18 Recommendation. The SFP should become more involved than previously in the development o f the SIAFF so that i t may in turn develop i t s own IT instruments that w i l l allow i t to make full use of the benefits that the SIAFF wi l l provide to control systems. In the same manner, i t could advise and share with the ASF the instruments and benefits from the control and audit management performed with the SIAFF, during the implementation stages and once full implementation i s completed.

9. AUDIT IN THE FEDERAL PUBLIC SECTOR4

A. Summary and Conclusions on Audit Management in the Federal Public Sector

9.1 The Supreme Audit Office of the Federation (ASF) began operations on January 1 , 2001. I t s institutionalization i s not fully completed and it cannot yet show actions and results allowing for an adequate evaluation. The ASF replaces the Supreme Accounting Office of Finances of the Congress (Contaduria Mayor de Hacienda del Congreso de la Uni6n). The Federation’s Superior Law of Control became effective on December 30, 2000. As the ASF i s an institution s t i l l in formation, i t i s not possible to show results or significant strengths and weaknesses in i t s management. However, there are two aspects that w i l l require special consideration from the Government: a) the ASF’s s t i l l incipient operational capacity w i l l not be substantially improved unless it i s granted an adequate budget; b) the delimitation and compatibility o f functions between the ASF and the SFP must be carefully analyzed and defined to promote a complementary approach by both institutions. I t s f i rs t commission was to review the Public Accounts o f 1997, 1998, 1999, and 2000, and afterwards 2001 and 2002; to date this task i s making fully absorbing i t s operational capacity.

9.2 The legal and regulatory auditing framework i s provided by the Federation’s Superior Law of Control that defines the scope of the management, organization and procedures to be followed by the ASF, which are compatible with international auditing principles. With the aim of delimiting the functions of the SECODAM and the ASF, as well as establishing and developing the mechanisms of coordination and collaboration between both institutions, on May 8, 200 1 both institutions signed the Agreement of Technical Cooperation and Information Exchange.

9.3 The powers of the ASF as defined in the Superior Law of Control are quite broad and meet the international standards applicable to this type of institution. However, they should be understood within the framework created b y i ts relation with the SFP and within i t s s t i l l incipient operational capacity that does not allow it to fully exercise such powers.

The ASF i s a new entity o f the Government and 2002 was only i t s second year o f operation. I t s institutionalization i s not fully completed and i t cannot yet show actions and results allowing for an adequate evaluation. This chapter wi l l only make reference to the functions and objectives for which it was created.


B.l. Strengths.

9.4 made of its strengths; this aspect wi l l remain pending for the future.

As the ASF i s a new entity in the process of institutionalization, no evaluation has been

B.2. Weaknesses.

9.5 B.l.l. The co-existence of the ASF with the SFP creates confusion. The similarity between i ts functions and types of control and those performed by the SFP, together with the major difference in operational capacity between both entities, have created confusion with respect to how viable the coexistence of both institutions may be.

9.6 The ASF indicated that the SFP i s the internal control body o f the Federal Executive; i t s jurisdiction i s limited to the departments and entities o f the centralized and semi-state Federal Public Administration. The ASF i s the external control body o f the three Branches of the Union, of the constitutionally autonomous bodies and of the federal resources transferred to States and Municipalities.

9.7 The SFP, in its capacity of internal control body of the Federal Executive Power, performs functions similar to those of the ASF within the scope of i t s jurisdiction, though with a much greater operational capacity, as all the internal control offices o f all departments and entities report to it. The governmental control strengthening strategy i s based upon the construction of synergies between both control institutions, though opinions have been expressed to strengthen the ASF and restrict the scope of the SFP to the function of Administrative Development.

9.8 The unequal positi,on of the Legislative Power before the Executive until the period before the LVII Legislature of the Union’s Congress (1977) favored a remarkable development of the SECODAM (now the SFP) in detriment of the operational and functional space of the former Superior Accounting Office of Finance (now the ASF). The Lower House o f Congress, through the ASF, w i l l have to continue with the implementation of i t s institutional strategy in the short and medium term. The ASF needs financial support to establish itself. Similarly, i t would be advisable to redistribute the operational capacities of both institutions in order to strengthen the external body reporting to the Legislative Power.

9.9 The powers that the SFP exercises in a permanent and preventive manner make it an agency that i s necessary to fulfill the objectives of development planning, and in general, to mantain the administrative order o f the Federal Executive. Therefore, though said powers cannot be exercised by a single institution, i t cannot be argued that said forms of control do not exclude each other, but in any case should be exercised under a single collaboration framework by the Executive Power and the Legislative Power, each of them acting within the scope of their respective jurisdictions.


9.10 The ASF represents a significant advance as compared to the former Superior Accounting Office of Finance of the Congress, in terms of independence and technical capacity. Therefore, i t i s important for the ASF to intensify i t s efforts to produce in a timely manner the audit reports and thus take timely corrective and preventive actions. In addition, i t i s advisable to reduce the constitutional term for submitting the audited Public Accounts, that currently must be submitted by March 31 o f the year following the auditable year, recognizing that the term to submit the report with the results o f the Public Account review was already adjusted b y the Federation’s Superior Law of Control, reducing i t by over five months.

9.11 The ASF should intensify i t s efforts to strengthen institutional capacity, mainly in terms o f personnel training and technological infrastructure; this i s because i t s functions require more and better trained personnel, considering that i t s new powers have been subject to changes both in terms of structure and review processes, as well as a new working strategy promoting a proactive approach in control actions, by means of the implementation o f efficient control systems that foster the improvement o f governmental practices.

9.12 the causes of corruption, through the adoption of the following priority actions, among others:

With this purpose in mind, the Executive Power should take steps to deal with the essence o f

0 Gradual reduction o f excess bureaucracy and eradication of the discretional approach in

0 Establishment of career civil service models that do away with the vision of ownership

0 Creation of indicators that wi l l allow for an evaluation of the performance of institutions

0 Identification of opportunities to improve public management; Incorporation at al l education levels of the study o f ethical and moral values;

0 Strengthening o f the supervision and control mechanisms for the application of the resources of Ram0 33, making it possible to ensure that they are used according to the budget provisions.

the provision of public services;

of public positions;

and public servants;

10. PARLIAMENTARY OVERSIGHT OF THE FINANCIAL MANAGEMENT OF THE FEDERAL PUBLIC SECTOR

A. Summary and Conclusions on Parliamentary Oversight

10.1 For over 50 years --and until very recently-- governmental and legislative management was performed in Mexico by a majority political party with limited effective opposition. With the current government a multiparty arrangement began operating in Congress without any prevailing majority; this created a rather unfamiliar process of analysis, debate and criticism of the Executive’s proposals. In this manner, the political transition i s showing a greater separation and balance between the three Powers, and the function of Parliamentary oversight i s gaining a strength for which i t was not fully prepared, neither politically nor administratively.

10.2 The Country’s House of Deputies carries out i t s function of oversight over public finances through the Surveillance Committee of the Superior Audit Office o f the Federation, the Committee of Finance and Public Credit, the Committee of Budget and Public Accounts, and the Supreme Audit Office of the Federation (ASF). The ASF i s a recently created body (December 2000) that i s growing rapidly but which does not yet have the sufficient capacity and budget to perform i ts work. The Committees do have sufficient technical and operational capacity but they do not have a tradition of supervision in a multiple-party arrangement and thus the coordination between the technical and the political aspects i s not yet efficient. I t may therefore be stated that the House’s oversight ability i s in the process of being perfected and that i t w i l l render increasingly better results.

10.3 The main strength of the oversight system l ies on i ts legal foundation that allows for Congressional participation in budgeting definitions, and also receives updated quarterly information on public finances and budget execution. The main weaknesses are associated with the short period established for the review, analysis, modification and approval o f the budget (one month and a half), and the weakness s t i l l exhibited by i t s executing entities. These periods are currently being revised to extend the review time.

10.4 improve the parliamentary oversight with the exception o f the ASF’ s strengthening.

There i s no information on the existence of any current initiatives to reform, develop or

B. Background

10.5 To understand how parliamentary oversight i s presently executed, i t i s important to remember that until very recently a political party that had an overwhelming majority and virtually


no effective opposition exercised the governmental and legislative management for over half a century. With the current government, and particularly in Congress, a multiparty arrangement began without any prevailing majority, which resulted in a rather unfamiliar process of analysis, debate and criticism of the Executive's proposals. In this manner, the political transition i s showing a greater separation and balance between the three Powers, and the function of Parliamentary oversight i s gaining a strength for which i t was not fully prepared, neither politically nor administratively.

10.6 The Legislative i s empowered to change the annual Budget bill submitted to it by the Executive, but i t only has the month o f December of each year to do it, and 15 additional days every six years whenever there i s change of government. These conditions run counter to the seriousness and effectiveness of the oversight function.

10.7 Today, things are beginning to change for the better, though some sectors of public opinion consider that the quality o f the legislative work i s very far from being adequate, among other reasons due to the limited qualifications o f most deputies and because despite improvements in terms of openness, political balance and presence of an increasingly more critical, participatory and informed media the political leaders o f the parties s t i l l direct and have a decisive influence on the way their Deputies vote in the House.

C. Strengths and Weaknesses

C.l. Strengths.

10.8 Because of the relatively recent creation of the ASF, this aspect was not evaluated.

C.2. Weaknesses.

10.9 C.2.1. The period for the budget to be reviewed by the Congress. The very short term (less than one month) that the Budget Committee of the House of Deputies has to review, comment, modify and approve the Annual Budget restricts the possibilities o f review and analysis and affects the seriousness of the Congress' participation. Every December, Congress receives the budget bill that must be approved and made effective on the 1'' day of January of the following year.

10.10 C.2.2. The objective of the quarterly reviews of budget execution. Although i t i s true that every quarter Congress receives for review the reports on budget execution from the Federal Government and the parastatal entities, the objective of said review does not seem to be very clear, as it does not result in any specific Congressional action.


11. TRANSPARENCY AND PUBLIC ACCESS TO THE FINANCIAL INFORMATION OF THE FEDERAL PUBLIC SECTOR

A. Summary and Conclusions on Transparency and Public Access to Information

1 1.1 The current government i s significantly encouraging actions oriented to promote transparency in public administration, and to creating instruments that develop both the population’s interest in reviewing public finances and allow for simple and up-to-date access. This i s new for the Government and for the public, and at present this can only be evaluated on the actions being taken rather than on their results. The main strengths o f the system are the Government’s decisive interest and involvement in this respect, and that a special permanent and inter-secretarial committee has been commissioned to lead on these aspects (Inter-Secretarial Committee for Transparency and Fight Against Corruption). Its main weakness lies in the lack o f experience on the subject and the related need to develop and/or coordinate a legal, operational and awareness basis for the instruments to be proposed.

11.2 With the enactment o f the Federal Law o f Transparency and Access to Governmental Public Information (June o f 20021, the procedures o f transparency in public management are regulated, and public access to information i s established as mandatory, with i t s quality i s defined. The created Inter-Secretarial Committee for Transparency and Fight Against Corruption (led by the SFP) coordinates the prevention and fight against corruption, and promotion o f transparency. The Secretariats have already begun a process of improving their Internet sites to include operating and legal information, and they are preparing themselves to meet the conditions provided by the L a w with respect to the information that must be published. The rules o f ethics and codes o f conduct for public servants are in the process o f being updated and adjusted to the new concepts. In general, there i s significant activity in the Government that i s wel l organized and devoted to promote transparency, fight against corruption and provide public access to information.

11.3 o f Transparency and Fight Against Corruption.

The World Bank i s cooperating with the SFP in a project designed to strengthen the Program

11.4 Transparency o f the Report on Standards and Codes Compliance (ROSC).

In September, 2002 the International Monetary Fund prepared the module o f Fiscal

11.5 The report evaluated the practices o f fiscal transparency in comparison with the Code o f Good Practice in Fiscal Transparency. In recent years, Mexico has made considerable progress in the improvement o f transparency in public finances.


11.6 The most important initiatives include the reform of the budgeting process, the implementation of an integrated system o f financial information, the introduction of a human resources administration system, the improvement of the public sector procurement system, the simplification of governmental regulations, the strengthening o f internal control and external auditing, the introduction of sound criteria for the State’s development banks, and the reduction of the discretional approach of inter-governmental relations.

11.7 In general terms, governmental agencies make available to the public an unprecedented volume of fiscal information, including via electronic media. However, the authorities acknowledge the need for further action to improve the presentation o f information and to make it more useful for interested users, including Congress. The IMF identified priority areas where additional actions are required to help meet the requirements of the above mentioned Code.

11.8 The specific recommendations include the following steps: (i) redefinition of the institutional coverage o f the budget; (ii) timely inclusion o f information from sub-national governments into the fiscal accounts; (iii) submittal o f the budget in a revolving context in the medium term; (iv) publication of estimates of the cost o f quasi-fiscal operations, contingent liabilities, and tax expenditures; (v) full implementation of an integrated financial information system; (vi) simplification of fiscal laws and regulations; (vii) implementation o f performance audits; and (viii) publication of comments and observations o f external audits and control of their enforcement.

B. Strengths and Weaknesses

B.l. Strengths.

1 1.9 B.l.l. National Agreement for Transparency. The National Agreement for Transparency has made i t possible to carry out projects in conjunction with academic organizations (Monterrey Institute of Technology, UNAM, Ibero-American University Center of Economic Research and Education); business groups (CANACINTRA and CONCAMIN); and non-governmental organizations (Association of Media Representatives).

11.10 B.1.2. International Contacts. Contacts are being established at the international level with international agencies such as the OAS, United Nations and OECD, to exchange experiences on anti-corruption matters and measure the corruption rate prevailing in public and private institutions in the country.

1 1.1 1 B.1.3. Projects with the Secretariat of Public Education. Long-term projects were started with the Secretariat of Public Education to create a culture of ethics and civics among children in Basic Education levels. Additionally, there i s a firm commitment to develop an interrelation with international financial agencies.


B.2. Weaknesses.

11.12 B.2.1. Projects. For the time being, only a few projects have become effective, as the majority are s t i l l in the process o f analysis, research and consensus for implementation and application.

11.13 B.2.2. Administrative Units. The administrative units wi th responsibility over these types o f matters are not yet complete in terms o f structure and equipment.

11.14 Comment on the SFP. The World Bank i s cooperating with the SFP in a project that wi l l allow for the strengthening o f the Program o f Transparency and Fight Against Corruption; to this end, a working group was created with representatives f rom each o f the areas o f this Secretariat, in order to identify the problems faced b y the Program, the way in which the Technical Secretariat and the different areas o f the SFP are participating in the solution o f the problem, as well as to make an initial identification o f areas where the collaboration o f the Wor ld Bank could improve the scope o f the Program.

11.15 The units o f the SFP have defined actions to meet the strategic objectives o f the Program (prevention and elimination o f practices o f corruption and impunity; verification and detection o f practices o f corruption; and punishment o f practices o f corruption and impunity).

11.16 The strategic lines o f the Program are mainly focused on the identification o f critical areas, operating processes and personnel susceptible to corruption who might therefore become risks. The use o f new tools requires non-traditional techniques in Public Management, such as the need to do process mapping, to apply risk identification methods, to evaluate internal control in order to mitigate risks, efficient and effective management and analysis o f large volumes o f information, and strategies based on information technologies.

11.17 The Program i s facing some problems, the most important being that the departments and entities perceive i t as a temporary measure that can be implemented with personnel and procedures that are not always the most adequate ones (ad hoc). The most appropriate means to link the Program to the structure o f each institution i s through participatory planning, so the plan i s to reorient the SFP’s efforts to include a transparency and anti-corruption program in the substantial governmental programs o f institutions.

11.18 At present, the Wor ld Bank has a preliminary Program proposal that considers the above mentioned aspects, highlighting the objective so that wi th the Wor ld Bank’s support the measures may be reinforced to coordinate the policies and actions to foster transparency and to prevent and fight against corruption in the departments and entities o f the APF.

12. FIDUCIARY RISK ASSESSMENT

A. The need for fiduciary risk assessment 1. 12.1 The previous sections of this CFAA discuss the strengths and weaknesses of public sector financial management, but as such may not provide the reader with a clear picture as to the level o f fiduciary assurance that can be derived from existing systems of public sector financial management, expenditure control, and procurement. As such, they do not explicitly incorporate the concept o f risk. This section attempts to fill th is analytical void by providing a brief but structured analysis o f fiduciary risk, based on a model developed by the UK Department for International Development (DFID).

12.2 There are a number of reasons to assess fiduciary risk. The Bank’s member countries see advantages in aligning their governance practices to regional or international standards and being more transparent so as to position themselves better for membership and influence in regional and international institutions. In the case of Mexico, the government has demonstrated an interest in reforming i t s public sector financial management through many recent initiatives. I t i s hoped that this fiduciary risk analysis, along with the CFAA in which it i s included, w i l l assist in these efforts.

12.3 There i s additionally a demand from the public for government transparency and accountability. This i s expressed through citizen and political groups, which have generally gained strength in Mexico in recent years, in part due to the recent heightening of competition between the country’s political parties5 At the subnational level, one credit rating agency has noted this trend and i t s effect on public financial management in Mexico, concluding that “Political competition . . . has given birth to a new generation of public managers . . . Mexican public officials are increasingly focusing on the institutionalization of their administrative and financial policies.”6

12.4 From the donor perspective, the World Bank and other financing agencies have seen their business change considerably in recent years. The relative increase in adjustment lending, debt relief, and sector programs, in place of traditional investment projects has reduced the relative importance o f tracking individual borrower transactions as a source o f fiduciary assurance and highlighted the importance of assessing the country’s own PFM system. Meanwhile, the increasing emphasis by donors on working with, and improving, government institutions and systems, also has indicated a need to better understand opportunities for enhancing public sector performance and thus reducing fiduciary risk.

The Mexican branch o f Transparency International, Transparencia Mexicana, was formed in 1999. Further

See “Brave New World: The Next Generation o f Mexican Public Management,” in pp. 103-112 o f “Local and information can be found on i t s website: http://www.transparenciamexicana.org.mx/

Regional Governments 2003,” Standard and Poor’s, McGraw-Hill Companies, Inc. 2003.


B. FRAMEWORK FOR FIDUCIARY RISK ASSESSMENT

12.5 The Bank’s CFAA guidelines (paras. 14-20) encourage Bank staff to include a “relatively brief analysis” of the probability that the country’s public financial management systems wi l l provide efficient management of public funds. These guidelines also recommend that the transparency o f public financial management also be considered in determining fiduciary risk. With this in mind, this assessment uses the following definition of fiduciary risk: the expected value of the losses that may result from gaps between generally accepted financial management standards and actual practices in the subject country. Ultimately, fiduciary risk implies the risk that funds do not reach their intended destination.’ Fiduciary risk i s not financial risk or credit risk, as it i s not a measure of a country’s fiscal situation or i t s ability to repay sovereign debt obligations.

12.6 Since it i s not practically possible to precisely measure fiduciary risk,8 the risk arising from non-compliance with each good-practice principle i s subjectively assessed. In doing so, the World Bank’s standard classifications of risk are used: Low, Moderate, Substantial, or High. These have been applied to each principle and as an overall measure. A rating o f “low” indicates that the country i s completely (or nearly completely) in l ine with the best practice benchmarks, while a “high (risk)” rating indicates that the country’s practices significantly deviate from the international standard. The ratings represent the level o f seriousness and concern with which any prudential shortcoming i s viewed by the World Bank, and the corresponding level o f benefit expected from reform. They do not necessarily reflect the desired selection or sequencing of reforms, which should take into account the costs of reform and interdependencies as well as the benefits of risk reduction. The costs, in particular the political costs, are for the national executing authorities to gauge.

12.7 In addition to the CFAA guidelines, this analysis i s made according to the DFID and OECDDAC guidelines’ on managing fiduciary risk when providing direct budget support. These build on the IMF Code o f Good Practices on Fiscal Transparency, the I M F N o r l d Bank reviews of 25 HIPC countries, and IFACPSC International Public Sector Accounting Standards. The primary difference between the method applied here and that suggested by DFID i s that the latter considers the poverty focus of public spending as a fundamental principle, while this analysis does not.”

’ High fiduciary risk does not necessarily indicate high levels o f corruption. High risk may instead simply reflect bureaucratic inefficiency or serious capacity weaknesses, which contribute to greater susceptibility to intentional mismanagement of funds. * Conceptually, each probability o f loss would be subjectively assessed on a scale o f 0-1, and multiplied by the estimated amount of the lost benefits. The latter would be calculated as the amount o f public funds that may be diverted or misapplied. If i t were possible to estimate the probability of losses, the overall risk amount would be the sum of the yoducts of the probability and amount o f each mutually exclusive loss.

DFID, “Managing Fiduciary Risk When Providing Direct Budget Support,” London, March 2002; and OECDDAC Task Force on Donor Practices, Sub-Group on Financial Management and Accountability, “Development Performance Measures for Public Financial Management,” Paris, March 2002. In its document, DFID proposed a ratings scale o f A (low - practices in line with best practice benchmarks), B (medium), or C (high). lo The DFID and OECDDAC guidelines include the support for pro-poor strategies as one o f their Good Practice Principles, i.e. that “the budget i s aligned with the national development strategy.” The Bank does not consider this to be a directly fiduciary issue and thus does not analyze the strategic allocation o f public expenditures within CFAAs. This issue may be reviewed as part of a Public Expenditure Review (PER) or other (e.g. poverty-related) research however.


12.8 In total, this analysis employs eight ‘Good Practice Principles’ and 17 benchmarks for assessing adherence to them.’’ O f the eight principles, six fa l l within the scope o f the CFAA, one within the Public Expenditure Review (PER) and one within the Country Procurement Assessment (CPAR). For each o f the six CFAA Principles, the team made an assessment o f how far actual practice in Mexico meets the relevant benchmarks.

12.9 This analysis was conceived and carried out after the relevant fieldwork for the C F A A so, in some cases, data are missing and assessments are not fully supported b y factual evidence. Nevertheless, i t i s believed that the overall assessment i s reliable.

c. RESULTS OF ASSESSMENT

12.10 The following discusses the results o f the fiduciary risk assessment.

12.11 Principle 1: A clear set of rules governs the budget process. The rules and procedures spelled out in the Budget, Accounting, and Public Expenditure Law, and in the Budget Manual, both o f which have been recently updated, are clear and comprehensive.12 Whi le there are some weaknesses in this area - such as the volume and complexity o f the rules and procedures, this i s clearly a strong aspect o f Mexico’s public financial management system. Risk related to this factor: Low

12.12 Principle 2: The budget i s comprehensive. If a budget i s not comprehensive, there i s a risk that receipts and payments outside the budget are not transparently separately budgeted and accounted for. Extra-budgetary funds may be used for doubtful purposes. Mexico’s budget includes all central government expenditures, including transfers to local authorities and public enterprises, as in most countries. Local authorities prepare their own budgets, but most transfers made to them are nondiscretionary. The budget also includes those non-financial parastatal entities (e.g. CFE and PEMEX) that are under direct state control; however, these entities are included within “government,” which complicates the review o f public sector finances. The existence of an extensive financial public sector, through which off-budget operations can be channeled, as wel l as other off-budget vehicles such as PIDIREGAS in the energy sector, create difficulties in the definition o f the public sector and have led to a dual definition o f the public deficit - the traditional one based on the current definition o f the public sector, and one determined by actual borrowing requirements. The M F has proposed a re-definition o f the coverage of government and the rest o f the public sector to align Mexico with sound international p ra~ t i ce . ’~ Risk related to this factor: Moderate

There are slight differences between the DFID Guidelines and the O E C D D A C framework. The OECDDAC framework adds two more Principles to the DFID list, on budget transparency and revenue laws respectively. In this assessment we have included budget transparency, but not revenue laws as these were outside the scope o f the CFAA. A benchmark was added to the expenditure control principle, so as to give explicit weight to the operation o f internal controls. In addition, as explained in the previous footnote, this analysis does not include a principle related to the

p2 For details, see http://www.shcp.sse.gob.mx/ l3 See IMF Fiscal Transparency ROSC, paragraphs 2,49 and 50.

overty focus o f expenditures.


12.13 Principle 3: The budget i s a reliable guide to actual expenditure. A budget’s value as a tool for effective fiscal planning depends on the existence of appropriate rules, procedures, and other mechanisms which provide the appropriate incentives to minimize deviations between budgeted and actual expenditures. This issue w i l l primarily be covered in the Bank’s PER. However, the IMF, in i t s Fiscal Transparency ROSC (para. 41), has concluded that “Budgetary data provide a reasonably reliable indication of actual results.” No risk rating given

12.14 Principle 4: Expenditure within a year i s controlled. Expenditure control i s generally appropriate in the central government, and i s strongly supported by the work of SFP [formerly SECODAM]. Monthly and quarterly expenditure reports are provided by SHCP to the Congress within 35 days of the end of the period, and these are usually made available to the public (on the SHCP’s web page) on the same day. Adjustments to higher-level budget l ine items are made only after an appropriate approval process, and the budget includes explicit mechanisms and rules for adjusting expenditure when actual revenues differ from forecasts. Weaknesses in this area include the lack of integration of information systems, which presents r isks in terms of the effectiveness and efficiency in the management of funds and information, and an over-reliance on SFP for maintenance o f the control framework, the heart o f which should rest with the agencies who manage government funds. Risk related to this factor: L o w

12.15 Principle 5: Government carries out procurement in line with principles of value for money and transparency. Mexico’s federal procurement arrangements were evaluated in the Bank’s Country Procurement Assessment Report (CPAR).14 Regarding risk, the CPAR concluded that: “The current procurement system i s a strong one, based on a solid institutional and legal framework involving agencies at all government levels, supported b y electronic procurement and bidding processes. However, i t i s s t i l l subject to r isks and inefficiencies where certain issues are in need of improvement. Consequently, the risk of the system i s appraised as Average.” The CPAR includes 16 principal recommendations for strengthening the public procurement process. Risk rating for this factor: Moderate

12.16 Principle 6: Reporting of expenditure i s timely and accurate. As noted above (Principal 5), the government produces regular expenditure reports. The annual report on the Public Accounts (Cuenta Pciblica) i s generally published within the first few months after the end of the year, but the audit of these accounts i s not required to be submitted to Congress by the National Audit Office (Auditoria Superior de la Federaci6n - ASF) until March 31 o f the following year - i.e. 15 months after the end of the reporting period. This does not compare well with international best practice, or with countries of s im i la r size and economic le~e1. I~ The accuracy of reports i s supported b y the

l4 “Mexico: Procurement Assessment Report,” June 19,2002. l5 In Brazil, for example, the Tribunal de Cuentas i s allowed only 60 days after receipt o f the report to present i t s “approval” o f the financial statements, and i n Turkey, the Draft Final Accounts must be presented to the Tribunal within 7 months after the end o f the fiscal year, after which the Tribunal has 75 days to provide i ts report (“Notice o f Conformity”) to Parliament, thus allowing sufficient time for this to be considered during the preparation o f the following year’s budget (Constitution, Article 164). However, in Brazil these time frames are not always complied with and in Turkey they relate only to the Draft accounts - therefore i t should be pointed out that while the timeline in


many strong aspects of the public financial management system (Ley de Presupuesto, Chart of Accounts, SFP’s internal audits, among others) but i s at the same time negatively impacted by problems such as the complexity of rules and procedures, and lack o f integration of information systems. The SIAFF i s the primary instrument for developing government financial reports, but i s weak and not sufficiently comprehensive. Accounting and reporting are not yet in line with new international public sector accounting and reporting standards (as issued by IFAC-PSC) and in some cases may require considerable efforts to comply with these standards.16 Therefore, it i s concluded that while information i s generally provided in a timely manner, the accuracy and presentation of such information could be improved. Risk rating for this factor: Moderate

12.17 Principle 7: There is effective independent scrutiny of government expenditure. Scrutiny o f government expenditure has historically been largely the responsibility of SFP, the government’s internal auditor. Legislative oversight, and financial audit by an audit agency which reports to this legislature, have only recently been strengthened, and w i l l take time to reach the level of international good practice. Therefore while improvements in this area have been significant since the late 1990s, and SFP continues to be generally effective in i ts role, some fundamental institutional improvements and capacity building are s t i l l in process. The executive branch could facilitate th i s process by providing user-friendly financial reports and by working with the Congress and civic institutions to strengthen their ability to monitor public accounts. Risk rating for this factor: Moderate

12.18 Principle 8: The budget process i s transparent. Substantial advances have been made in recent years to improve the transparency of the budget process. A great deal of information on budget process and execution i s made available to the public on a timely basis. This information i s not easily comprehensible, however, both for i t s sheer volume and the way i t i s presented. The presentation o f not only financial, but also performance information should be improved so that government decision-makers (including the Congress) as well as the public w i l l be able to more easily understand and utilize the information provided. This i s recognized by the government, which i s taking steps to address the problem. Risk rating for this factor: Moderate

Mexico i s longer than in most countries, actual practice in both the timeliness and quality of the reports may be better than in cohort countries. (Sources: the Bank’s CFAA for Brazil, Turkish Constitution). l6 For example, although required by law, commitments and accrued obligations are not consistently and timely recorded. See IMF Fiscal Transparency report, para. 33.


T T h e budget is a reliable guide to actual expenditure 3.1 Budget outturn shows a high level of consistency with the budget

4. Expenditure within the year is controlled

4.1 In-year reporting of actual expenditure

4.2 Internal controls operating to prevent fraud and error

4.3 Systems operating to control virement, commitments and arrears

5. Government carries out procurement in line with principles of value for money and transparency 5.1 Appropriate use o f competitive tendering rules

5.2 Decision making i s recorded and auditable

5.3 Effective action taken to identify and eliminate corruption

6. Reporting of expenditure is timely and accurate

6.1 Reconciliation of fiscal and bank records i s carried out on a routine basis

6.2 Audited annual accounts are submitted to congress within the statutory period

7. There is effective independent scrutiny of government expenditure

7.1 Government accounts are independently audited

7.2 Government agencies are held to account for mismanagement and criticisms and recommendations by the auditors are followed up.

8. The budget process is transparent

8.1 Information on the fiscal activities o f government i s available in the public domain

8.2 Information presented in a way that facilitates policy analysis and promotes accountability

Overall Fiduciary Risk

Summary of Fiduciary Risk Assessment 12.19 The table below summarizes the results o f the analysis. The f i rs t statement represents the Principle, which i s fol lowed by applicable benchmarks.

Good Practice Principle and Benchmarks for Assessment

1. A clear set of rules governs the budget process

1.1 A budget law specifying fiscal management responsibilities i s in operation

1.2 Accounting policies and account code classifications are published and applied

2. The budget is comprehensive

2.1 All general government activities are included in the budget

2.2 Extra-budgetary expenditure i s not material

Rating

Low

Moderate

Not rated: to be discussed in PER

Low

Moderate

Moderate

Moderate

Moderate

MODERATE


12.20 The overall conclusion of Moderate fiduciary risk indicates the substantial institutional capacity of the Mexican public sector, strong performance in many fiduciary areas, and the advances made in recent years to improve public sector financial management and procurement. At the same time, this analysis recognizes the need for improvement in a number of areas, many o f which are the subject of ongoing reforms.

Preparation of this CFAA*

* TTL: Victor Ord6fiez (FMS). The Bank’s working team express their appreciation to the government officials contacted in the preparation o f this report (Annex 5), and especially Mr. Ricardo Ochoa, General Director of International Financial Agencies (presently General Director of International Financial Affairs of the MOF) for his personal support and that o f his staff.


ANNEX 1

SPECIFIC OBJECTIVES AND SCOPE OF REVIEW OF EACH SECTOR

I. BUDGET MANAGEMENT OF THE FEDERAL PUBLIC SECTOR

1.

2.

3.

4.

A. Objective. The specific objective o f the review o f the budget system was to check the quality o f budgetary procedures (planning, design, programming, execution, evaluation and settlement), as wel l as to check the effectiveness o f the budget as an instrument to evaluate the fulfil lment o f the Federal Government’s action plans and the effectiveness in the use o f Public funds.

B. Scope. The scope o f the review includes the analysis of: a) i t s legal basis; b) the availability o f standard procedures for budget planning, design, programming, execution, evaluation and settlement; c) the existence o f a conceptual and programming basis; d) the existence o f an action plan for the budget period; e) the existence o f budget programming policies and goals; f) the existence and availability to personnel involved in budget management and o f instructions and documentation appropriate for the execution o f the different budget phases (planning, design, programming, execution, evaluation and settlement); g) the existence o f physical goals and budget management and effectiveness indicators; h) the existence o f procedures to evaluate budget management and effectiveness in the use o f Public funds.

11. TREASURY MANAGEMENT OF THE PUBLIC SECTOR

A. Objectives 0

0

0

0

0

T o determine the effectiveness and efficiency in the management o f fiscal funds by the Treasury o f the Federation (TESOFE); T o check the efficient and timely supply o f funds to the entities so that they may comply wi th their budget objectives; The check the effective supervision o f transfers o f revenues that must be deposited in the treasury account by the entities that collect federal funds; T o check the efficient management o f payments to suppliers o f the Federal Government; T o check that the figures o f programmed revenues and expenditures to be included in the Federation’s Treasury Programming, as wel l as their adjustments and updates, are realistic, certain and complied with.

B. Scopes 0 T o review the process o f supervision o f the deposits to the Treasury accounts

(methodology, available resources, action plan, training program); 0 The review the process o f cash flow programming, as wel l as i t s results and compliance; 0 To review the efficiency in funds transfer and payment procedures; 0 T o review the internal and external control processes applicable to treasury management; 0 T o review the information and supporting documentation preservation procedures;


0 To review the transaction reporting procedures and to check the status of updating, appropriateness and timeliness of the reported information.

111. ACCOUNTING AND FINANCIAL REPORTING MANAGEMENT OF THE FEDERAL PUBLIC SECTOR

5. A. Objectives 0

0

0

0

0

0

To check the systematic and adequate registration of the transactions that affect the economic and financial situation of public organizations; To check that the system provides timely and certain information on the public financial management to support decision-making processes; To check that the system provides orderly, complete and timely accounting information to allow for both external and internal control and audit tasks; To check that the information on the public sector i s automatically processed and integrated into the national accounting system; To check if the necessary financial statements are produced to show the results of the financial, budget, economic and patrimonial management o f the State; To check if standard and current accounting procedures are used, in agreement with international practices.

6. B.Scope To review the process of transaction classification, validation and registration (methodology, available resources, action plan, training program); To review the internal control processes applicable to the accounting management; To review the information and supporting documentation preservation procedures; To review the transaction reporting procedures and to check the status of updating, appropriateness and timeliness of the reported information; To review the effectiveness of the system as an instrument to support decision-making; To discuss the effectiveness of the system as an instrument to support the evaluation of the State’s financial management and the effectiveness and efficiency in the use of public funds. .

IV. FEDERAL INTEGRATED FINANCIAL MANAGEMENT SYSTEM (SIAFF)

7. A. Objectives 0

0

0

To determine i t s scope and level of development and implementation in the federal public sector; To determine if the system i s conceived to promote the transparent, effective and efficient administration o f Public funds; To determine if its sustainability i s ensured by: o An adequate legal framework that requires and regulates i t s operation; o The Government’s institutional support ensuring i ts application, updating and technical

and financial support; o Being provided with instruments that provide for transparency in the financial

management of the public sector;


o The existence o f instruments and a training methodology that make it possible to set up and maintain a team o f individuals who have knowledge and responsibility over i t s management.

B. Scope 0 To review the process o f institutional implementation (methodology, available resources,

institutional diagnostics, implementation action plan, training program, follow-up and assistance processes and technical support for users); To review the implementation process and i t s results in the public sector (affiliate institutions, quality and degree o f usage by users, results obtained); To review the internal control processes developed automatically by the system, as wel l as the existing non-automatic processes; T o review the procedures o f information and supporting documentation preservation procedures; T o review the transaction reporting procedures and to check the status o f updating, appropriateness and timeliness o f the reported information; To review the effectiveness of the system as an instrument to support decision-making; To discuss the effectiveness o f the system as an instrument to support the evaluation o f the State’s financial management and the effectiveness and efficiency in the use o f public funds.

0

0

0

0

0

0

V. PUBLIC DEBT MANAGEMENT

8. As a result o f the indebtedness level o f the Public Sector (in the order o f 2,456 bi l l ion Mexican Pesos equivalent to 40% o f the GDP, where 40% o f this amount represents foreign debt and the rest internal indebtedness), in addition to the strategy to convert the foreign debt into internal debt, and the responsibility-among others-assumed by the Government in the cases o f IPAB (Institute for the Protection o f Bank Savings), FARAC (Trust Fund to Support the Recovery o f Highways under Concession), and PEDlREGAS (Long Term Productive Infrastructure Projects), the administration o f the Mexican public debt has important implications on the public finances and the macroeconomic development in general. Although i t i s not the purpose o f this document to make an analysis o f the debt, i t s strategies, procedures or effects, i t has the objective o f analyzing the capacity to manage it and to analyze and report on i t s status.

9. A. Objective. The specific objective o f the review o f the public debt system was: a) to check the State’s capacity to evaluate, contract, grant or guarantee financial resources selectively for priority objectives; b) to check the capacity to analyze and administer the contracted debt in an appropriate manner; c) to check the capacity to foresee the evolution o f indebtedness; d) to check the capacity to recommend policies and guidelines for future indebtedness.

10. B.Scope 0

0

To review the integration status o f the public credit system to the SIAFF; T o review the process o f classification and registration o f debt operations, including their follow-up and verification o f benefits perceived (methodology, available resources, action plan, training program); To review the process o f analysis and evaluation o f new indebtedness projects; 0


0 To review the process of debt administration and public debt service programming; 0 To review the internal control processes applicable to debt management; 0 To review the information and supporting documentation preservation procedures; 0 To review the procedures to report the status of the public debt, and verification of the

status o f updating, appropriateness and timeliness of the reported information; 0 To review the effectiveness of the system as an instrument to support decision-making; 0 To discuss the effectiveness of the system as an instrument to support the evaluation of the

State’s financial management and the effectiveness and efficiency in the use of public funds.

VI. PUBLIC INVESTMENT MANAGEMENT

11. A. Objective. The specific objective o f the review o f the public investment system was to check whether i s makes i t possible: 0 To ensure that State resources are allocated to the most profitable options of socio-

economic investment; 0 To harmonize investments programs with development objectives; 0 To ensure that the projects and programs contribute to improve the population’s well-

being; 0 To guarantee that the external and counterpart resources are used in a timely and effective

manner; 0 To guarantee the allocation of resources for the sustainability of the investment.

12. B. Scope. The scope of the review includes an analysis o f 0

0

0

0

The legal basis for its participation; The means available to i t to perform i ts work; The scope and terms of the activity carried out; The results obtained and the proposals to improve the investment processes and their evaluation.

VII. INTERNAL CONTROL MANAGEMENT OF THE FEDERAL PUBLIC SECTOR

13. A.l Specific Objective. The specific objective of the review o f the internal control system was to check if i t complies with the objective o f controlling and improving: 0 The efficiency in the operations of attracting and using public resources; 0 The efficiency and effectiveness of the internal control elements employed; 0 The information on the management, use and control of the State’s assets and resources; 0 The public servants’ accountability procedures; 0 The procedures to prevent an improper management o f State resources.

14. A.2 Other Objectives. The following was reviewed: 0

0

0

If the internal control procedures are systematically established in the institutional practice of the public sector; If the Responsible Units have the necessary resources to operate; If the internal control i s clearly defined allowing for an evaluation o f i t s effectiveness.


15. B. Scope. The scope of the review includes an analysis to check if there are: Controls of lawfulness, that only allow for the execution o f exclusively legitimate and appropriate operations; Controls of timeliness, so that the transactions are executed and registered in due time and pursuant to the terms under which they were authorized; Preventive controls, that avoid collusion to commit crimes against the public administration; Management controls, that evaluate and measure the efficiency, effectiveness and economy of the different operating levels, as well the costhenefit o f said controls; Detection controls, that detect r isks and irregularities in the execution and registration of operations in a timely manner; Practical controls, that avoid the implementation of unnecessary or low-benefit controls; Functional controls, so that the controls to be implemented are supplementary and streamlined with the operations; General controls, promoting standard controls of general application, Specific controls, specially designed to control all aspects of the operations.

VIII. AUDIT MANAGEMENT IN THE FEDERAL PUBLIC SECTOR

16. A. Objective. The specific objective of the review o f the audit system was to check if i t complies with the objective of demonstrating to the Mexican Federal Government and the citizens in general that:

Adequate benefits have been obtained from the invested amounts; 0 The revenues have been fully deposited according to the location where they were

collected; The public entities have complied with the legal procedures for contracting, purchase or sale of goods or services;

0 The Federal Government’s assets are adequately protected; 0 The financial statements and other financial information are impartially submitted in

accordance with the law and the generally accepted accounting principles; The plans and programs have been executed in accordance with the Government’s objectives, policies and projects, and the federal resources have been properly used;

0 The approved budget was executed in accordance with the objectives, plans and programs for which it was requested; The executive and operating responsibilities are performed within a framework of transparency and supporting an accountability process at all levels.

17. B. Scope. The scope of the review includes the analysis o f 0 The legal basis for the governmental control; 0 The ASF’s capacity to propose and issue policies, rules and procedures for the operation of

the governmental control system; 0 The ASF’s capacity to promote the development, training and professionalism of the

External and Internal Auditing function; 0 The ASF’s performance, checking that i t complies with the principles o f independence,

confidentiality, professionalism, objectivity, timeliness and multidisciplinary activity.


0 The capacity of execution of the annual audit plan and the availability of adequate resources:

Ix. PARLIAMENTARY OVERSIGHT OF THE FINANCIAL MANAGEMENT OF THE FEDERAL PUBLIC SECTOR

18. A. Objective. The specific objective of the review of the Parliamentary oversight o f the financial management of the public sector was to check i t s involvement in the following processes:

Preparation, approval, follow-up, modification and settlement of the Federation’s Budget; Acquisition of new indebtedness in the cases provided by law.

19. B. Scope. The scope of the review included an analysis o f 0

0

The legal basis for its participation; The means available to it to perform i t s oversight function; The scope and terms of the oversight activity.

x. TRANSPARENCY AND PUBLIC ACCESS TO THE FINANCIAL INFORMATION OF THE FEDERAL PUBLIC SECTOR

20. A. Objective and Scope. The specific objective and scope o f the review on the aspects of transparency and public access to information are the following: 0 To check the existence of systematic procedures o f evaluation of the agencies’

management and results; 0 To check the existence of ethical behavior standards for public servants and follow-up

procedures; 0 To determine the legal treatment given to the cases of corruption and money laundering, as

well as the punishment foreseen; To check the existence of a legal framework that guarantees public access to the information on the State accounts, and that enables a public debate o f these aspects;

0 To check the existence of instruments and routine procedures in the public management that enable public access to the State’s up-to-date financial information;

0 To check the existence of organizations capable of analyzing, interpreting and criticizing the information of the State accounts; To check the existence of media interested in fostering public disclosure and a national debate of the criticism, interpretation and results of the State’s financial management.

Country Financial Accountability Assessment

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Transcript of Country Financial Accountability Assessment