unlicensed analysis of the characteristics of public financial management; comparison and application of public financial management in the state management of thuy nguyen district, hai phong city luận văn ths quản lý công

ABSTRACT Title:ANALYSIS OF THE CHARACTERISTICS OF PUBLIC FINANCIAL MANAGEMENT, COMP7\ RISON AND APPLICATION €1F PUBLIC FINANCIAL MANAGEMENT IN THE STATE MANAGEMENT OF THUY NGUYEN DISTRIC

ACKNOWLEDGEMENT

I would like to sincerely thank District party committee of Thuy Nguyen District People’s Committee for granting me a great opportunity to participate in Master Program of Public Management which jointly trained by Uppsala University

of Sweden and University of Economics and Business - Vietnam National University; I am also deeply indebted to Dr Hans Blomkvist from Uppsala University (Sweden) and Dr Nguyen Phu Ha from University of Economics and Business - Vietnam National University for their enthusiastic supports and valuable suggestions during the study and completion of this thesis

I gratefully acknowledge the experts and leaders of Thuy Nguyen district, district and commune departments, leaders of enterprises who supported me in the process of conducting research, survey and verification of information, as well as readily gave their time for joining the interview and provided me with necessary information to ful li ll all the steps of the thesis

My deep gratitude to Uppsala University (Sweden) and University of liconomics and business - Vietnam National University and profi:ssors of the Master Prtigram of’ Public Management Council li›r giving me a chance to present this thesis and I would appreciate your comments that will help tiirther improve my thesis

Respectliilly,

Biii Anlt l"iién

ABSTRACT Title:ANALYSIS OF THE CHARACTERISTICS OF PUBLIC FINANCIAL MANAGEMENT, COMP7\ RISON AND APPLICATION €1F PUBLIC FINANCIAL MANAGEMENT IN THE STATE MANAGEMENT OF THUY NGUYEN DISTRICT, HAI PHONG CITY

Level: F inalassignment tor Master PrograminPublic Management

Authors: Birt Anh Tuan

Sweden Supervisor: PhD.Hans Blomkvist

Loca lSupervisor: PhD.Nguyen Phfi H:i

Time of completion: December 20 14

Objective:This research aims to improve the aggregate fiscal discipline, allocative efficiency and operational efficiency on the basis of enhanced transparency, accountabil ity, predictability and participation in public financial management of Fhuy Nguyen district, Hat Phong City

Methodology:

Based on the theoretical framework for good governance associated with the ohjectives o1’ public financial management, the thesis mainly used secondary data obtained from the documents reflecting the results ot" the state budget expenditure

in Thuy Nguyen district in 3 years from 20 I I to 20 13, compared with plan

assigned to see the strengths and weaknesses in the state budget expenditure management in ’l huy Nguyen district The thesis also applied the the concept of’the

“ladder of citizen participation” with eight levels developed by Sherry Arnstein ( 1969) to evaluate the levels of participation This model is considered a tool to identify levels of’ participation of organizations as well as citizens in three main categories: Non-participation, Degrees of tokcnism and Degrees of citizen power

In addition, so that the causes of the weaknesses in the state budget expenditure management could be deeply analyzed the author conducted in-depth

interviews with a number of leaders of district People’s Committee, and ofticials of

division of planning and I mance, division ot’education, division of health at district level as well as some chairmen and accountants at commune level

district construction debts increased by nearly 2 times in comparison with the

at located budget after three years

District State Treasury has done well both in revenue control and cash — on hand forecast to timely serve spending needs Only at the end of the year, when demands for spending are too large, it suffers from shortage of money

- Fhe participation of commune authorities in the district activities; of socio -

political organizations in the Party and government activities; of people in district government activities was at the same level of No power (compared with eight- level ladder developed by Sherry Arnstein ( 1969) to describe the process of citizen participation) This shows that the "abolishmen t of district People's Council" has many shortcomings Some activities such as determination of socio-economic objectives and determination of budget allocation, etc., were not conducted in accordance with international good practices

In terms of respect for people’s opinions, there was difference in situation between the district level and commune level Comparison between the two levels showed that the degree of citizen participation in the activities of commune level was between the “Df?bº CeS €tf toki:nism” and Degrees of power” in the 8 - level ladder described by Sherry A rnstein ( 1969) while district level only reached “No power” It proved that commune People's Council has efficiently implemented its ftinct ion and power representing the will and aspirations ot’ local people Thereby, the level of responsibility of authorities for the settlement of citizens’ claims was higher at commune level than district level

Some recommendations were made for the effective management of publ ic expenditure management namely:

- Strengthening the monitoring and supervision of the implementation of financially transparent processes at all levels, especially commune level Public disclosure of tinancial performance should be clear, simple, understandable and

timely

- Strengthening the coordination and participation of stakeholders and

citizens to identify key tasks and key investment projects in order to avoid

spreading — out budget and limit power abuse, corruption and waste

- €l ut put — based allocation will improve budget performance and accountability of budget users The output here is understood as the result of the activities performed by the organization as assigned

- Improving self-responsibility of civil servants, contributing to saving state budget spending Specifying the responsibilities of each individual in the

organization and enhance their self-responsibility will contribute to improving the

efficiency of state budget spending

Suggestions for future research:

Expanding the research scope to other districts of Hat Phong City will provide a more objective perspective for assessment

Contribution of the thesis:

Strengthening public financial management towards openness, transparency, accountability and participation will help Thuy Nguyen effectively use its resources and to be a reliable place to receive investments from the higher levels and private sectors

Key words: Abolishment ot’ People's Councils, public finance, publicity and transparency, accountability, participation, prcdictabil ity

TABLE OF CONTENTS

ACKNOWLEDGEMENT

ABSTRACT

TABLE OF CONTENTS

LIST OF TABLES

LIST OF FIGURES

LIST OF CHARTS

ABBREVIATIONS

l INTRODUCTION 1

l l Background l l 2 Research objectives 2

I 3 Research questions 2

2 TH EORY.TICAL FRAMEWORK 3

2 l Four pillars of good governance 3

2.2 Main Objectives of’Public Finance Management 3

2.3 Public expenditure management and good governance 4

3 RESEARCH METHODOLOGY 9

3 I Outline of the research iiicthodology 9

3.2 flata collection methods 9

3.3 Methods of data processing 10

4 DATA ANALYSIS 1 1 4 1 Overview of budget management of Thuy Nguyen district 1 I 4.2 Assessment of accountability in the management of the district budget 13

4.3 Assessment of the budget transparency 20

4.4 7tssessment of the budget predictability 28

4.5 Assessment of participation in budgeting process 32

5 CONCLUSIONS 39

6 RECOMMENDATIONS 41

6 l Recommendations 41

6.2 Suggestion for future research: 41

7 CON 4 III BUTION OF THE THESIS 42

REFERENCES 43

APPENDICES 45

LIST OF TABLES

Fable l Ob ject ives of Public Finance Management 3 Fable 2 Public expenditure management and good governance 4 Fable 3 Public expenditure management and good governance 5 Table 4 Actual budget expenditures vs estimates l l

4 able 5 Investment in capital construction in 20 I I -2913 and debts by 30/ I 2/20 13

14 Table 6 Aggregation of capital expenditure in 2013 15 Table 7 Total expenditure for land clearance in 20 11 16 Table 8 Actual expenses vs estimates of the Division of Natural Resources and Environment 19 Table 9 Assessment of performance of plans assigned of thc Division of Natural Resources and Environment 19 Table 10 General transfers, targeted transfers for district and commune governments 23 Table I I lludget settlement in 20 11-20 13 25

"l’ablc 12 Actual revenues vs estimated revenues 201 1 -20 13 2b Table 13 List of construction works with funding withdrawal was not in accordance with the recommendations of’ thc auditors 30

ABBREVIATIONS

CPC Commune People’s Committee

DPC District People’s Committee

M& E Monitoring and Evaluation

PEM Public Expenditure Management

PFM Public Financial Management

PPC Provincial People’s Committee

VFF Vietnam Fatherland Front

VSIP Vietnam Singapore Industrial Park

1 INTRODUCTION

1.1 Background

Fhuy Nguyen is a northern district of Hat Phong city, located on important traffic routes connecting to Quang Ninh and Hat Duong In Hat Phong development strategy to 2020, Thuy Nguyen was identified as a dynamic economic

region attracting foreign investment projects such as Vietnam Singapore Industrial

Park(VSIP) of Singapore, key projects of the Government and of the city

In recent years, Thuy Nguyen has applied the regulations of financial management towards saving and efficiency Especially the period 201 I -20 15 is considered as stable budget cycle, Thuy Nguyen is applying the regulations in accordance with the resolution of Haiphong city People’s Council, i e the city provides balancing subsidy for district level; the district sets spending limit for commune level

"Fhuy Nguyen has nine departments in the political system of districts, 37 communes and towns are units of“ the state apparatus; There are 76 schools and one hospital which belong to public agencies Annual budget expenditure is from VNB

700 to 9110 billion

Thus, in order to ensure economically and effectively budget spending, it is necessary to ensure transparency in the budget execution The unit which uses the state budget must improvc its accountabil ity The level of participation of people under the motto "people know, people discuss, people do and people check" should also be promoted Predictability in budget planning should be improved to achieve scientitlcness and effectiveness

"Fhe government of Vietnam has four levels: national, provincial district and commune levels Each level of government has an elected body to approve the budget and monitor budget execution Since 201 I , at the request of the Ministry of

home A1’t airs, Thuy Nguyen district piloted the "abolishment of People ’s Council”

model How it affects the objectives of aggregate fiscal discipline, allocative

efficiency and operational efficiency in budget management needs to be studied with a view to identifying lessons learned

2

1.2 Research objectives

- To review the implementation of following objectives: aggregate fiscal discipline, allocative efficiency and effective performance of public financial management of Thuy Nguyen in 20 l l -20 13

- To examine the degree of transparency, accountability and participation in

the budget cycle in Thuy Nguyen district

1.3 Research questions

Does Thuy Nguyen district’s management of budget expenditure ensure the

aggregate r scal discipline, allocative efficiency and operational efficiency?

- What are the levels of transparency, accountability and predictability in the budgeting process of Thuy Nguyen district?

- What types of participation in which citizens engage at the district and commune budgeting process?

2 THEORETICAL FRAMEWORK

The assessment of public financial management, which was done using new concept of public management acquired from the Master program held by Uppsala University (Sweden), is summarized as follows:

.4ccou ntebili !7

Govern mrnts should be

enswrreblr to citizens for

u hat t hry do

C” itizens should know whet

thCir govrrnmCn t is doing so

t hry can hold it eccounteblr

Predictabili 7

Governments should be predictable so citizens cen plen their ow n lives

Pa rtiripetion Citizens shou Id have a direct

sey in what t hCir govern mCnts do whrn it

effects them

Figure I.Four pillar of good governance

1"eble I.Gbjcctivrs o£ Public Finance Management

4

Table 2 Public expenditure management and good governance

Fiscal discipline Allocative efficiency

ti›recasts and riscal

targets

Publish program budgets, targets

and results

Audit and legislative review of

efficiency and compliance

Predictability

Detailed plans and budgets within targets

5

Table 3.Public expenditure management and good governance

Fiscal discipline Allocative efTice ncy Operational

efficiency Accountability -Budget estimates

based on allocation

norms which have been approved by

the Provincial People's Council

(PPC)

- Actual expenditures do not exceed estimates

- Budget expenditures meet

the targets

- Not spreading out

investments

- Autonomy decentralized and

authorized in association with

guidances, M&E

- Saving of resources

expenditure norms

- Forecast of resources will be allocated in order of

priority

- Publicity of targets

in expenditure

estimates including recurrent

expenditures and capital expenditures

- Allocation norms

spending priorities

Postpone of construction works

budgetary risks

-Revenues are

concentrated in the State Treasury

- State treasury to

ensure funds for

expenditure needs

- Having inspection

- Expenditure estimates are in accordance with the actual revenues

and audit plans to reduce loss and waste

participate in the

annual budgeting process

- People know about priorities in capital construction works

- Commune

People’s Council determines its socio-

economic targets and conduct the monitoring of implementation process

- District role in determining its socio-economic targets and monitoring tiinction

of socio-political organizations

- Opinions of citizcns and lcvel

of respect of government

authorities

- Settlement of the government authorities on the

petitions of citizens

(Sent cc Author j

Transparency is generally defined as the principle of enabling the public to gain

in tormation about the operations and structures of a given entity Transparency is

otlen considered synonymous with openness and disclosure, although one can find some subtle differences among these terms (Etzioni 2010)

It is essential not only that in tormat ion be provided, but that it be relevant and in understandable form Dumping on the public immense amounts of raw financial

figures does nothing to improve fiscal transparency (Schiavo - Campo and Tommasi

1999)

Kopits and Craig (1995) added “/f involves ready access to reliable, comprehensive, timely, understandable, and internationally comparable

- Definition #1 : “Accoun?‹ib/l/J ” is the obligation to render an account for a

responsibility conferred.It presumes the existence of at least two parties: one who allocates responsibility andone who accepts it with the undertaking to report upon

the manner in which it hasbeen discharged(Ottawa: Information Canada 1975);

- De tinition #2:“Accountability is the liability assumed by all those who exercise authority toaccoun t for the manner in which they have fulfilled responsibilities entrusted tothem” (Minister of Supply and Services Canada, 1979);

In tcniis of participation, Sherry Amstein ( 1969) described citizen participation as a ladder with eight levels:

Arnstein (1969) Ladder of citizen participation

Degrees of citizen power

Degrees of tokenism

No power

George Julian

Figure 2.madder of citizen participation

3 RESEARCH METHODOLOGY

3.1 Outline of the research methodology

The thesis mainly used the comparative method The first part of the thesis is the analysis of modem public financial management with the application of modern public financial principles to assess budgeting operation

The latter part of the thesis, Thuy Nguyen district’s management of budget expenditures was assessed from the perspective of the new public management The overall assessment considered the level of compliance with the aggregate fiscal discipline, by comparing the achievements with the initial goals to see the difference 4’he study of budget execution process was done in different stages:

H udget estimation, budget execution, budget settlement and budget revenues

I he collected data werc synthesized by content based on the theoretical framework

They were also analyzed in combination with interviews with multiple

stakeholders at different perspectives to clarify the level of compliance with fiscal discipline, allocative efficiency and operational efficiency of the district budget

J.2 Data coffeC'tfOft Methods

Data were available from the annual report 201 l - 2013: Estimates of revenue and expenditure, performance reports and budget settlement rcports Rased

i 0

on the key concerned issues of the thesis, the author developed questionnaires to conduct interviews with the leaders of the financially autonomous units such as: Health; Education; District departments; Schools; district and commune People’s Committees to draw conclusions about the effectiveness of budget spending in each unit; allocative efficiency of expenditure and participation in drafting the annual district budget

3.3 Methods of data processing

Synthesis and comparison methods were used Data were synthesized by each stage of budget operation, namely budget estimation, budget execution, budget settlement and budget revcnues Comparison method was used to compare: norms cstimated vs norms allocated; actual vs estimates to determine the degree of compliance with the fiscal discipline of the district; comparison of the ratio of subsidies in the total budget every year; comparisonbetween the actual per tormances vs report to determine the transparency of management Statistical method was used as well to check the capital construction debts accumulated to

2013 The data processing was also combined with a summary of in-depth interview results to assess the level of participation of citizens and civil society organizations

in the budgeting process

4 DATA ANALYSIS

In the implementation of the public finance reform program in accordance with the State budget law, Thuy Nguyen has increased decentralization of budget management

to communes and delegation of financial powerto units using slate budget It also set

salary caps of officials andcivil servants according to theallocated norms

In order to strengthen control of public expenditures towards publicity and transparency, each unit using state budget issued internal spending rules which were developed in an open discussion with the involvement of its officials

Management based on estimates approved by the district People's Council is one of the

regulations of the State budget law However, the actual expenditures from slate budget

in 201 I -2013 of Thuy Nguyen district much exceeded the estimates, see Table I below:

Table 4.Actual budget expenditures vs estimates

Unit:VND million Items Estimate Settlement Percentage increase

isource District financial settlement report)

So that the picture of Thuy Nguyen district budget management can be seen more clearly, the next part of the thesis will analyze in depth the four pillars of "good governance", namely: accountability, transparency predictability and participation

4.2 Assessment of accountability in the management of the district budget 4.2 1 Hai Phong city People’s Committee developed the allocation norms of

recurrent expenditures for state agencies at district and commune levels.However, during the implementation process, the DPC adjusted to increase the norms for the district authorities and reduced the norms for the communes under its management

In order to maintain fiscal discipline and avoid deficits, the norm for administrative

cxpcndilure was speci tied in the Decision No.2050 of Hat Phong city People’s Committee with an amount of VNI3 22 million / person / year It would not be changed during stable budget period 201 1-2015 (unless there is an adjustment for inflation) Nevertheless, in 2013 the l3PC adjusted to decrease the norms allocated for 37 communes by an average of VND 21.64 million/ person / year while administrative expenses tiir the di.strict level washigher than prescribed atVND 23.87 million / person / war ‘I he main cause of’this adjustment was that ihey had to pay salary for contract stall’

in addition to trill-time staff who arc rcgulated by the City I3epartrnent of home AtTairs

41lus in terms of accountability thc DPC ”tightened” spending of the lower - level authorities but thcy were “geneioas“ In its level by allowingthemselves to allocate

expenditure over the norms It is an unacceptable action

J z z rhe situations of spreading investment, debts and inefficient investments

have regularly happened

Characterized as a poor district, the objective reason which caused large investment debtsof over 40% in all types of constructions owned by the district and commune levels in 20 1 1-2013 (illustrated in I able 4.2 ) was that the city government (higher

authorities) provided capital expenditures in drops and untimely However, the main

cause ot’ this situation was due to the fact that the People's Committee éetermined too manysocio - economic objectives to be achievedwi thout linking them

to financial resources

14

Table S Investment in capital construction in 2011-2013 and debts by

30/12/2013 I/nit: V/VD million

Contents

Debt from

previous year

(Source District financial settlement report)

In-depth analysis on the investment in capital construction, we can see that the

investments have been spreading Even in the Resolution of the People's Council there were too many goals determined so it was difficult to identify key

objeclivesand key constructions

l’ablc 5 i l luslratesmore about the spreading of investment and the DPC started to

find theirresponsibility for settling these debts In the 2013 estimates, spending for school construction accounted for 62.2% of the total capital expenditures of the district but they mainly used capital expenditures for payments of construction

15 debts arising mom many years ago Expcnditure m r rural roads was high, which accounted for 16.3% With regards to construction items to be constructed and repaired such as offices of the Party, Goverrnent and mass organizations, though

Hat Phong city People’s Committe directcd Thuy Nguyen district to “stop the construction and repair of thehead offices ” since 20 10, it still deployed some of the

(Source District financial settlement report)

Spreading investment led to inefficient investment Land has been left idle for

many years despite huge of money was spent by the EPC for land clearance

16 Table 7 Totsl expenditure for land clearance in 201 I

tsource District financial settlement report)

Thuy Nguyen district notified its communes and the thousands of households on land acquisition pot icy, mainly agricultural land to serve the industrial projects It drew up an inventory developed land crops and architectonic model compensation plans It requested people to stop production for many years However, by the end

of 2013, hundreds of hectares of land has been left idle and thousands of households

were suffered from “exceeding offallow land but lacking of cultivation land” The

district did not allocate funds for land clearance as announced to households but waited for the advancement from the enterprises havinginvestment projects Some enterprises are really facing difficulties but some intended not to carry out their project which led to delayed projects causing loss to many people

17

ltega rding the poor quality investment c‹›nst ructions using state budget, people ctimplained and asked about estimates nouns, commune officials refused to answer and requested them to ask district level When people brought the questions to the

district, they only got general answer like “that construction was invested by the city, the district only managed the construction after being handed - over”

4.2.3 Financial autonomy though recurrent expenditures were saved, the

performance was with unsound results

In the implementation of financial autonomy, in 3 years from 20 1 1 to 2013 the state agencies focused on developing internal spending regulations for operating et’t iciently allocated funds State regulations allow agencies to spend less than the allocated budget norms and "savings" from this practice can be used to increase the income of civil servants

Cln the one hand, this regulation encourages departments/agencies to save expensessuch as electricity, water, paper, petroleum public relationship expense, etc However, on the other hand, it causes negative impact on the completion of tasks assigned especially when district government has not conducted monitoring and evaluation of the per lonnancc of completed tasks and not considered it as criteria tor budget allocation I“he story of the flivision of Natural Resources and linvironmen t about granting certi ficate of land use right is an illustration

tlne of the important specialized divisions ot’ the flivision of Natural Resources and Environment has the function ot’ granting land use rights for people When comparing the results of this task with the allocated budget, there was a ct›ntradictory Since minding for the Division of Natural Resources and Environment was relatively stahlc over the years, the actual expenses exceeded the estimates by 13%, l % and 3% respectively for 20 1 1, 2012 and 20 13 However, there was a big gap between the operational achievements of this division and the

plan assigned except for the year 201 l when its achievements exceeded targets

Table 8.Actual expenses vs estimates of the Division of Natural Resources and

Environment

8

(Source: District financial statement)

Table 9 Assessment of performance of plans assigned of the Division of

Natural Resources and Environment

Actual

VS

plan assigned

Actual

VS plan assigned Ciranting of

20

Chsrt 3 Assessment of budget execution results of the Division of the Natural

Resources and Environment in 201 I -2013

(Source: District financial statement) The chart showed that only in 201 I the Division of the Natural Resources and Environment’s actual expenses exceeded plan assigned and the line showing task completion was close to the line showing investment cost When being asked about the causes of incomplete tasks in the two consecutive years of the Division of Natural ltesources and Environment, the Head of the division only gave objective

reasons ”Funding allocated to the Division of Natural Resources and Environment

was only enough for spending on salaries allowances and some administration expenses, it was even not enough for travelling and accommodation costs of staff when going to communes to verify the documents and conduct realistic appraisal “ 4.3 Assessment of the budget transparency

4.3 1 The contents andforms of publicity were incomplete and not transparent

The Circular No 03 of the Ministry of Finance and the Grassroots Democracy Ordinance regulate the provision of budget settlement transparency Agencies responsible for enforcement must understand clearly the contents to be publicized and conduct the information publicity every year However the publicity in terms

of form and time did not comply with the regulations Most of communes did not publicize the settlement reports after being approved by the Commune People’s

21 Councils Some other torms of publicity such as notices to the communesocio- political organizations and leaders of villages sand population groups etc ; announcement on the radio system were conducted but with insufficient

in tormation Information about the district budget was not transferred to the commune level and the relevant units Normally, district budget settlement is develope‹i by the Division of Finance and sent to the District Commissioner, DPC and some other sector in a narrow scope, Information has been internally publicized

in the key staff meeting of District Commissioner or officials meetings of DPC or CPC

Chert 4.Assessment of financial publicity besed on responses from 20 people who are district and commune officials in tht in-dtpth interviews

(Source District financial statement)

Chart 4 shows that the level of publicity ofbudget estimates is the highest, 811% of the respondents said that information provided was adequate and timely The level

of publicity descends, for budget settlement is 35%« and for other financial information is 10%