GEO

Spending from contingency funds remains a serious problem

24 May, 2016

 

The Government’s and President’s Contingency Funds are used to finance unforeseen expenditures and funded through the state budget. The Government and the President choose how these funds are spent. It is unfortunate that unbridled spending from the contingency funds, which was one of the largest problems in public finance under the previous government, continues to be one.

Following November 2015 changes to the State Budget, the size of the Government’s Contingency Fund increased from GEL 50 million to GEL 85 million. Yet, according to the final 2015 budget, approximately GEL 168 million was spent – almost twice as much as planned in the budget.

Proper and careful planning by spenders and local government can keep the number of requests for money from contingency funds to a minimum. Insofar as a large share of spending from contingency funds is predictable through the use of appropriate budgetary planning mechanisms, it is entirely possible to have a minimal amount of spending from contingency funds.

Under the previous government, spending from both the President’s and the Government’s contingency funds raised quite a number of questions. At present, however, the Government’s contingency fund is an issue. While the President’s Contingency Fund does not exceed the upper limit for spending as set in the budget, the Government’s Contingency Fund significantly exceeds its limit.

1. Contingency Funds: Problems

1.1. Overspending from the contingency funds is caused by spenders inappropriately planning their budgets. This leads to unplanned spending, which then is financed from the Government’s Contingency Fund.

Spenders are unable to plan their budgets well, because the electronic budget planner does not ensure that expenditures are properly planned and tied to outputs and outcomes. If an agency does not know what they will do in the coming year, at the time they are requesting funds from the budget, they will not be able to predict the costs of their activities. When the agency realizes it has to do something which it had not requested funds for, money will not be available in the agency’s budget. As a result, the agency will have to request money from the contingency fund.

1.2. Contingency funds are not financed transparently: The mechanism by which contingency funds are financed is quite opaque. As in the past, this remains one of the funds’ major problems. The contingency funds are almost entirely spent in the first and second quarters, and then the funds are replenished. During the previous government, spenders were given loans from the contingency funds. Loans were later “recovered”. If a spender did not appropriately plan its budget or an unforeseen expenditure came up, the spender would obtain the money it lacked from the contingency fund as a loan. When agencies received money from the state budget, the contingency fund would recover the money which it lent to the spender. It is possible that this practice is still in use , however, when contingency funds run out of money, the government immediately instructs the Ministry of Finance to find appropriate resources in accordance with the rules provided in legislation. For example, on June 4th, 2015, the Government instructed the Ministry of Finance to provide GEL 5 million to its Contingency Fund through finding appropriate resources in accordance with the rules laid out in legislation. Yet, no such rules exist.

1.3. The Government’s contingency spending is significantly higher than it appears in the budget: There is GEL 280 million in the Fund for the Implementation of Regional Projects. Although the fund is not formally categorized as a contingency fund, by all accounts it is one. Spending from the fund is not planned in advance, with few exceptions.[1] The Fund for Implementation of Regional Projects is distinct from a contingency fund in only one formal respect – the Budget Code does not formally allow the fund to spend on items not budgeted for. According to Article 28, Point 1 of the Budget Code, the share of spending from the President’s and Government’s Contingency Funds in total should not exceed 2% of annual, planned budgetary spending. Although these two funds do not exceed 2% of annual planned spending, taken together with the Fund for the Implementation of Regional Projects, which is in all respects a contingency fund, spending exceeds the 2% limit by a significant margin.

1.4. The Law on Public Procurement does not cover contingency funds: Currently, the requirements and restrictions laid out in the Law on Public Procurement do not apply to the contingency funds. This makes the funds even more opaque and gives rise to greater opportunities for arbitrary spending. Georgia is not the only country where laws on state procurement do not apply to contingency funds, but spending  from contingency funds in such countries (including in the EU) is only allowed in response to force majeure events rather than to cover unforeseen expenditures.

If the Budget Code stipulated that contingency funds could only finance spending in response to force majeure events, then, of course, contingency funds would not need to be covered by the Law on Public Procurement, because spending in such contexts takes place in extraordinary situations.

1.5. Spending from Contingency Funds - legislative compliance: Twenty six percent of the Government’s Contingency Fund (approximately GEL 44 million) was transferred to local governments by 23 different acts in 2015. Yet, it is entirely unclear what types of transfers were used.

Many of the transfers were not equalization, special, earmarked, or capital transfers. These are the only types of transfers recognized by law. The transfers do not qualify as any of these, because:

  • Capital transfers increase non-financial assets. When transfers are used to partially cover the activities of spenders, they cannot be said to increase non-financial assets;
  • Special transfers are used to respond to force majeure events such as natural or environmental disaster, war, and epidemic. The majority of the transfers were not made in response to force majeure events;
  • None of the transfers were equalization transfers, because equalization transfers are done through a special formula and must be included in the state budget;
  • Earmarked transfers to local government budgets follow a specific set of rules, while none of the transfers did.

This type of unplanned spending is counter to the equal socio-economic development of local governments the declared policy of equalizing financial resources among different local government bodies for the implementation of their responsibilities (Budget Code, Para 1 & Para 3, Article 71, ).

2. International Best Practices

We reviewed international best practices for contingency fund spending in consultation with the Ministries of Finance of Slovenia, Slovakia, Estonia, the Czech Republic, and Hungary. In these countries:

  • Contingency funds are mainly used to finance spending in response to force majeure events;
  • There are two situations in which contingency funds are used outside of force majeure events:
  • When there is an urgent need and a delayed response would result in significant damage to state or public interests and/or property;
  • To make a payment on a government guaranteed loan when the payment due was entirely unpredictable.

Contingency fund spending follows these principles even in countries like Hungary, which is not particularly well-known for its fiscal discipline.

3. Recommendations:

Transparency International Georgia believes that the  contingency spending should only be allowed:

1. As a result of force majeure events rather than to cover unforeseen expenditures. Unforeseen expenditures, being a very general concept may include any expenditure, which may be presumed to be unforeseen but is attributable to a spender’s careless or poor budget planning;

2. If there is an urgent need and delayed spending would seriously harm the state and/or the public’s interests or property;

3. In order to cover expenditures which could not, in good faith, be predicted, such as unforeseen payments on government guaranteed loans.


[1] The State Fund to Aid the Effective Functioning of Governing Bodies was another fund which in practice functioned as a contingency fund. It was controlled by the Prime Minister. This fund has already been abolished.


 
Author: Mikheil Kukava