Financial management reform : the case of ports in Madagascar

file:///O|/PUBLIC/twu_xweb/transpor/publicat/td-ps7.htm 81610 TRANSPORTATION, WATER AND URBAN DEVELOPMENT DEPARTMENT THE WORLD BANK February 1994 Transport No. PS-7 FINANCIAL MANAGEMENT REFORM: THE CASE OF PORTS IN MADAGASCAR Marc H. Juhel and Michel G. Audige Reforming the financial management of public administrations is often at the core of the search for improved efficiency. When an administration delivers services of commercial or industrial nature, adapting its financial management to operational needs is a prerequisite for any genuine evolution towards greater productivity. However, clearing the way for implementation of such a move may be a lengthy and difficult process. THE PORT SECTOR IN MADAGASCAR IN 1987 Administrative Organization The organization of the port sector mainly resulted from the administrative regulations adopted in 1968/69, which brought about the following structure: q Ministry of Transport (MOT): responsible for the management of the whole port and maritime sector, through its then Merchant Marine, Civil Aviation and Meteorology Department; q Central management unit: the Ports Service, located in Antananarivo; and q 18 ports: 4 deep-sea shipping ports and 14 coastal shipping ports. Toamasina, with the largest traffic share, was the only one to be financially autonomous and is still managed by an operating company under the MOT's supervision. The other 17 ports were centrally managed by the Ports Service. file:///O|/PUBLIC/twu_xweb/transpor/publicat/td-ps7.htm (1 of 6)07/17/2005 10:00:21 AM  file:///O|/PUBLIC/twu_xweb/transpor/publicat/td-ps7.htm This note focuses on the 17 centrally managed ports, excluding Toamasina, which underwent a corporate management reform program as part of the Port Rehabilitation Project financed by the Bank. Financial and Accounting Management According to administrative regulations, the 17 ports were financially managed by the Ports Service, which was in charge of governing the so-called Ports Annex Budget (BAP). This BAP was a separate item in the government's annual budget. The budget consisted of provisions for operating and investment expenses and operating incomes from port dues and lease fees. A balanced BAP was mandatory, with the consequence that a state subsidy would complement the revenues each time it appeared necessary to fulfill this commitment. The financial management of port activities was simply a thorough follow-up of the expenditure performance under the budget lines on the expenses side, and a timely recording of the operating incomes on the revenues side. Furthermore, this purely administrative accounting did not provide any information on the operations'' productivity, let alone any financial return assessment. The administrative accounting process itself proved highly time-consuming and inefficient. The review of the administrative networks used in the BAP execution underscored this: q 62 basic documents were in use; q up to 160 elementary transactions could be made using these 62 documents; q the time for processing a payment order, from the initial order form to the actual payment to the supplier, often took 110 days; q the time for processing an income transaction, from the starting event to the actual recording in the budget revenues after payment completion, could take from 61 days for the port dues to more than one year for the lease fees; q an average of 319 monthly transactions were managed by the Ports Service in 1986, with 14 employees assigned on a full-time basis, which amounts to a staff productivity of less than 1.2 transactions per person per day; and q the outstanding invoices amounted to more than 2 years' budget, half of them being 2 years old and over. THE PROJECT: ACCOUNTING REFORM, FINANCIAL LIABILITY AND ADMINISTRATIVE STREAMLINING The reform project designed with the Bank's assistance made clear that port sector management should comply with demanding requirements in terms of financial results to ensure the consolidation of physical improvements to ports and to increase their assets through implementation of the other project components. These requirements involved the regular inventory of a sound financial management file:///O|/PUBLIC/twu_xweb/transpor/publicat/td-ps7.htm (2 of 6)07/17/2005 10:00:21 AM  file:///O|/PUBLIC/twu_xweb/transpor/publicat/td-ps7.htm practice, asset depreciation, minimum return on fixed assets, full coverage of operating costs by revenues, etc. To be in a position to monitor this evolution and take any corrective steps required, the Ports Service needed a financial framework tailored on commercial principles. Consequently, the project provided for: q the implementation of a commercial accounting system, to be managed in parallel with the administrative budgetary follow-up, to provide the Ports Service with the managerial tools needed: income statements, depreciation policy, operating and financial ratios, and source and allocation of funds, at both the ports and central level; q the definition of anchoring points ("bottom-line" items) in the administrative budget process in order q to provide the linkages between the commercial accountings and the budgetary execution as mandated by law; and q the streamlining of the administrative process itself, by eliminating irrelevant controls and useless duplicate procedures in the processing networks. Beside the complement in relevant financial information brought by the new commercial accounting system, two other main features of the reform involved (a) increased decentralization in administrative management, and (b) a real time treasury management function at both the ports and central level. A comprehensive technical assistance and training program was included to ensure the sustainability of the new working framework. One major departure from the previous administrative arrangement related precisely to the treasury management, essentially carried out at the local port level in the proposed scheme. This involved the appointments of a local revenues and expenses trustee, operating a cash advance under personal responsibility. Due to the lack of efficiency in the communications and transport networks between Antananarivo and the ports, this arrangement was indeed a key provision of the project. It aimed at allowing each port to handle its daily operating and maintenance requirements, improve efficiency in collecting port dues and fees, and streamline the administrative chain from budget allocation to payment completion and actual revenue collection. The local port cash trustee would be personally liable for the financial management performance, and would be accordingly granted an appropriate financial incentive commensurate with this responsibility. The port manager would decide on the appropriateness of any expense within an agreed limit, and the,; trustee would be held responsible for its regularity. On the financial side, the anticipated income statements highlighted the need for an active overhaul of the tariff policy, to account for the depreciation policy relating to assets, the strengthening of the maintenance schedule, and the financial return objectives. A progressive implementation schedule was designed to have port users bear the increases in port charges when the physical improvements resulting from the rehabilitation program begin to materialize. PROJECT IMPLEMENTATION: FROM ANTANANARIVO TO THE COAST file:///O|/PUBLIC/twu_xweb/transpor/publicat/td-ps7.htm (3 of 6)07/17/2005 10:00:21 AM  file:///O|/PUBLIC/twu_xweb/transpor/publicat/td-ps7.htm After preliminary definition studies of the new financial and accounting system were completed in 1987/88, project implementation began in 1989. The first task was to design a balance sheet based on the financial statements of the preliminary studies, and to translate the administrative accounting of the last budgetary year into the commercial form. This was done to identify the links needed between the two systems and to initiate the training of the Ports Service executives. The operating accounts and balance sheet statements were worked out and updated for the period ending on June 30, 1989. The whole financial management system was presented in detail during a two-day seminar in Antananarivo, attended by all the Ports Service executives from the ports and the center, and by high level executives of the Finance Ministry. In fact, since it appeared obvious from the outset that the reform process would need the active involvement of the Finance Ministry, which retained the overall controlling function of the BAP execution, key finance officials were associated with the project evolution during the study phase. The real time implementation began in January 1990 in the central unit of the Ports Service in Antananarivo. The new procedures were tested while the existing ones were used in parallel to avoid any disturbance in budget monitoring. The BAP agents were trained to use the new documents and accounting forms with the assistance of a Malagasy accounting office financed under the project. The objective was to familiarize the central unit with the new system and the linkages with the administrative budget process before expanding it to the ports on the coast. In the meantime, the necessary decrees establishing the position of the local port cash trustees were prepared and signed. The 1991 BAP was drafted including some minor amendments in the budgetary schedule to allow for easier correspondence with the outputs of the commercial accounting system. The first significant hurdle appeared when, despite its continuous involvement in the reform process, the Finance Ministry failed to approve the proposed BAP in its renewed format for 1991 and asked for it to be redrafted using the former administrative schedule. Later that year, after the candidates for the positions of port trustee had been screened and finally selected, the mounting political turmoil prevented their assignment. Nevertheless, the commercial accounting framework implemented in the Ports Service in Antananarivo remained active and has been used since, in parallel with the official administrative budget, allowing it to present yearly financial results picturing the operations outcome and to follow the main financial indicators. In fact, reviewing these results leads to the realization that although much of the process overhaul remains to be done, at least a tool is available to assess the success or failure of the attempted actions. The decentralization process contemplated in the reform project is yet to be implemented, which is clearly the main reason why the revenue collection is still lagging far behind budget expectations. Despite the commitment of all the operating units in the Ministry of Transport, it appears clearly enough that the Finance Ministry, perhaps because of the troubled period of public administration in the last two years, put the brakes on any measure aimed at loosening its direct advance control on the BAP execution. As a consequence, the establishment of the local treasury management units has been stalled, file:///O|/PUBLIC/twu_xweb/transpor/publicat/td-ps7.htm (4 of 6)07/17/2005 10:00:21 AM  file:///O|/PUBLIC/twu_xweb/transpor/publicat/td-ps7.htm thus preventing the reform from yielding its most promising benefits. However, the financial framework now in place in the Ports Service allows the managers in Antananarivo to know what remedial measures are needed to meet the budget financial objectives, as for instance a significant increase in the port dues and lease fees, since the corresponding move advocated in the reform package has only been partially implemented due to the continuous reluctance of the Finance Ministry. This precise knowledge of the port sector's financial situation, which was lacking in 1987, now allows complementary actions to take place with a view to further implement the next steps of the reform, which might lead to corporatization of the port management. RESULTS AND LESSONS In the process of converting a public facility operating under a fully centralized administrative management into a market-oriented undertaking, the scheme devised in Madagascar may be an interesting intermediate step to consider, in particular when dealing with regional entities. This formula allows the introduction of a management decentralization pattern which is a prerequisite for a responsive daily operations' framework, when implementing the basis of a commercial financial management throughout the structure. No institutional upheaval take place at this stage, but the rationalization of the management framework that accompanies the reform implementation paves the way for further developments towards full financial autonomy, and therefore a possible corporatization of the public utility. In the meantime the training program will have made possible the upgrading and reassignment of staff according to the actual management needs, and the financial policy brought in line with the requirements of a balanced operation pattern. An important aspect of the process is the emerging understanding by public managers of sound financial management, and the kind of leverage it can bring them in their relationship with both their clients and the government. It helps build a sensitivity to financial matters throughout the service, and since the administrative structure itself is not questioned at this stage, there is no perceived threat to staff and collaboration at every level is likely to be granted. However, there are some conditions to be met to clear the way for such a reform. The targeted organization must adhere to the principles set forth in the program. More important, perhaps, the main possible stumbling block to be overcome is likely to be found in the Finance Ministry. The fear of the consequences of loosening direct financial monitoring, together with the substitution, to a large extent, of a priori clearance by a posteriori assessment, will generally antagonize the Public Finance establishment. It is therefore all the more crucial to involve the Finance Ministry as early as possible, not only at the level of the general principles of public reform likely to be spelled out in the Loan Agreement, but going down to the practical consequences on public accountability practice. In the case in point, the fact that the Finance Ministry endorsed the action program included in the Loan Agreement did not prevent it from becoming reluctant later about the actual implementation of the corresponding measures, although it has been continuously involved in their working out. Reasonable and explicit Bank conditionalities, supported by a strong political will, may help get the message through the administrative pyramid down to the different working units involved. file:///O|/PUBLIC/twu_xweb/transpor/publicat/td-ps7.htm (5 of 6)07/17/2005 10:00:21 AM  file:///O|/PUBLIC/twu_xweb/transpor/publicat/td-ps7.htm SUMMARY OF THE RECOMMENDED ACTIONS q Set up a commercial accounting framework in parallel with the administrative budget process even if the latter remains the only official binding document. q Make sure the parallels between the two accounting systems are clearly established ' d, so that the commercial accounts can actually feed the administrative accounts, allowing the financial management to be carried out on the basis of the commercial framework. q Whenever possible, decentralize the daily financial transactions to the operational units involved through a cash management delegation with commensurate liabilities and incentives. q Begin the, training program with a comprehensive presentation--possibly during a seminar--of the features of the proposed system, of the technical linkages with the administrative budget practice, and of the enhanced management capacity provided. The audience would include all management and accounting levels. q Include from the outset of the process every public agency possibly affected by the implementation of the new framework, and in particular the public finance administration. q Carry out the implementation phases and the initial training in association with a local accounting firm which would later follow-up on the reform progress and provide assistance as far as necessary, thus helping to achieve sustainability. TO LEARN MORE World Bank. 1986. Madagascar: Ports Rehabilitation Project. Staff Appraisal Report No. 6294. Washington, D.C. Task Manager: Bengt Bostrom, ext. 33376 file:///O|/PUBLIC/twu_xweb/transpor/publicat/td-ps7.htm (6 of 6)07/17/2005 10:00:21 AM