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January 26, 2011

Jamaicans Make Headway With a Realistic Approach To Treasury Management Reform

Posted by Devon Rowe (Director General – Ministry of Finance of Jamaica) and Eileen Browne (Consultant for CARTAC and IMF Fiscal Affairs Department)

Inroads...

Jamaica has instituted centralized treasury processes that are expected to save J$140,000,000  (or approximately 1.6 mln US $) annually while demonstrating its commitment to continuing migration to modern centralized treasury management using a treasury single account. The changes are high profile – salary and utilities payments for all ministries are to be released directly by the treasurer (the Accountant General in Jamaica), avoiding four days of lost float going to other government bank accounts before issuing paper checks. The transactions cost less, employ more electronic banking, are more transparent and end electricity shut-offs, as well as save money.

Armed with an action plan designed by some of the world’s most respected treasury experts, Jamaica focused on results to design an alternate path to reach its goal. Early in 2010, IMF experts reaffirmed the findings of an EU-sponsored PEFA in 2007: Jamaica’s ambitious reform agenda must begin by getting control over cash.

The road travelled...

Shrinkage of private sector jobs by 27% in two years, when coupled with significant domestic security issues, threatened to expand the demand for government services in Jamaica. Three factors limited Jamaica’s ability to respond dynamically: High historic debt levels, although being decreased annually, reduce budget possibilities; a strong tradition of social welfare categorizes many expenditures as mandatory; and thirdly, Jamaica’s traditional hierarchical organizational architecture poses significant challenges to the need for continuous collaboration and communication.

The government decentralized much financial control to the ministries almost two decades ago in an effort to benefit from decision-making closer to service provision. However, the monitoring and reporting that accompanies successful decentralized systems were not affordable. Equally important, the fundamentals of a budget process based on strong fiscal discipline were not fully in place.  The budget laws approved  by Parliament did not reflect the actual pattern of expenditures and were characterized by multiple amendments, cash rationing and increasing stocks of unpaid obligations. Getting a stronger handle on cash was the imperative first step toward sustainable reform. 

 Jamaica’s leaders knew they needed a better way to manage their budget and finances.  Research indicated centralization would be required in order to better understand and control cash flows.  Without better planning and daily knowledge of actual activity, government could not make the best use of cash nor could it supply the predictability needed to move from cash rationing to cash management, giving ministries the ability to manage their resources effectively.

Donors, eager to help Jamaica create a more reliable public financial management system, encouraged a number of reforms:  new automation efforts; new charts of accounts; replacement of cash accounting with accrual; institution of medium term frameworks to assure more policy-based budgeting; and e-government. Early in 2010, an IMF Mission to Jamaica concluded that one key reform, centralized treasury management, could reliably form the foundation for many of the additional reforms (and that conversely, without the foundation of centralized treasury management, the other proposed reforms could not achieve the results they sought).  A time-table with good-practice steps of creating a central treasury was developed and agreed. In July of 2010, the IMF’s regional technical assistance centre in the Caribbean, CARTAC undertook a program of periodic expert advisement with the goal of moving quickly toward a treasury that centrally managed cash and exerted more transparent control over execution of the budget within the year – although this would prove to be an ambitious timeframe.

New directions....

The GoJ appointed an executive in charge of the transformation and CARTAC provided a technical expert. They forged a bond based on mutual respect and a single goal:  creating a more useful treasury management function in Jamaica.  With much consultation and based on the executive’s organizational and cultural insights, together with the expert’s understanding of why and how particular portions of treasury development had become standard steps, they realized the standard sequence and time-frame would not work optimally for Jamaica. Building a sustainable reform in Jamaica would not occur if deadlines were the paramount consideration. 

The Prime Minister, through consultation with the Finance Minister and Financial Secretary, appointed a single executive, Director General Devon Rowe, to head all Central Treasury Management System (CTMS) efforts, who subsequently determined that sustainable results were more important than calendared deadlines.  To this end, he broadened the stakeholder group. They proposed an alternate sequence of events that would give Jamaica early, visible wins and increase confidence in the longer, more radical change project. 

Initial efforts on the project quickly demonstrated that there was little shared understanding of the purpose of CTMS – even the nature of its role in better managing cash. Equally as significant, the various parts of government (including various parts of MoF) continued to emphasize other reform efforts, perhaps unaware that they needed the CTMS to be implemented before they could be successful and achieve significant donor conditionality measures. Thus, rather than devoting all efforts to rationalize the way cash is used and reported, there were those who continued to pursue a new Chart of Accounts and Accrual accounting and reporting and highly engineered budget displays. The appointment of a single executive would assure that the CTMS was achieved so that the other reforms could then be its enhancements.

During the first monthly intervention of the CARTAC/IMF Expert, the DG determined that a Steering Committee made up of high level officials of the major stakeholders must create and recommend to the Financial Secretary (FS) a Conceptual Design (CD) that would define: the purpose of Jamaica’s CTMS (take custody of cash faster, manage it better, disburse it just-in-time, while producing useful reports on the daily cash position of the government); what would be included in the Treasury Single Account in which the inflows would be kept at the Bank of Jamaica (BoJ) in order to assure the best earned interest, the lowest borrowing rates and the most efficient banking arrangements (all central government budget funds from 2011); what roles would change among stake-holders (the AG was to become the treasurer, individual ministries would continue to make expenditure decisions but send payment instructions to the AG for central j-i-t settlement through the banking system); and what stages and time-lines were to be pursued. 

By the second intervention of the CARTAC expert, the DG had determined a two-day retreat would be the vehicle to agree on a draft CD.  In the intervening month, documents and slide presentations were developed to increase the understanding of stake-holders on design options. The retreat led to the production of a draft CD and also showed the need for much more education of stakeholders throughout the various organizations and in the community (Cabinet, parliamentary committees, unions, banks, donors, etc.). Patience and persistence – and repetition whenever needed – produced a more universal understanding of the desired results rather than the mouthing of jargon defined differently by many.  And it continues to produce acceptance rather than resistance.  But the process took time – several months, which were not part of the time-table agreed in the spring.

Jamaicans showed their real understanding of both the purpose of better cash management (efficiency and transparency) and undertaking a project with so many participants that requires so much change – big, early wins.  The DG encouraged innovation, requiring the expert to explore every creative suggestion. The DG, the AG, the Budget Director and the Deputy Governor of the Central Bank came up with winning alterations to the standard path to a CTMS:  using (admittedly inelegant) first steps to get large cost savings on very visible payments.

By January 2011, instead of a first pilot project in a single part of a single ministry, Jamaica had centralized all ministry payments for utilities and salaries.  Instead of retaining cash for 5% of payments in the treasury until direct payment, more than 80% had been effected. The success of these innovations allows more stake-holder buy-in and ownership of the pilot program now scheduled for the first quarter of the 2011 budget year. Its genesis, approval, involvement, broad education, and collaborative implementation have increased the receptivity of the rest of government to the remainder of the work that Jamaica is committed to accomplishing.

The automation improvements to produce a basic treasury module are underway, but results will take time. By January 2011, more than 80% of the operating budget payments of central government are made by the AG, without money travelling between numerous bank accounts.  In October last year, electricity payments were centralized (with each ministry sending the AG the approved invoice for payment).  In November, water payments followed suit.  In January, the salary payments were released centrally. In every case, the government avoids the costs of borrowing and increases its interest earnings by reducing the payment float by at least two days. In the case of utilities, the negotiated agreement to enact the single central type payment also means no shut-offs (a too frequent occurrence previously). The three very visible payments executed in this way quell the fear that change would mean delay in payment.

The road ahead....

Jamaica will need another full year to make the CTMS more fully functional. The hundreds of existing bank accounts have been inventoried, will be categorized and mostly closed. New software enhancements will allow the AG to transact daily payments and reconcile cash while providing payment advice to the ministries. Electronic banking efficiencies will be introduced through a partnership with central and commercial banks to reduce transaction costs. Daily cash position reports will be provided to government officials. Negotiation of banking services for the entire government by a single official will result in better pricing for better services.

During the pilot projects and subsequent roll-out, numerous daily operating processes will be reviewed for continued necessity, for effectiveness and for efficiency.  Organizational functions will change:  checks will no longer be issued by ministries; receipts will no longer be submitted net by principal revenue receivers; hundreds of bank accounts will be closed, and those that remain will be co-owned by the Accountant General.  The nature of many jobs will change, often becoming more varied and interesting as computers increasingly do the routine and repetitive. Reporting will become faster and executive dashboards will allow better executive understanding of cash and its implications.

At the end of the year, when the software has been developed, tested, tried in pilot agencies and rolled out to the rest of the central government, the CTMS will serve as the core of a new IFMIS design that will allow continuously improving operational efficiency.  

In 2011, much of government is involved in moving toward a central treasury to manage cash.  Cabinet, parliamentary budget committees, principal financial officers have all been briefed as has wider cross-sections interested staff in the central finance agencies and the pilot agencies (Education and Transport in addition to MoF).  Donors have rallied around a sequenced set of conditions and benchmarks which recognize CTMS as a foundation. Much credit must go to Jamaica for forging major inroads into this highly challenging task.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

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