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November 03, 2021

Improving the Performance of Public Entities in Sub-Saharan Africa

SOEs
Posted by Matthieu Sarda[1]

Many Sub-Saharan countries are updating and modernizing their legal and regulatory frameworks for the financial management of state-owned enterprises and other public entities (e.g., universities and hospitals). These entities raise revenues and have a management and decision-making structure that are at arms-length to the government, and thus merit separate treatment to the ministries and agencies directly managed by the government.

Some public entities in the region are experiencing PFM challenges that need to be addressed. This article reviews some of the main issues.

First, what are the criteria to be applied in determining whether public entities’ finances should be channeled through a country’s treasury single account (TSA)? Many countries’ legal frameworks are silent on this matter referring only to the laws or decrees establishing each public entity. Governments in the region could consider some modifications to this practice especially for entities that receive substantial funding through the state budget. Two types of risk associated with public entities holding funds in commercial banks should also be recognized. One type of risk is the opportunity cost linked to the externalization of these funds. Another is the contingent liabilities caused by the entities’ overdraft facilities or loan agreements with commercial banks. 

Second, what accounting and reporting frameworks are best suited to public entities? According to directives issued by regional communities such as ECOWAS and many national legal and reglementary frameworks, public entities should use the same accounting standards and chart of accounts as the state government. However, many Sub-Saharan countries have adopted a different chart of accounts for their public entities. Moreover, the accounting and financial reporting of these entities is not reliable. Records are kept only manually or by using office software. It is thus difficult to estimate precisely the assets owned by these entities, or their commitments and other liabilities that can create delays in payments or arrears. Without a binding framework for the TSA, the liabilities that public entities contract with commercial banks are not accurately recorded in the entities’ accounts. These contingent liabilities may represent significant fiscal risks for the State.

How can these risks be better managed and reduced in size? Several possibilities present themselves:

  • Encouraging countries to include public entities within the TSA, especially when the entities benefit substantially from government subsidies. Any requests for exemption should only be granted if the Treasury faces practical difficulties in servicing these accounts. Enhancing the banking services offered by the Treasury therefore seems necessary, via dedicated entities that have been established in some countries[2].This solution requires benchmarking the quality of services that the commercial banks provide, evolving gradually toward a client/vendor relationship,
  • Preparing accounting instructions that are appropriate for public entities, modelled closely on the State’s chart of accounts while also taking account of the entities’ special circumstances and resources (e.g., care fees for hospitals, registration and tuition fees for universities) and the nature of their asset holdings.
  • Specifying in public sector accounting standards the methods used to value the government’s shareholding in public entities.
  • Automating the public entities’ accounting and reporting systems. To avoid excessive development costs, it could be useful to adopt a modular approach rather than building a completely new information system. For example, an accounting module derived from the government’s financial management information system could be implemented by each public entity.

All such solutions should be discussed with the Court of Auditors, to ensure that expectations are fully aligned and that there is a full understanding of the changes to be implemented and their auditing requirements, in particular regarding the certification of accounts.

The ultimate goal is to produce more reliable, comprehensive, and transparent financial reports and budgetary information, to contain fiscal risks, and to contribute to the better overall management of public entities. Furthermore, the improved reliability of data on these entities will allow finance ministries to employ more advanced fiscal risk assessment tools (e.g., the IMF’s Fiscal Stress Test Tool), and to provide a more thorough analysis of these risks.

A French translation of the article is available on the following link.

 

[1] The IMF’s Resident PFM Advisor for the Republic of Congo and the Central African Republic.

[2] In Niger, for example, the “ACCD” (Agence Comptable Chargée des Dépôts) has been created.

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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