Introducing Commitment

Management & Controls

SARTTAC PFM Mission

August 19, 2021
Dhaka, Bangladesh

Building Macroeconomic Capacity in South Asia

1
European Union FCDO
 Learning Objectives
1. To understand an expenditure control framework, key trends,
expenditure cycle and commitments.
2. To introduce commitment controls in Bangladesh – steps and
associated reforms
Topics Covered:
I. Expenditure Control Framework- main features, key trends, expenditure
cycle and commitments
II. Bangladesh GFRs - Expenditure Controls
III. Introducing a commitment control system – steps
IV. Commitment Controls – Associated Financial Regulations
V. Bangladesh IBAS++ – Commitment Control Module- high level
considerations
VI. Key Takeaways
Building Macroeconomic Capacity in South Asia
2
European Union FCDO
 I.Expenditure control Framework
Context
• Effective expenditure control is critical for good PFM
• Budgets are meaningless if expenditure cannot be controlled during execution
• Important for integrity of the PFM system and trust in a government’s stewardship of public
resources
• Lack of adequate expenditure control - a problem in many countries
• More than two-thirds of countries with C or D score on PEFA (PI-20)
• Weak controls associated with higher arrears
• Weak controls associated with a lack of budget credibility

• To evaluate expenditure control systems and address any weaknesses, it is important to

understand:
• the key stages of the budget execution cycle
• the specific control objectives at each of these stages
• the responsibilities of the relevant actors in enforcing these controls
• approaches to expenditure control in different PFM traditions
• Commitment controls are essential for sound expenditure and budget
management
Building Macroeconomic Capacity in South Asia
3
European Union FCDO
 I. Expenditure Control Framework
Key Trends
• Increased focus on ex ante control over commitments rather than ex-post
controls only at the payment stage of expenditure cycle.
• Shift from controlling only cash expenditures towards controlling accrued
liabilities
• Greater devolution of control responsibility towards line agencies combined with
risk-based central control
• Reliance on internal and external audit to ensure the integrity of control systems
(and that they effectively work in practice)
• Emphasis on transparency and accountability to the legislature and public

Key Question: Strengthening expenditure control by reinforcing traditional

administrative arrangements or Modernizing them?

Building Macroeconomic Capacity in South Asia

4
European Union FCDO
 Expenditure Control Framework
Key Stages of Expenditure Cycle

Authority
and Intent 1. Authorization 2. Apportionment 3. Reservation
to Spend

Incurrence of 4. Commitment 5. Verification

Obligations

Clearance of 6. Payment Order 7. Payment

Obligations

Building Macroeconomic Capacity in South Asia

5
European Union FCDO
 Budget Execution Control Points
Stage of Expenditure Control Authority Control FMIS System Based Actions/Controls
Process

Budget Approved Parliament (or Appropriation Budget recorded in FMIS

delegate)
Budget Released Minister(ry) of Warrant / budget Allotment released based on cash
Finance allotment flow projections and plans
Commitment Budget entity Purchase Requisition Commitment for current year
controlled against released budget

Obligation Budget entity Contract/Purchase Obligations recorded and controlled

Order/work order against commitment
Account Payable Budget entity Invoice Payment order controlled against
the obligation
Payment Ministry of Cheque or EFT Payment reflects payment order.
Finance instructions

Building Macroeconomic Capacity in South Asia

European Union FCDO

 I. Commitment Control Framework
Expenditure Cycle- Commitment
• Commitment: A commitment is an obligation that
commits the government to a future payment.
• A commitment can arise out of an implicit or explicit
contract.
• The precise definition of a commitment varies from one
budget system to another and depends on the economic
category of expenditure.
• At the commitment stage, there is no expenditure.
• A well-developed commitment control system (CCS) is
essential.

Building Macroeconomic Capacity in South Asia

European Union FCDO

7
 II Bangladesh GFRs
Expenditure Controls
GFRs require
• Controlling officer must see that the total expenditure is kept within limits of authorized
appropriations.
• He should arrange to be kept informed not only of what actually has been spent from an
appropriation but also what commitments and liabilities have been incurred and will be incurred
against it.
However, there is no system/mechanism to record and track commitments
• No financial controls are applied before incurring commitments, including issuing administrative
approvals, purchase order, or signing a contract- no central record or register is maintained to
record commitments at the time when these are incurred
• Budgetary control is primarily applied at the time of issuing expenditure sanctions and processing
payment vouchers and not at the time of commitment
• The GFRs do not prescribe the regular maintenance of a Register of commitments and liabilities
to track commitments and liabilities incurred, paid and outstanding.

Building Macroeconomic Capacity in South Asia

8
European Union FCDO
 Bangladesh PFM Reform Strategy
PFM Reform Action Plan 2018-23
• PFM Reform Action Plan (Act #21) requires MOF to introduce commitment
controls for cash management and strengthen the Treasury single account. The
main sub-activities for commitment controls are:
Develop policies and procedures regarding approving, accounting for, and reporting of
commitments (e.g. requisition, purchase orders, work orders, contracts, goods received
note, invoicing, payment)
Identify monthly, quarterly and annual accounting closing rules and procedures to
control commitments and develop policies and procedures that connect commitments to
cash management and cash control.
Introduce commitment control features in IBAS++
Develop and rollout special modules for SAEs in IBAS++ - the related development work is
in progress.

Building Macroeconomic Capacity in South Asia

European Union FCDO

 II. Bangladesh GFRs
Need for prescribing a Commitment Control System (CCS)
• A commitment is an obligation that occurs when a action is taken, such as placing an order,
issuing a purchase order or awarding a contract, so rendering the government liable to pay
immediately or in future.
• Control of commitments is essential for controlling expenditure since all commitments result in
future cash payments.
• The limits on commitments can be based on budget appropriations and/or on expenditure
allocations/cash releases by Finance Department.
• Commitment control based on budget appropriations alone would not fully prevent incurrence of
fresh arrears in case of revenue shortfalls and unavoidable expenditure overruns.
• Commitments based on expenditure allocations, guided by a well functioning cash management
system, could be effective in avoiding the build-up of fresh arrears.
• Lack of commitment control results in accumulation of payment arrears with harmful effects on
economy.

Building Macroeconomic Capacity in South Asia

10
European Union FCDO
 III. Designing a CCS for IBAS++
Step 1. Establishing a Framework
Slides (11-19) facilitate the IBAS++ team and system users in designing a CCS.
These are basic steps of a standard CCS – need to be customized.
• Execution of the budget starts with commitments at the spending units, it is essential to
introduce a commitment control system (CCS) for spending units.
• Each Ministry/Departments/Agencies/SAEs (MDAs) should have a Commitment Control
Officer (CCO). The Accounting /Controlling Officer or Drawing and Disbursing Officer
(DDO) should act as CCO and be responsible for managing the CCS as prescribed by the
Finance Department. The Accounting Officer may delegate his/her responsibility to DDO
to act on his behalf and manage the system
• Each MDA should establish a commitment register to record, control and report on
commitments, outstanding commitments and payment arrears. All expenditure
transactions excluding salaries and allowances should be processed through the CCS. The
commitment control for salaries and allowances should be exercised centrally by the
Finance Department. (Contd.)
Building Macroeconomic Capacity in South Asia
11
European Union FCDO
 III. Introducing a Commitment Control System
Step 1. Establishing a Framework
• The Accounting Officer/CCO should designate specific officers to authorize
purchase of goods and services, issue a purchase/work order, award a contract;
and authorize payment on an invoice/bill before its submission to accounts for
payment. This should be associated with proper delegation of financial authority
• All multi-year contracts entered into by any MDA would require prior approval of
Finance Department. The MDA must provide for payments anticipated during
the budget year as well as in the following years. The MoF should make full
provision in the annual and MTEF budget.
• The Treasury must update its medium-term cash plans, including for the budget
year to provide for the anticipated cash flow.
• Redundant checks during the procurement , commitment and payment stage
which impose unnecessary compliance burden should be streamlined and
phased out.
Building Macroeconomic Capacity in South Asia
12
European Union FCDO
 III. Introducing a Commitment Control System
Step 2. Before the Start of Each Quarter

• The Finance/Budget Department should notify the quarterly

expenditure allocations/quarterly commitment limits before the
beginning of each quarter.
• The principal task of cash planning is to ensure that the quarterly
allocations are set consistent with the projected cash availability and
can then act a control total for the CCO in deciding whether to approve
proposed commitments.
• The CCO, in consultation with staff, should make necessary adjustment
to its expenditure plans to ensure that commitments during the quarter
do not exceed the ceilings notified by the Finance Department.

Building Macroeconomic Capacity in South Asia

13
European Union FCDO
 III. Introducing a Commitment Control System
Step 3. Before a commitment is made
• Before an order for goods and services is placed or tendering process is initiated, or a commitment is
incurred in any form, a commitment requisition for the required commitment needs to be prepared and
approved by the authorizing officer
• A commitment Requisition Form should be used for initiating a commitment
• The commitment requisition form will be sent by the authorized officer to the Controlling officer/ DDO to
seek formal approval of the commitment by the CCO
• The CCO ensures that the requisition does not exceed the available balance under the relevant budget
item in the quarterly expenditure allocation.
• On verification of the availability of funds, the commitment requisition will be recorded in a commitment
register
• Where adequate funds are not available under the relevant budget line, the requisition will be rejected
and returned to the authorizing officer.
• Keep a separate record of rejected commitments with the reasons for their rejection, so that when those
are resubmitted, those can be linked with the previous records.

Building Macroeconomic Capacity in South Asia

14
European Union FCDO
 III. Introducing a Commitment Control System
Step 4. Before a Contract is signed

• CCO and Chief Accountant should ensure that financial rules ,

regulations and procurement requirements have been fully
met before approving a commitment . Any waiver or
exception can only be granted by Principal Secretary Finance.
• Any form of commitment, including purchase order, signing
of contract, certificate of commencement of a contract will
be issued only after approval of a commitment requisition by
the CCO in the commitment register maintained by the
Finance/Accounts Division

Building Macroeconomic Capacity in South Asia

15
European Union FCDO
 III. Introducing a Commitment Control System
Step 5. Before a Payment is Made
• A copy of the approved commitment requisition form should be
attached to the documents sent to the Treasury/Finance for
authorizing payments.
• The payment would not be processed unless a transaction has been
recorded and approved as a commitment earlier. If this has not been
done, the authorizing officer will provide necessary explanation to the
CAO.
• The Treasury/Accounts would follow the current processes for
authorizing payments.

Building Macroeconomic Capacity in South Asia

16
European Union FCDO
 III. Introducing a Commitment Control System
Step 6. After a Payment is Made

• After a payment is made against the payment voucher, the

Finance/ Accounts Department will record payment details
against commitment in the commitment register so that the
commitment gets discharged.
• Any variation between the actual payment and commitment
amount will be adjusted in the commitment register so that
commitment gets fully discharged with payment.

Building Macroeconomic Capacity in South Asia

17
European Union FCDO
 III. Introducing a Commitment Control System
Step 7. At the End of the Month
• At the end of each month, the Commitment Register should
be totaled and closed. Closing balances will be carried
forward as opening balances at the beginning of each month
• It will be for the CCO/Head of Accounts to ensure that all bills
are paid on due dates or within 30 days.
• The CCO/Chief Accountant should be responsible for
monitoring outstanding commitments and unpaid bills and
reporting to the MoF on a monthly basis.

Building Macroeconomic Capacity in South Asia

18
European Union FCDO
 III. Introducing a Commitment Control System
Step 8. At the End of the Year
• At the end of the year, the commitment register should be totaled
and closed. Outstanding balances of budget and expenditure
ceilings lapse with the close of the year
• Closing balances for outstanding commitments and unpaid bills
will be carried forward as opening balances in the commitment
register for the following year
• Outstanding commitments and unpaid bills are charged and paid
out of the following year’s appropriations in a prioritized manner;
and these should be cleared during the first quarter of the year

Building Macroeconomic Capacity in South Asia

19
European Union FCDO
 IV. Commitment Controls
Associated Financial Regulations
• The Financial Rules and Regulations (FRs) need to prescribe a system for
controlling all types of commitments and accumulation of payment
arrears.
• The FRs should make the CAO responsible for maintaining an effective,
efficient and transparent system of financial management including
expenditure and commitment controls.
• The Treasury should have power to withhold budget provision and release
of funds in the prescribed conditions, including accumulation of arrears.
• The FRs should prescribe a set of sanctions and penalties for non-
compliance and financial misconduct.

Building Macroeconomic Capacity in South Asia

20
European Union FCDO
 IV. Commitment Controls
Associated Reforms
• Enhance the credibility and realism of budget --One of the first steps
to ensure the effectiveness of commitment controls is to strengthen
the realism of the annual budget and MTEF
• Strengthen Financial Management and Accountability at MDAs;
define the responsibilities of the Chief Accountant/ Director Finance
and establish their accountability for the proper financial
administration in terms of Financial Regulations
• Capacity building for MDAs accounting and budget staff to enhance
compliance with the FRs

Building Macroeconomic Capacity in South Asia

21
European Union FCDO
 IV. Commitment Controls
Multi-year Projects/Contracts
The IBAS ++ CCS module needs to include multi-year projects/contract recording, monitoring,
controlling and reporting – the module could have the following features.
•Multi-year contracts/projects need to be linked with Medium-term Expenditure Framework (MTEF) and Annual
Budget Estimates
•A commitment register needs to be established for multi-year contracts to record project wise resource
allocations under MTEF and annual budget estimates
•The annual budget estimates, and three year MTEF estimates should be consistent and updated on a rolling basis
•The annual budget, and MTEF should constitute ceilings for checking the appropriation availability for registering
and approving multi-year contracts.
•The multi-year contracts should not be approved if sufficient funds are not available in the MTEF for the project
for which the contract is being issued; the new projects should be included in MTEF only when the ongoing
projects are fully provided. It would be useful to recheck the availability of funds at the commencement of the
project.
•A joint monitoring committee should be set up for monitoring the progress in implementation of multi-year
projects/contracts – commitment register should provide data for monitoring and analysis.

Building Macroeconomic Capacity in South Asia

22
European Union FCDO
 V. IBAS++ System
Commitment Control Module- High Level Considerations
• A platform for managing, annual/multi-year commitments.
• A system for enabling internal controls over commitments.
• Delegated authority to specific users to perform specific functions.
• Segregation of duties.
• Embedded system controls –
• Procurements should not start unless there is sufficiently available budget.
• Payment vouchers should not be prepared or authorized for payment unless the
commitment has been formally recorded and approved.
• The module must integrate the full cycle of commitment, invoicing, payment and
arrears and track the execution of annual budget.

Building Macroeconomic Capacity in South Asia

23
European Union FCDO
 Key Takeaways
• A commitment control system is critical for sound budget execution – the
key objective is to focus on controlling commitments rather than on
associated cash payments.
• Bangladesh budget execution framework and associated systems, for
example EGP; and IBAS++ do not include any budgetary and financial
controls while incurring commitments.
• IBAS++ needs to include commitment controls:
- adopt a risk-based approach to control commitments, as a start;
- not all transactions need to pass through identical control processes; and
- distinction can be made between the treatment of high-value and risk-prone
transactions vis-à-vis low value transactions.

Building Macroeconomic Capacity in South Asia

24
European Union FCDO
 Sample Commitment Register
Financial Year…………………………… Quarter/month……………………
Budget Details Budget Code Title (Description)
Budget Head
Programme/Schemes
Administrative Expenditure
Object
Object-Detail

1 2 3 4 5 6
Approved Supplementary Reallocation Revised Budget Quarterly Budget Balance
Provision (+)(-) (1+2 +3) (4-5)
Estimates Expenditure
Allocation to date

Opening
Balance

Building Macroeconomic Capacity in South Asia

25
European Union FCDO
 Commitment and Payment Details
1 1 2 3. 4. 5 6 7 8 9
(a (b) Commitments Payment

3(a) 3 (b) 4 (a) 4(b) 4(c) 4(d)

PO/ Inv. Details During Bgt. Exp. 3 (c) Inv.no Bill Pay Other Outstanding Bills
No. the ceiling or amount ment details commit payable
month bill ments
Dat Balance date Rem Sign off
(3a-4c) Date
e available arks By
for CCO
commitment

Building Macroeconomic Capacity in South Asia

26
European Union FCDO
 Summary of Outstanding Commitments as on
(End of Month)
 
Ministry/Spending Units ……… Year………
(1) (2) (3) (4)
Budget Approved estimates Quarterly Expenditure Commitments
item including Allocations  
Details Supplementary and  
Reallocation

(a) (b) (c) (a) (b) (c)

End of For the Total Exp. End of During Total

previous current Ceiling to previous the Commitments
Quarter Quarter date (a+b) quarter Quarter (a+b)
YTD YTD

Building Macroeconomic Capacity in South Asia

27
European Union FCDO
 Summary of Outstanding Commitments as on
(End of Month)
 
Ministry/Spending Units ……… Year………
(7) (8) (9)
(5) (6) Outstanding Unpaid bills to date Budget Balance
Payments Balance Commitments
available to date
under (4c-5c)
quarterly
Expenditure
Allocation (2-4c)
(a) (b) (c) (3c-4c) (a) (b)
End of During Total Less 30 days or
previous the Payments than 30 more
quarter quarter (a+b) days
YTD

Chief Accountant)/Date _______________________________

CCO/Accounting Officer/ Date _______________________________

Building Macroeconomic Capacity in South Asia
28
European Union FCDO
Questions and Discussion

Thank You

Building Macroeconomic Capacity in South Asia

29