Mon, 22 Dec 2003

State treasury management

Legislation alone will not be effective in preventing corruption and curbing inefficiency within public finance management, because the efficacy of the law, finally, depends on the mentality of the officials implementing it.

But Minister of Finance Boediono was right in observing -- after the House of Representatives endorsed the state treasury bill on Thursday -- that stronger rules on budget allocation, accounting systems, cash and debt management, procurement and internal control systems could greatly help minimize opportunities for malfeasance.

The passing of the new legislation itself came as a surprising year-end gift from the House. The general public, even most mass media, seemed to have forgotten the bill after the government submitted it to the House in September 2000, along with draft laws on state finances and on auditing state financial accountability.

There were vigorous debates for a few weeks immediately after the unveiling of the three bills, but then they disappeared from the deliberation agenda until this March, when the House unexpectedly passed the state finance bill into law.

The lack of media coverage of the deliberations has not adversely affected the quality of the laws, which were prepared with assistance from the World Bank and the International Monetary Fund, as well as several of Indonesia's sovereign creditors.

The two laws provide stronger legal foundations for developing higher standards of transparency and accountability in public finance management. Hopefully, the other bill on auditing state financial accountability can be completed early next year, because the three pieces of legislation are designed to supplement and reinforce each other -- with the single objective of improving public finance management and accountability.

Law No. 17/2003 on state finances, which replaced Dutch colonial laws of the early 1900s, stipulates that the financial accountability reports of the central and local governments should not only cover revenues and expenditures, as they do now, but also cover budget realization, cash flow, notes on financial reports and financial statements of state companies and other state institutions.

In provisions specially designed to deter officials from embezzling public funds, the State Finance Law stipulates that any official who is tasked with receiving, keeping, paying and/or transferring money, securities papers or state property will be regarded as a treasurer, and are obliged to submit accountability reports to the Supreme Audit Agency. The "treasurer" as defined in this provision will be held personally responsible for any loss of state money under their management.

The State Treasury Law is to replace the Dutch colonial budget management law (ICW) of 1925 which, with some amendments, is still used by the government. The new law will put the ministry of finance fully in charge of managing the state budget, and it clearly stipulates the principle of a single consolidated fund. The law also enforces the role of the finance minister as the state's chief financial officer.

The law stipulates provisions on budget management and financial planning, debt, procurement and property management, and penalty and sanctions for state treasurers. In addition, it has clear-cut stipulations on the settlement of government financial losses caused by mismanagement or corruption, and on the foreclosure of the assets of treasurers found to cause financial losses to the state.

The new law will require the government to reorganize the ministry of finance by dividing its budgetary and treasury functions. This will create a stronger treasury directorate general, which will conduct a comprehensive overhaul of the government's payment and receipt systems, consolidate the government's cash resources currently held in thousands of bank accounts and improve the framework of internal control.

The State Treasury and State Finance Laws will help the government greatly in building a sound financial management system, which is a key factor in good governance.

These two laws, together with the bill on state financial audit, which is expected to be enacted early next year, will help improve transparency in government budget preparations and accountability in treasury management. This, in turn, will facilitate the collection of sufficient resources from the economy and the effective allocation and use of these resources.