The Framework for Fiscal Responsibility sets out a range of measures to strengthen public financial management in the Cayman Islands. It was signed by the Cayman Islands government in November 2011 and, after some unsuccessful political wrangling trying to change a number of clauses, passed into law in its original version in November 2012 as an amendment to the Public Finance Management Law.
The framework agreement requires certain procedures for financial management, public borrowing and public project bidding processes to be followed by the Cayman Islands government. The fiscal framework document also requires Cayman to get its budget back in line with responsible financial management guidelines contained in the territory’s Public Management and Finance Law by the end of the 2015/16 budget year.
The framework agreement defined the Cayman Islands government’s fiscal strategy as consisting of five components: controlling government expenditure, limiting new borrowing, re-aligning the revenue base, improving the performance of statutory authorities and government companies and reducing costs by working in partnership with the private sector.
In pursuing these objectives the government also agreed to follow several key principles. These include effective medium-term planning to ensure that the full impact of fiscal decisions is understood, putting value for money considerations at the heart of the decision making process, the effective management of risk and delivering improved accountability in all public sector operations.
In line with these principles the framework dictates specific rules and guidelines within which government has to act.
The framework requires government to improve the quality and independence of statistical economic, business and social data that is gathered, set up a reporting framework for its expenditures and develop econometric models to assist with forecasting coercive revenues.
Government also has to discuss all proposals and decisions affecting expenditure, revenues and borrowing in its Strategic Policy Statement. The SPS has to be updated annually, covering a period of at least three fiscal years.
In an effort to improve the usefulness and accuracy of the strategic policy statement, the framework agreement also states that a budget presented for the forthcoming year has to be consistent with the SPS.
Value for money
Other major requirements of the agreement include that Cayman must “suitably appraise” all public projects before the procurement process begins and all projects must have a sound business case, demonstrating the economic need for the project, and include a risk-assessment completed prior to bidding to enable an informed decision on whether or not to proceed to the procurement stage.
The framework stipulates that for projects with a lifetime value above CI$5 million and for those where the use of public private partnerships (PPPs) or any other form of alternative financing is being considered, the Cayman Islands government will retain independent accounting, legal, financial, economic, environmental and other technical advice as appropriate to ensure robust investment appraisals are produced.
In addition the agreement demand that public-private partnerships will not be considered for projects of less than $15 million.
The framework demands that, as part of its risk management, government make contingent and actual liabilities, such as pension and healthcare, subject to actuarial assessment every three years and set out strategies for managing these liabilities in the strategic policy statement.
To manage the existing debt levels, Cayman will not borrow to fund capital expenditure unless the project will yield sufficient revenues to pay for debt service; or if the government has enough surplus funds to cover the costs of repaying debt.
At the same time the framework rules prevent the Cayman Islands from entering into any further long-term borrowing to support public projects through 30 June, 2016. The only exception to that rule is in the case of natural disasters affecting the Islands.
What happens when the rules are breached?
If the Cayman Islands breaches of the rules of the framework which are now part of the Public Finance Management Law, it must present a plan to correct such a breach to the UK secretary of state. This plan has to be reflected in the government’s annual strategic policy statement. Government will also need to obtain UK approval before any significant financial decision is taken, for instance prior to the finalisation of the SPS, any new borrowing or refinancing, proceeding with any public project with a lifetime value above $5 million or using public assets as collateral with third parties, the consideration of any revenue stream or the divestment of any public asset.
Although the rules of the fiscal framework were met with widespread approval the limiting nature of the framework and the need to consult with the UK government and obtain approval on financial affairs in the case of a breach were named as a cause of concern.