Transcript Slide 1

Public Finance and
Budgeting
Miami ICGFM , May 11, 2006
Richard Bartholomew
OTA Senior Budget Advisor
AN OVERVIEW OF
PUBLIC FINANCE & THE
BUDGET
Today’ Presentation
1.
2.
3.
4.
5.
6.
A brief look at the Public Finance System
The Budget Process
An Emphasis on Budget Execution
The PEFA Indicators
The Platform Approach
Questions and Discussion
What Happens When The Public
Finance System Malfunctions?
– improper payments
 Inflation – the worst tax
 Budget deficits and debt pile up
 Corruption
What Happens When The Public
Finance System Malfunctions?
 Money
gets spent but results are
not seen – damage to democracy
and government credibility
 Banking System – bank
manipulation or bad regulation
can create serious problems
It is necessary to
understand this system
to work effectively in it
The Public Finance System
MoFinance: Macroeconomics, Budget, Treasury, Tax and Debt
Executive/Council of
Ministers
Taxpayers, Bondholders
Lenders
Ministries/Chapters/
Localities/Agencies
Supreme Audit Agency
External
Partners:
WB, IMF,
donors,
peer
groups
Parliament
Payments System
A Vehicle to Achieve Objectives

PFM can help move us from where we are to
places we want to go:
To better benefits and education for citizens
 To economic competitiveness, growth and jobs
 To more security in the streets or at the border

PFM is a sophisticated, powerful vehicle that must be
professionally maintained and controlled
PFM Task 1
Maintain aggregate fiscal discipline by
-Setting Spending Frameworks
-Establishing Fiscal Rules & Controls
PFM Task 2
 Allocate
resources effectively,
according to priorities, by

formulating the budget in a fair, stable
and sustainable process that involves
stakeholders
PFM Task 3
 Gather,
Maintain and Use resources
efficiently by
- executing the budget in a way that
does not waste money or time.
Revenue collection is in this task.
Capital inventories are part of it.
Roles




Taxpayers,
Fee Payers,
Lenders and
Asset Purchasers
All provide the inputs, the fuel of Public Finance
Roles


Parliaments have the constitutional authority to
provide public resources
Councils of Ministers and subordinated agencies
hold Executive powers and manage public funds
Managers of Public Funds




Ministries, led by the
Finance Ministry
Special bodies, such as
procurement boards
Local governments
Government Sponsored
Enterprises
Managing Public Funds



Schools and universities
Subordinate
organizations such as
public transport
Private
vendors/contractors for
state and donor projects
(NGO’s)
Payments Systems



Help collect revenues
Make payments
during budget
execution
Interact with other
systems, especially
banking
External Partners

International Financial Institutions (IFI’s)
World Bank: development loans/grants
 IMF: monetary stabilization and planning
 Development Banks: project financing




OECD: shares advanced practices
Networks (ICGFM, SBO’s)
Bi-lateral donors such as Japan, EU, The
Netherlands, Britain and America
The Verification Role
 Supreme
Audit Agencies and Internal
Auditors report on the ultimate use of
resources – can you define this in a
more precise way?
 Budgeters needs auditors!
 Audits determine credibility
Program Budgets Need Auditors
Program budget systems
 Require performance audits using nonfinancial data
 Must validate indicators that measure results
 Use continuing flows of audit information to
analyze results and make allocation decisions
 Rely on the expectation of audits to
encourage spending organizations to submit
truthful budget execution data
The Fiscal Facts of Life
1. Countries can only spend what
they can collect through
revenues and borrowing
2. They must manage these
funds successfully
Finance of Ministry Functions
 Revenue
 Public
Finance Policy
 Budgeting
 Macroeconomic
Estimates
 Internal Audit/Control
Finance Ministry Functions
 Treasury:
management of
accounts and
payments
 Debt Operations
 Financial
Institutions
Regulation
Finance Ministry Budget Tasks
1.
2.
3.
4.
5.
Budget Formulation - ensuring allocation of funds
according to priorities enacted in Parliament based on
Executive preparation
Budget Execution - conforming the use of
resources to the enacted plan and making changes
Systemic controls and accountability
Analysis – monitoring and internal challenge
Information and Reporting – for transparency and
management
Budgeting

Focuses on PROCESS, as does Internal Audit

This is different from Debt Instruments and
Treasury payments, which involve transactions
The Budget

The device that
allocates the shortage of
public money

There is never enough
money to do all the
things people want
done.
The Budget
We use budgets to
decide what is
most important
and who gets what
proportion, or
share, of public
resources
Therefore:
A budget should =
a priority list of
government actions
and policies
The Formulation Chart
 This
illustrates a complete, mature
process
 OTA suggests that you use it as a
template to see how your system
measures up
 A detailed explanation can be found in the
UST 100 course found on our website
A Good Formulation Process:
 Starts
with real macroeconomic and
budget execution data
 Operates within politically accepted limits
 Relies extensively on analyses of financial
and non-financial data
 Has an established calendar and clear
instructions/manuals/handbooks
 Incorporates internal challenges, appeals
and final decisions
Formulation
 You
can badly execute a well
formulated budget
 You cannot execute a badly
formulated budget well
Budgeting for Results
 OTA recommends
program, or results
based budgets
 This is how we tell people what we are
doing with their money
Program Budgets Take Time
 Get
political “buy in” – do not waste
the effort
 Put the data/accounting fundamentals
in place early
 Start with outputs while you work on
outcomes
 Migrate from organization/economic
classification to measurable
objectives that drive real programs
Budget Execution
Allocation
plan
Apportionment
Commitments
Payments,
receipts and
accounting
Forecasting, Cash Management
and Borrowing
Formulation
Analysis and
review
Audit System
Reports and
Statements
Year end
accounting
The Rail Track Analogy
Budgeting ALWAYS
follows two tracks:
Budget Formulation
and
Budget Execution
The Rail Track Analogy
Ties of budget law
and policy, help
execution to follow
budget formulation.
Execution data ties
guide formulation.
Destination: SAI Report

The last stop on every
budget’s journey down
these twin tracks is a
final statement, the
reconciliation of what
was authorized to what
has been spent and
accomplished.
Budget Execution Stakeholders
Finance ministry units:
Central Treasury Management
Budget
Internal controls and auditing
Finance Ministry Execution
Stakeholders
Cash and Debt Managers
Revenue Units
Capital Investment Programmers
Grant Management Unit
Spending Ministry Execution
Stakeholders
Departments or sections which perform the
following functions:
Treasury transactions
Budgeting
Revenue collection
Capital Programs and Projects
Spending Ministry Stakeholders
Human resources/payroll
Procurement officers
Internal audit and other controls
Grant Management
Other Budget Execution
Stakeholders
Citizens, companies and organizations
 Audit Institutions
 The Council or Cabinet of Ministers
 Parliament
 Planning and analysis units

Other Budget Execution
Stakeholders
The Central Bank
 The banking community
 Credit rating organizations
 International Financial Institutions (IFI’sWorld Bank and International Monetary
Fund) and Donors

Budget Execution Duties
a. carefully managing daily financial
operations;
b. accounting under clear rules and
controls;
Budget Execution Duties
c. maintaining a record of historical and
comparative data; and
d. auditing, analyzing and evaluating the
financial performance and results of
government policies, spending and
programs
Major Treasury Unit Duties
Cash management.
 Management of bank accounts.
 Accounting and reporting.
 Planning and forecasting of cash flows.

Treasury Unit Duties
•
•
•
Management of debt and guarantees.
Administration of grants and counterpart
funds from international aid.
Financial assets management.
Cash Management



NOT cash rationing! Does not pay bills on an ad
hoc, day to day decision basis.
Relies on continuous communication, good data
and established rules
Uses multiple tools
Experience-based scheduling
 Short term borrowing
 Commitment System

Cash Management Activities
a. controlling aggregate spending;
b. effectively implementing the budget by insuring that
adequate cash is available to pay liabilities and prevent
arrears;
c. concentrating available funds to earn interest; and,
therefore
d. minimizing costs of public borrowing.
More Treasury Responsibilities



Maintaining the Chart of Accounts;
Setting budget accounting standards;
Developing budget accounting laws, regulations,
policies, and procedures;
More Treasury Responsibilities



Reporting on results of the government’s
budget execution; and
Preparing statutorily or contractually required
financial and non-financial reports (e.g. for
donor funds)
Others you could suggest?
Chart of Accounts


The General Ledger – Those accounts representing
the highest level of summarization for assets,
liabilities, equity, revenues, and expenditures of the
state. These are the accounts that will be the basis for
the annual financial statements.
Functional Classification – The broad area of
government activity, often defined by the
international “GFS” system endorsed by the
International Monetary Fund. GFS compatible
functional classifications are used for international
reports.
Chart of Accounts 2

Economic Classification – Shows “what” is
being acquired/paid for with budget resources.
Examples include Employee pay, Employer
Benefit/Social Insurance costs, Goods and
Services such as travel, and interest payments.
Chart of Accounts 3


Revenues – Taxes, fees, and other receipts that
finance the government’s operations.
Organizations – shows what governmental
entity is responsible for expenditures or revenue
items. Examples might be the education ministry
or a special investigations office.
The PFM System Should Use ANY
Desired Classifications
Location
 New spending vs. existing
 Beneficiary groups (retirees, students)
 Combinations of other classifications, such as
sectoral classification
 Source of funds (internal, donor)
 Level of Government
 Your suggestions?

More Classifications





One-time or ongoing (projects or
programs)
Capital or recurrent
Risk (high, medium, low danger of
failure)
Government Priority Items
Decision options (grouping by variables)
The Power to Classify



Determines how we think about Public Finance
Defines Transparency
Enables Reform


Manipulates debate


Intergovernmental equity needs jurisdictional data
Do I argue for money by organization or function?
Limits concepts

Example: without program classification, we cannot
see results. All other classifications show inputs.
Classification and the Useful IFMIS



Can the system accommodate current
classifications for budget formulation and
execution?
Can the system add classifications when desired
by the users?
Can the system manipulate all classifications for
analysis?

Example: ability to compare and modify
classifications at various time points
2/13/2003 7:10:24 AM
Historical Classification
All funds
Economic Class 1 - by Organization 1
Col. 1
State budget
Nominal values
Report total /%change
1 - Current expenditures
1 - Parliament and Related Organizations
2 - Central Elections Commission
3 - Chamber of Control of
4 - Constitutional Court of
5 - Supreme Court of
6 - General courts
7 - The council of Justice
2 - Interest
24 - Ministry of Justice of
25 - The Ministry of Culture of
35 - Ministry of Finance
55 - State Road Department
3 - Subsidies and transfers
8 - State Chancellery
19 - Ministry of Education
21 - The Ministry of Economics, Industry and Trade of
4 - Capital expenditures
1 - Parliament
3 - Chamber of Control
4 - Constitutional Court
5 - Net lending
35 - Ministry of Finance
1999 Actual
Col. 2
2000 Actual
1,231,900.2
3%
1,264,116.0 -20%
395,737.2
32.1%
390,959.4
30.9%
9,671.6
1,702.6
2,690.5
532.6
1,318.9
4,205.1
422.0
0.8%
0.1%
0.2%
0.0%
0.1%
0.3%
0.0%
8,544.0
2,240.2
2,555.5
983.0
1,704.0
6,756.0
551.7
0.7%
0.2%
0.2%
0.1%
0.1%
0.5%
0.0%
165,923.0
13.5%
181,200.0
Col. 3
Col. 4
Col. 5
Col. 6
2001
2002
2003
2003revised
1,012,861.6
24%
1,259,527.5 12%
1,415,359.8
300,155.2
29.6%
401,457.8 31.9%
497,698.2 35.2%
7,718.4
550.0
1,757.2
955.6
1,785.0
6,760.0
493.4
0.8%
0.1%
0.2%
0.1%
0.2%
0.7%
0.0%
14.3%
141,504.5
14.0%
0.0%
14.0%
9,556.2
420.8
3,260.0
1,267.6
2,255.0
8,460.0
590.0
0.8%
0.0%
0.3%
0.1%
0.2%
0.7%
0.0%
173,750.0 13.8%
8,680.7
2,371.4
3,124.4
1,047.6
2,130.0
8,460.0
360.5
6%
0.6%
0.2%
0.2%
0.1%
0.2%
0.6%
0.0%
165,300.0 11.7%
1,494,600.0
571,614.1 38.2%
10,502.8
420.8
2,970.0
1,248.6
2,075.0
8,060.0
540.0
0.7%
0.0%
0.2%
0.1%
0.1%
0.5%
0.0%
187,474.8 12.5%
1,874.8
0.1%
165,923.0
13.5%
181,200.0
14.3%
4.5
141,500.0
338,861.6
27.5%
399,526.8
31.6%
360,818.0
35.6%
48.2
520.4
206.1
0.0%
0.0%
0.0%
266.4
527.4
237.3
0.0%
0.0%
0.0%
53.4
146.2
237.3
0.0%
0.0%
0.0%
53.4
190.2
237.3
0.0%
0.0%
0.0%
59.0
475.4
312.3
0.0%
0.0%
0.0%
59.0
469.6
312.3
0.0%
0.0%
0.0%
24,953.4
2.0%
32,366.0
2.6%
9,351.5
0.9%
20,626.1
1.6%
14,954.3
1.1%
10,368.4
0.7%
520.0
0.0%
300.0
0.0%
273.9
50.0
132.0
0.0%
0.0%
0.0%
247.2
40.0
20.0
0.0%
0.0%
0.0%
18.7
117.4
40.0
0.0%
0.0%
0.0%
387.2
230.0
20.0
0.0%
0.0%
0.0%
239,850.0
19.5%
214,600.0
17.0%
159,372.8
15.7%
227,838.0 18.1%
269,875.0 19.1%
221,500.0 14.8%
239,850.0
19.5%
214,600.0
17.0%
159,372.8
15.7%
213,575.0 17.0%
253,000.0 17.9%
221,500.0 14.8%
173,600.0 13.8%
150.0 0.0%
384,075.0 30.5%
165,100.0 11.7%
200.0 0.0%
467,532.3 33.0%
185,600.0 12.4%
503,642.7 33.7%
2/13/2002 7:18:21 AM
Historical Classification
All funds
Organization Budget – by Program
Col. 1
State budget
Nominal values
1998 Actual
Report total/% change 11,802.4 -7%
25 - The Ministry of Culture
1- Institutional Support Program
a – Theater sub program
– Element/Activity: original works
b – Museums sub program.
- Renovation Project
c- Music sub program
– Element/Activity: original works
2 – Cultural Development Program
a– New artists sub program
– Element/Activity: scholarships
– Project new art
Col. 2
1999 Actual
10,966.7
-12%
Col. 3
Col. 4
Col. 5
2000 Actual
2001 Actual
2002 Approved
9,624.7
11,551.0 17%
13,532.2 17%
15,890.4 17%
20%
Col. 6
2002 Revised
%of Tot.
3,713.5
31%
3,701.0
34%
3,316.1
34%
4,248.5
37%
5,818.8
43%
6,917.9
44%
553.7
553.7
1,495.7
1,495.7
1,664.0
1,664.0
5%
5%
13%
13%
14%
14%
548.9
548.9
1,500.3
1,500.3
1,651.8
1,651.8
5%
5%
14%
14%
15%
15%
560.3
560.3
1,332.7
1,332.7
1,423.1
1,423.1
6%
6%
14%
14%
15%
15%
560.3
560.3
1,472.5
1,472.5
2,215.7
2,215.7
5%
5%
13%
13%
19%
19%
654.0
654.0
1,747.6
1,747.6
3,417.2
3,417.2
5%
5%
13%
13%
25%
25%
1,224.0
1,224.0
3,008.9
3,008.9
2,685.0
2,685.0
8%
8%
19%
19%
17%
17%
8,089.0
69%
7,265.7
66%
6,282.8
65%
7,302.5
63%
7,713.4
57%
8,972.5
56%
8,089.0
69%
7,265.7
66%
6,282.8
65%
7,302.5
63%
7,713.4
57%
8,972.5
56%
7,515.1
573.9
64%
5%
6,779.4
486.3
62%
4%
6,115.4
167.4
64%
2%
7,052.2
250.3
61%
2%
7,507.5
205.9
55%
2%
7,877.8
1,094.7
50%
7%
Execution Manuals (Policies and
Procedures) 1





Accounting
Reporting
Chart of Accounts
Capital Assets
Procurement
Execution Manuals (Policies and
Procedures) 2




Donor funds
Payroll
Internal controls and audit
Glossary of terms
Internal Control Objectives
It is every stakeholder’s duty to follow procedures to assure :


Effectiveness and efficiency of
operation (e.g. payment processing
time)
Reduction of Risk (e.g. securing
assets)
Internal Control Objectives



Prevention of Corruption (e.g. dual
signatures)
Reliability of financial reporting (e.g.
professional verification techniques)
Compliance with applicable laws and
regulations (e.g. release of funds
requirements observed)
Execution Sequencing
1.
2.
3.
4.
5.
6.
Allocation Plans
Commitments for contracted goods or
services
Authorization to spend
Disbursements and Procurement
Reconciliation and Accounting
Reporting and Analyzing
Accounting





Cash
Accrual
What do you prefer?
GFS 2001: Compatibility but not an accounting
system
IPSAS Compliance
Sample Cash Controls

Segregation of duties in the handling of cash is one of the
most effective ways to gain control over this asset. No one
individual is to have complete control over cash.

Incoming cash must be made a matter of record as soon as
possible. Two persons should open the mail when they
expect cash or checks in the mail.

One copy of the listing is forwarded to the cashier. The other
copy forms the basis for accounting controls through ledger
posting. A third person periodically compares the listing with
the deposit.
Payroll Controls



Census of Employees (remove phantoms)
Position controls to prevent unauthorized
hiring
Signed Time sheets
Payroll Controls
 Responsible,
accountable
supervisors
 Full Time Equivalent or Head
Count?
 Cash payments or bank
deposits?
PEFA
The Public Expenditure and Financial
Accountability project of the major
donors
Applying PEFA
Indicators
The Performance
Measurement Framework
-PMF
The OECD-DAC Task Force on Donor Practices provided guidance
on diagnostic reviews and performance measurement and
suggested:
1.
Reducing duplication in
assessments and high transaction
costs on partner countries
2.
Establishing a performance
measurement framework to monitor
progress over time in PFM systems
A Public Expenditure Working Group was set up in July 2003,
chaired by the World Bank, with Fund and PEFA Secretariat
representation, reporting to the PEFA Steering Committee
1. Greater country ownership, and
alignment of donor work around country
priorities
2. Reduced transaction costs from
streamlining diagnostics
3. Enhanced collaboration between
donors, governments, and stakeholders
4. Better meeting of both development and
fiduciary concerns
Improved impact on the reform of country systems
The PFM High-Level Performance
Indicator Set 1
A. PFM-OUT-TURNS: Credibility of the budget
PI-1
Aggregate expenditure out-turn compared to original approved budget
PI-2
Composition of expenditure out-turn compared to original approved budget
PI-3
Aggregate revenue out-turn compared to original approved budget
PI-4
Stock and monitoring of expenditure payment arrears
B. KEY CROSS-CUTTING ISSUES: Comprehensiveness and Transparency
PI-5
Classification of the budget
PI-6
Comprehensiveness of information included in budget documentation
PI-7
Extent of unreported government operations
PI-8
Transparency of inter-governmental fiscal relations
PI-9
Oversight of aggregate fiscal risk from other public sector entities.
PI-10
Public access to key fiscal information
The PFM High-Level Performance
Indicator Set 2
C. BUDGET CYCLE
C(i) Policy-Based Budgeting
PI-11
Orderliness and participation in the annual budget process
PI-12
Multi-year perspective in fiscal planning, expenditure policy and budgeting
C(ii) Predictability and Control in Budget Execution
PI-13
Transparency of taxpayer obligations and liabilities
PI-14
Effectiveness of measures for taxpayer registration and tax assessment
PI-15
Effectiveness in collection of tax payments
PI-16
Predictability in the availability of funds for commitment of expenditures
PI-17
Recording and management of cash balances, debt and guarantees
PI-18
Effectiveness of payroll controls
PI-19
Competition, value for money and controls in procurement
PI-20
Effectiveness of internal controls for non-salary expenditure and assets management
PI-21
Effectiveness of internal audit
The PFM High-Level Performance
Indicator Set 3
C(iii) Accounting, Recording and Reporting
PI-22
Timeliness and regularity of accounts reconciliation
PI-23
Availability of information on resources received by service delivery units
PI-24
Quality and timeliness of in-year budget reports
PI-25
Quality and timeliness of annual financial statements
C(iv) External Scrutiny and Audit
PI-26
Scope, nature and follow-up of external audit
PI-27
Legislative scrutiny of the annual budget law
PI-28
Legislative scrutiny of external audit reports
The PFM High-Level Performance
Indicator Set 4
D. DONOR PRACTICES
D-1
Predictability of Direct Budget Support
D-2
Financial information provided by donors for budgeting and reporting on project and program aid
D-3
Proportion of aid that is managed by use of national procedures
Today’s PEFA Discussion
• Consider possible applications
• Explore pitfalls
• Relate to reform programs
• Note the “Platform Approach”
Indicators Are For Country Use
 Straightforward
and credible
 Good job for a special assistant
-
But ratings must be
reviewed/discussed
 Provides
immediate insights
 Auditors are suited to this task
PMF: For Country Use
A
measure of change over
time – milestones & marks
 A tool for interaction with donors
that can prove progress
 The basis for a “Platform
Approach”
The platform approach is currently being implemented
in a number of countries, supported by development
agencies.
In Cambodia, for example, this approach is led by
government and supported by a joint donor group.
There is an 8 year plan to move through the platforms.
Why Platforms?
Reforms are often led by different agencies and
donors, with insufficient attention provided to
the co-ordination and sequencing.
This has typically led to a fragmented and partial
approach, characterized by:
 an undermining of government-led reform
 less trust between governments and donors
 administrative burdens on government
Fragmented Approaches


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too much focus on technical developments
(e.g. complex IFMIS)
a tendency to promote parallel systems
implementation of reforms frequently fails to
complement each other
an inconsistent approach to PFM reform
between line ministries and the Ministry of
Finance and the SAI
Cambodia Platform 1: A credible
budget delivering reliable and
predictable resources to budget
managers
Broad Activities
• Integration of budget (recurrent & capital
budgets)
• Strengthen macro and revenue forecasting
• Streamline spending processes
Enables a basis for accountability
Cambodia Platform 2: Improved
internal control to hold managers
accountable
Broad Activities
• Re-design budgeting classification system
• Initial design of FMIS for core business
processes
• Define the internal audit function
Enables focus on what is
done with money
Cambodia Platform 3: Improved
linkage of priorities and service
targets to budget planning and
execution
Broad Activities
•Re-design the budget cycle (e.g. MTEF)
• Pilot program-based budgeting & budget analysis
• Further fiscal decentralization
Enables more accountability for
performance management
Cambodia Platform 4: Integration of
accountability and review processes for
both finance and performance
management
Broad Activities
• Full design of FMIS
• Develop IT management strategy
• Initial design of asset register
Do Not Wait For Donors
 Learn the PEFA system now
 Identify strengths/weaknesses
 Create plans to raise ratings
 Divide TA among donors based on
sequenced action plans
Target Selected Indicators
 Decide
what is critical AND
doable
 Set practical steps
and timeframes
Good Target Indicators
1 & 3 Aggregate out-turn vs. enacted1st step in deficit control
2 Composition of out-turn vs. enacted --can highlight budget execution
quality and policy strategies
4 Arrears – often elusive, always
important to budget credibility
Good Targets
7 Off Budget spending – an issue in
most countries; can be a political
power indicator
10 Public access – can be done with
websites, publications and public
activities. Good for an “early win.”
Good Targets
11 Annual budget process
18 Payroll controls – one place to
start the fight against corruption
Good Targets
16 Availability of funds – a key budget execution
improvement opportunity
21 Effectiveness of internal audit
24 Budget reporting – a practical test for the
IFMIS, or existing systems
Example
PI-21. Effectiveness of internal audit
Dimensions to be assessed:


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(i) Coverage and quality of the internal audit
function.
(ii) Frequency and distribution of reports.
(iii) Extent of management response to internal
audit findings.
Internal Audit – Rate Your System
Internal Audit Effectiveness

Grade D:
(i) There is little or no internal audit focused
on systems monitoring.
(ii) Reports are either non-existent or very
irregular.
(iii) Internal audit recommendations are
usually ignored (with few exceptions).
Effectiveness

Grade C:
(i) The function is operational for at least the most important
central government entities and undertakes some systems
review (at least 20% of staff time), but may not meet
recognized professional standards.
(ii) Reports are issued regularly for most government entities,
but may not be submitted to the ministry of finance and the
SAI.
(iii) A fair degree of action taken by many managers on major
issues but often with delay
Internal Audit Effectiveness

Grade B:
(i) Internal audit is operational for the majority of central
government entities (measured by value of
revenue/expenditure), and substantially meet professional
standards. It is focused on systemic issues (at least 50% of
staff time).
(ii) Reports are issued regularly for most audited entities are
distributed to the audited entity, the ministry of finance and
the SAI.
(iii) Prompt and comprehensive action is taken by many (but not
all) managers.
Internal Audit
Grade A:
(i) Internal audit is operational for all central
government entities, and generally meet
professional standards, It is focused on systemic
issues (at least 50% of staff time)..
(ii) Reports adhere to a fixed schedule and are
distributed to the audited entity, ministry of finance
and the SAI.
(iii) Action by management on audit findings is
prompt and comprehensive across government
entities.
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Problems with PEFA
Consultants with opinions
 Differences in scoring or data- weaknesses
can cause problems of appearance &
substance
 Extra work required
 Inadequate for major anti-corruption
efforts
 Donor add-on requirements

PEFA-based Reform Plans
 Specify
indicator (s) for
improvement
 Set a timetable for change
 Report monthly on milestones and
manage setbacks
Example
Goal: Improve the stability of the
budget process through improved
procedures/circulars
Objective:
Improve the BY07 Circular to raise
Indicator 11 (policy based budget:
orderliness and participation)
# 11 – Budget Circular
Dimension (i) the Calendar (no change targeted)
Score = B:
A clear annual budget calendar exists, but some
delays are often experienced in its implementation.
The calendar allows units reasonable time (at least
four weeks from receipt of the budget circular) so
that most of them are able to meaningfully
complete their detailed estimates on time
# 11 Example
(iii) Timely approval by the legislature
(no change needed)
Score = A: The legislature has, during
the last three years, approved the
budget before the start of the fiscal
year.
Improvement Plan Target
Dimension (ii): preparation of budget
submissions
Current Score = D:
the quality of the budget circular
(instructions) is poor, causing
confusion about requirements and late
submissions of requests
Target
Desired Score = B:
A comprehensive and clear budget
circular is issued which reflects
ceilings approved by Cabinet (or
equivalent).
Ceiling approval takes place after the
circular distribution to units, but
before they have completed their
submission.
Plan Milestones
1.
2.
3.
4.
5.
6.
7.
8.
Agree on concept – Nov, 06
Inform spending units - Nov, 06
Draft the changes-Dec-Jan, 06-7
Gain cabinet approval for draft- Jan, 07
Training as needed- Feb, 07
Distribute Final Circular- March 15, 2007
Cabinet sets ceilings- April 15, 2007
Requests submitted –June 2007
What do you think?

At what point might the plan schedule most
likely break down?
Drafting and Training time adequate?
 Reasonable target score?
 Unrealistic time frame for this change?

Other Potential Complications
 Possible
disagreement with donors on
the quality of a new or old budget
circular
 Failure of Cabinet to give timely
ceilings (results in a C rating)
 Your observations?
Rating Change
 Country
score for # 11 goes from
ADB = B rating
 to ABB = B+
 According to the PMF, policy based
budgeting has advanced
Advances Country PFM Goals:
1.
2.
3.
Transparency
Accountability and Credibility
Stability and Sustainability
Recommendation
1.
2.
3.
Do your own PEFA
Review
Set a PEFA focus for your
planned changes/reforms
Get measurable results
Further Information
Websites:
www.ustreasury.hu/budget/frm.shtml
 www.ustreasury.hu
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Email: [email protected]
Remember:
1.
2.
3.
Public Finance Management impacts
every citizen and public organization
PFM requires collaboration
PFM Change occurs through:
personal, technical and political
processes
Two Sides to the PFM Reform Coin
1.
2.
The design, training and technical assistance
face
The management of people face
These two aspects must be considered for any
reform activity to succeed.
Change Management
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Leaders want change but people and
organizations resist it.
Why? We are not sure how it will affect us and
what our work will be like after the change is
made. Uncertainty breeds resistance.
Systems do not “work” or “fail” – people make
them work or allow them to fail
Reactions: Anger & Fear


Those who are corrupt are angry that someone
is trying to expose them.
Those who are honest worry that someone
intends to take away their work and security.
The Faces of Change
Responses to Change 1
Denial
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This cannot work in our country
because…
This only works in other countries….
We cannot get political support for such
an idea because….
Denial
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We do not have the technical expertise/staff
capacity/etc. to do this
There are many other things that we must do
that are more important
We agree that this is a good idea and we intend
to begin, but only when the time is right
Response 2
Bargaining
 Ok, we will do it, but let’s move slowly;
 It would be better to do it this way than that
way;
 Let’s study this thoroughly before taking the
next steps. Appoint a study committee!
Response 3
Depression
 It has happened.
 There is no going back.
 We could not stop it.
BUT, this shows that the leaders of
change are succeeding.
Response 4
Acceptance
The change becomes the new “old way” and
develops many defenders
Are you trying to change PFM?
Economic Forecasting?
 Budget Formulation?
 Accounting Standards?
 Procurement?
 Information Systems?
How do you plan to deal with the human side of
change?
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