Public Financial Management Reform: A complete history (abridged)

Reform Lessons, Capacity Building, TA, and WGA Bill Dorotinsky Fiscal Affairs Department IMF Whole-of-Government Approaches in Fragile States Conference Paris March 17-18, 2008

Distinction

   

Public finance policy

 Rice subsidies

Public financial management (PFM)

  Treasury system Budget processes

Relations

 Bad system likely to produce bad policy  Bad system cannot implement well good policy

Focus of remainder is on PFM

100 90 80 70 60 50 40 30 20 10 0 Indicator Number 1

HIPC Expenditure Tracking 2005 Results

Percentage of Countries Not meeting Benchmarks (24 Countries) 2001 2004 2 3 4 Formulation 5 6 7 8 9 10 Execution 11 12 13 14 Reporting 15 16 New

HIPC Expenditure Tracking Lessons

  

Realistic expectations of reform progress are

needed.  Over-all the countries improved 10 percent over three years, or about 3 percent per year The "basics" of PFM systems were still not right.  Basic PFM system operations were very weak, but fads remain popular

A holistic – systems – approach to PFM system

analysis and reform development is needed.  The connections between various PFM system components are understood, but infrequently emphasized or included in reform measure development

    

Lessons (continued)

Country ownership of reforms is the critical variable for PFM

system improvement.   Country action plan implementation best predictor of PFM system improvements. Efforts to improve PFM systems must begin with country ownership – leadership – in assessing performance, setting the reform agenda and implementing reforms.

How



PFM system assessments, reform actions, and implementation are undertaken is at least as important as

assessment instruments. Joint action planning between authorities and technical assistance providers can yield better results.

Narrowly focused action plans, reflecting clear reform priority setting, might improve reform impact and PFM system

performance.

Donor coordination around a more limited set of reforms might

help keep reforms focused and yield better results.

Customized reforms to country needs may yield better results

  Rather than donor pre-packaged measures Country’s pragmatic needs for managing resources, self-defined, may be the best place to start

Capacity-Building

     Build PFM systems that meet country resource management needs  pragmatic, simple solutions fitting country circumstances Emphasize country staff doing the work, versus doing work for them Advisory/TA work is changing  Less on ‘what to do’, more on ‘how to do it’ Needs change; flexible, fast response needed Long-term   Critical mass, cohorts, generational On-going engagement with increasing country assumption of tasks, task management, analysis, etc.

Country Systems

-- donor financial arrangements reinforce or undermine country PFM system

Function

Budgeting Banking

Parallel System

Parallel project budgets, in many cases not included in the country’s budget.

Limited use of Country System

Regular national budget procedures, supplemented by more detailed or reclassified “project budgets” Funds retained in commercial bank or outside country.

Funds retained in central bank, separate account

Substantial Use of Country System

Where national procedures allow for earmarking of multi year funds and carry forward to future years, these might be used to more easily attain project objectives.

A Treasury Single account in central Bank, with subaccount might to notionally prevent co mingling of project funds with general funds.

“Pure” Country System

Project expenditures and financing included in national budget and approved as part of regular budget procedures.

Treasury Single Account Similar entries for other aspects of country systems: Payment; Program Management; Internal Controls; Accounting; Financial Reporting; Record-keeping; Audit (internal and external); Procurement; Oversight

PFM TA modalities

   

Different modalities for different needs Training

 Generic, general out-of-country   Specific, in-country On-the-job

Direct TA

 Shorter versus long-term  Resident, regional, peripatetic, virtual

Peer-learning

On WGA

 

WGA supports capacity-building if it

  Prioritizes, focuses donor support  Simplifies versus complicates Brings more practitioner expertise where needed  Supports country needs, priorities  Helps solve practical problems, versus trying to re-create provider-country PFM system

WGA may work differently for PF Policy and PFM

Supplemental

Resource Mobilization, Budgeting Links

Resource mobilization Accountability I Low economic; low political; non-tax resources Low II Economic outruns political; non-tax resources Low III Economic outruns political; No non-tax resources High IV Political outruns economic; non-tax resources Low Administrative Control Low

Examples

Suggests this pattern recurs in countries with large oil-wealth.

Low High Emerging nations of Europe from 14 th century. Typical pattern of cash-flow budgeting. Use of expedients. Indirect taxation, regressive. Splintered or fragmented budgets, earmarks. Lack of budgetary control. Fictional budgets. Absence of information on real financial position. High borrowing. Low accountability and low administrative control; confusion of public and private roles and high leakage.

Medieval city-states of Italy and northern Europe; also English republic of mid-seventeenth century and French Revolution.

Typified by trouble raising revenues, for which they rely on direct taxes, levies in kind, voluntary contributions. Accountability imposed informally either through legislative commissions or personal control of bureaucracies.

High Mobilizing aristocracy. Early examples in 17 th and 18 th century Prussia; exemplified in Napoleonic Empire.

Source: “Patterns of Budgeting.” Naomi Caiden in

Perspectives on Budgeting

, 2nd edition. Allen Schick, Ed. ASPA 1987. Pp. 15-26.