August 21, 2014

18 Key Principles of PFM Reform

MindTheGap

Posted by Hisham Waly[1]

While circumstances vary from country to country, I have found that there are some generic principles for PFM reform.  I have drawn these principles from my personal experience (inside and outside the World Bank) and readings (see list of resources at the end of the article).

1- First, Define the Problem. The starting point for reform is asking officials what the problem is.  Officials embrace change more readily when faced with specific problems that they must address. If the problems are not recognized internally, any attempt at reform, even if externally financed and supported is more likely to fail.

2- Develop a PFM Strategy, but Remain Flexible. PFM reforms benefit from being implemented as part of a home-grown and country-led comprehensive PFM strategy.  PFM reform strategies that assume that a developing country’s budgetary systems can be up-graded to the standards of OECD countries within the typical multi-year span of a donor funded project—and without an appropriate enabling institutional environment—are unrealistic.

3- In Most Cases, Say No to the “Big Bang” It is important to take a holistic approach to reform—but this does not mean launching multiple large-scale projects at the same time.  Such a “big bang” approach requires conditions that are difficult to find in most developing countries: political opportunities, government stability, human skills capacity, information, and organization. It entails intensive coordination with multiple stakeholders, and does not allow for absorptive capacity to grow as the reform initiative expands.  

4- “Basics First”—But Agree on What Constitutes “Basics” Countries with low capacity should focus first on the basics (the foundation) on which the reforms are to be built. The “basics” could include for example:

•  a well-functioning budgeting input that generates a comprehensive and credible annual budget;

•  budget execution controls and spending ceilings that are consistent with the country’s fiscal policy and targets;

•  reliable accounting system that meet the IPSAS - cash reporting standards for central government operations;

•  efficient cash management, including a single treasury account and sound internal controls that avoid arrears;

•  complete, timely, regular, and transparent financial reporting; and

•  an independent and robust external auditor. 

5- Beyond the Basics: Approach with Care!  The decision to move beyond the basics to more advanced functions should be determined by country and reform circumstances. This transition must be adequately sequenced as when governments tried to “leap-frog” to more sophisticated reforms—such as performance budgets, and accrual accounts—most failed because of premature implementation and limited ownership.

6- Beware of the Allure of “Best Practices” Benchmarking a country’s status to peer comparator countries with relatively similar contexts, and identifying the “good practices” that can be adapted to the local context, is a better approach.

7- Deal with Ongoing PFM Reforms: It’s Complicated!  Successful ongoing reforms could be incorporated in the new reform. Nonetheless, in some cases, tough choices will need to be made to terminate, delay, or modify ongoing reform elements if their costs outweigh their benefits.

8- Nontechnical Factors: Ignore Them and They May Sink Your Reform.  Success of reforms depends to a large extent on the nontechnical context—that is, political, economic, institutional, and organizational factors. It is essential to analyze these factors and adjust the reform to mitigate risks. In some circumstances, an analysis of the nontechnical factors will lead to a conclusion that launching reform is not possible at a given time, or that certain implementation actions need to be delayed.

9- Recognize the Strengths and Limitations of the Ministry of Finance. Having a wide array of champions both inside and outside of the Ministry of Finance will help move PFM reform forward, especially in countries where ministers are replaced frequently. In most cases, however, securing the firm support and long-term commitment of the Minister of Finance is essential for the PFM reform to succeed.

10- Look Beyond the Ministry of Finance. It is crucial to understand and take into account the relationships among the different players and stakeholders in PFM reform. The allocation of roles and responsibilities among these players varies substantially from country to country (e.g., centralized versus decentralized structures). The wider political economy context is critically important, and is shaped by several institutional interfaces—formal political institutions, administrative institutions, civil society, and external actors—as well as by such structural constraints as the degree of ethnic fragmentation.

11- Ensure That Accountants and Economists Work Well Together. PFM experts may compete over the leadership of a PFM reform process. Accountants tend to focus on improved controls, accounting, reporting, and internal and external auditing systems, whereas economists concentrate on budgeting, fiscal discipline, and macroeconomic issues. Both sets of skills are vital for the success of PFM reforms.

12- Develop Feedback Loops.  Having accurate, timely, and meaningful feed-back loops, from both state and non-state actors, is crucial to making PFM reforms more effective. Such feedback loops lead to smarter project design that reflects lessons of the past, midcourse corrections, and improvements, instead of relying on late evaluations. They also inform subsequent decision-making—for example, when considering whether to move beyond the basics to more advanced reforms.

13- Manage the Risk of Failure. In a note on “Sequencing PFM Reforms,” Jack Diamond summarizes the five correlated dimensions influencing the overall risk of failure in PFM reforms: “the scope, the degree of behavior change involved, the number of institutions covered, the time required for completion, and the reform action’s ‘visibility.’” He also proposes three guiding principles for sequencing: “First, whenever possible minimize reform risks while maximizing reform impact. Second, match the risk profile of reform actions to the risk environment. Third, allow flexibility in deciding between different sequencing strategies.”

14- Life Happens. Natural disasters happen, economic shocks occur, revolutions erupt, elections are lost, Ministers of Finance are replaced, government priorities change, and donors develop new strategies. To respond to these unforeseen events the PFM reform strategy must be designed with flexibility and with the understanding that a well-thought-out change of course during implementation is not a sign of failure, but is the best way forward. 

15- Mind the Gap.  Analyzing PEFA scores, Matt Andrews has distinguished between PFM dimensions linked to legislation, processes, and procedures (that is, de jure reforms) from those linked to implementation (that is, de facto reforms). He finds that average scores for de jure dimensions are consistently higher than those of de facto ones. In many cases, instead of focusing on closing the gap between laws and practice and helping countries implement approved budgets (the challenging part of PFM reform), some PFM practitioners, donors and countries focus on introducing more laws and decrees (the easier part of PFM reform). 

16- Manage the Donors and their Consultants. All donors and PFM experts agree that (i) PFM reforms need to be home-grown and country-led, and (ii) donor coordination is crucial. However, the exact opposite often happens: donors develop the reforms, and international consultants lead their implementation (often on the excuse of weak country capacity). There are excellent examples of donor coordination and country leadership that need to become more frequent.

17- Remember: Communication Matters. Strategic use of communication increases the chance of achieving successful PFM reforms and may help mitigate many of the risks related to their non-technical aspects, such as a lack of political will to instigate reform.  Toward this end, key elements of a communications strategy will need to be developed, including: defining communication objectives; targeting key groups; utilization of media outlets; and delineation of messages.

18- Fragile and Conflict-Affected States (FCS): Appreciate the Diversity. Most of the principles discussed here apply to FCS but their interpretation may be different. For example, in some FCS, focusing reform efforts on budgetary execution could be a priority over budgetary preparation. Also, the number of donors tends to be much higher in FCS, posing a challenge for aid coordination and harmonization. It is important to recognize that FCS states are quite diverse and what works in Iraq may not be appropriate in Yemen.

Suggested references that inspired some of the ideas in this article:

•  Allen, R. 2009. The Challenge of Reforming Budgetary Institutions in Developing Countries IMF Working Paper.  FAD

•  Allen, R. 2008. “Reforming Fiscal Institutions: The Elusive Art of the Budget Advisor.”  OECD Journal of Budgeting. Paris: OECD.

•  Allen, R., R. Hemming and B. H. Potter, eds. 2013. The International Handbook of Public Financial Management. London: Palgrave Macmillan.

•  Andrews, M. 2013. The Limits of Institutional Reform in Development: Changing Rules for Realistic Solutions. Cambridge University Press.

•  Andrews, M. 2006. “Beyond ‘Best Prac-tice’ and ‘Basics First’ in Adopting Performance Budgeting Reform.” Public Ad-ministration and Development 26(2):147 - 161. Wiley InterScience.

•  Bietenhader, D. and Andreas Bergmann, A. 2010. Principles for Sequencing Public Financial Reforms in Developing Countries.  International Public Management Review, 11 (1): 52-66.

•  Diamond, Jack. 2013. “Good Practice Note on Sequencing PFM Reforms.” PEFA.

•  Dressel, Bjoern, Brumby, Jim. 2012. Enhancing Capabilities of Central Finance Agencies: From Diagnosis to Action.  Washington, DC: World Bank. 

•  Organization for Economic Co-operation and Development (OECD). 2010. Progress in Public Management in the Middle East and North Africa. Case Studies on Policy Reform.

•  Potter, B. and Diamond, J. 1999. Guidelines for Public Expenditure Management. Washington DC: IMF.

•  Schiavo-Campo, S., (2007), “Budgeting in Postconflict Countries,” in Budgeting and Budgetary Institutions.  Ed. A. Shah. Washington, DC: The World Bank.

•  Schick, A. 1998. 'Why Most Developing Countries Should Not Try New Zealand Reforms', The World Bank Research Ob-server. 13(1): 123-131.

•  Wescott, C. 2008. “World Bank Support for Public Financial Management: Conceptual Roots and Evidence of Impact.” Background Paper. World Bank.

•  World Bank. 2008. “Public Sector Reform: What Works and Why?” World Bank Independent Evaluation Group

 


[1] Governance Practice Manager, Governance Global Practice, Middle East and North Africa Region, World Bank. The views expressed in this article are the author’s and do not necessarily represent those of the World Bank.

 Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

August 18, 2014

GFSM Manual

GFSM 2014 Cover

Purpose of the Government Finance Statistics Manual 2014 (GFSM 2014)

 The GFSM 2014 is an international methodological standard primarily for data compilers to prepare comprehensive government finance statistics “fit for use” for policy analysis. It describes concepts, definitions, accounting rules, classifications, and standard data presentation.

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August 15, 2014

Interview with Phil Sinnett, former PEFA Head

Mr. Phil Sinnett

PEFA

Posted by Richard Allen[1]

Phil Sinnett recently retired as the Head of the Public Expenditure and Financial Accountability (PEFA) Secretariat, returning to live in South Africa. In this post, I interviewed Phil on his experiences of working for PEFA and his plans for the future.

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Interview with Phil Sinnett, former PEFA Head" »

August 13, 2014

Increasing Extractive Industry Revenues

Administering Fiscal Regimes for Extractive Industries

Posted by Katherine Baer[1]

On Monday, July 28th, the IMF’s Fiscal Affairs Department (FAD) launched a new book: Administering Fiscal Regimes for Extractive Industries: A Handbook, by Jack Calder[2] [Available here!]

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Increasing Extractive Industry Revenues" »

August 11, 2014

Public Consultation for Updating the PEFA Indicators

PEFA

Posted by the PEFA Secretariat

The Public Expenditure and Financial Accountability (PEFA) Program, launched in 2001, has created a credible and comprehensive framework for assessing PFM functionality, which has been applied in a large number of countries since 2005—countries with different income levels, different administrative heritages, and in different geographical regions.

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August 08, 2014

IMF’s new Fiscal Transparency Code and Evaluation

   Transparency_Code

Posted by Sailendra Pattanayak[1]

The IMF has just published a new Fiscal Transparency Code which replaces the earlier 2007 version. The new Code sets the standards for the disclosure of information on governments’ financial positions, prospects and risks, and is built around four pillars covering the key elements of fiscal transparency. These pillars are: (i) fiscal reporting; (ii) fiscal forecasting and budgeting; (iii) fiscal risk analysis and management; and (iv) resource revenue management. While the first three pillars of the new Code, containing 36 principles, have been published [ Download FT CODE (PDF)], the fourth pillar on resource revenue management will be completed by mid 2015 following a separate consultation process with key stakeholders.

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IMF’s new Fiscal Transparency Code and Evaluation" »

August 04, 2014

IMF Guide on External Debt Statistics

External Debt Statistics

Posted by Rita Mesías[1]

The 2013 EDS Guide[2] is now available in hard copy (see http://www.tffs.org/edsguide.htm). It provides guidance on (1) the concepts, definitions, and classifications; (2) the sources and techniques for compiling; and (3) the analytical uses of external debt statistics (EDS).

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August 01, 2014

This is PFM – Looking Good but Does it Work?

Looking Good

But Does it Work?

 

Posted by Richard Allen

An interesting new working paper[1] by an eclectic group of experts from Harvard University, the IMF, the World Bank, the Overseas Development Institute, the International Budget Partnership, and the Collaborative African Budget Reform Initiative (CABRI) casts new light on the meaning of PFM and approaches to reforming it. As the paper notes, it is encouraging that experts from such diverse organizations and arenas can agree—to some extent at least—on the basics of PFM. The paper coincides with the publication by the OECD of its Ten Principles of Budgetary Governance[2], a document that provides a solid overview but is more conventional in scope and focus.

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July 21, 2014

Philippines: A Competency Model for PFM Professionals

PHL

Posted by Gordon Ferrier1

Human resource aspects of public financial management (PFM) reform strategies are given less than their due in the literature. Yet they are fundamental to the success of such strategies, as a recent initiative by the Government of the Philippines (GOP) to develop a Competency Framework for some 60,000 government employees exemplifies.

In March 2013, the GOP embarked on an ambitious new strategy for reforming PFM systems. Its PFM Reform Roadmap aimed to “clarify, simplify, improve and harmonize the financial management processes and information systems of the entire government machinery for improved public service delivery”.

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July 18, 2014

Fiscal Transparency and Accountability – Why Did so Many Countries Meet in Moscow Recently to Discuss it?

PEMPAL Logo

POSTED BY: Elena Nikulina, PEMPAL Team Leader and Deanna Aubrey, PEMPAL Strategic Adviser (World Bank).   

On 27-29 May 2014, 179 people met in Moscow, Russia to discuss fiscal transparency and accountability. The meeting was held by the PEMPAL network[1] and was hosted by the Ministry of Finance of the Russian Federation and other key donors to PEMPAL including the World Bank, and the Swiss Government’s State Secretariat for Economic Affairs, SECO. 

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Fiscal Transparency and Accountability – Why Did so Many Countries Meet in Moscow Recently to Discuss it?" »

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