Norway's public financial management system

-- a PEFA-based assessment

Posted by Bill Dorotinsky, World Bank

In previous posts, we've blogged about the Public Expenditure and Financial Accountability (PEFA) Performance Measurement Framework, launched in 2005 and applied in over 80 developing countries (see our April 21 and August 4, 2008 posts).

Norway has supported the development of this framework to assess the performance of a country’s public financial management system. This PEFA assessment of the Norwegian public financial management is the first time the framework has been applied in a high income OECD country. The aim of the assessment was to get further experience with the framework by using it in another country context. A special section on management of Norwegian petroleum revenue is included in the report.

How did Norway score?

Of course, Norway is a wealthy country, well developed, with a reputation for strong governance and fiscal prudence. Consistent with this perception, Norway assessed very strong using the PEFA framework.

Of the 28 indicators, Norway had

• 16 "A"s (57 %)
• 6 "B"s (B or B+) (21 %)
• 4 "C"'s (C or C+) (14 %)
• 2 "D"s  (7 %)

The Norwegian authorities get high marks for a very credible self-assessment. (Had the distribution of scores been 90 % or more "A's", the perceived credibility of the self-assessment would have been lower.)

In terms of the six 'dimensions' of PFM system performance, Norway (using simple averaging of the indicator scores under each dimension) assessed as

1. Credibility of the Budget - "A"
2. Comprehensiveness and Transparency - "B+"
3. Policy-Based Budgeting - "B"
4. Predictability and Control in Budget Execution - "B+"
5. Accounting, Recording and Reporting - "B+"
6. External Scrutiny and Audit - "B"

Indicators or dimensions of indicators receiving less than a "B" score were

• Indicator 9 (i) Oversight of aggregate fiscal risk from other public sector entities ("C"). Autonomous agencies and public enterprises in Norway annually (at least) submit financial reports to their parent ministry, but the Ministry of Finance does not compile these into a consolidated review of fiscal risk from these entities.
• Indicator 12 (i) and (iii) Multi-year perspective in fiscal planning, expenditure policy and budgeting ("D" and "C", respectively). Multi-year forecasts are prepared on a rolling, 3-year basis under current policy, but these are not presented by economic classification, and the numbers are not clearly linked to annual budget ceilings. Sector strategies (costed) exist for some sectors, but are not consistently linked with aggregate forecasts or ceilings.
• Indicator 19 (i) Competition, value for money and controls in procurement. The management information system collects data on larger contracts (number above a threshold), but not the monetary value of these contracts, nor whether they are awarded competitively (or the percentage value competitively awarded over all contracts).
• Indicator 21 Effectiveness of internal audit ("D"). Generally, ministries do not have internal audit units, and only the larger agencies do have IA units or systems.  Agency IA reports are submitted to their parent ministry, but not to the Ministry of Finance or Auditor General. No information is available to assess the extent of follow-up on IA findings, though the PEFA report notes that some external audit findings were repeated over several years, suggested there might be limited follow-up to IA findings too.
• Indicator 23 Availability of information on resources received by service delivery units ("D")(focus on primary schools and primary health clinics). There is no central database of resources received by front-line service delivery units, which in Norway are the responsibility of municipal authorities. A "municipal PEFA" would be needed to assess the availability of such information at the local level.
• Indicator 24 (i) Quality and Timeliness of In-Year budget reports ("C"). While budget execution reports allow comparison to budget, they generally do not include commitment data (cash-based only), making it more difficult to tell if agencies are on track with the budget.
• Indicator 28 (ii) and (iii) Legislative Scrutiny of external audit reports ("C"s). Generally, in-depth hearings on external audit reports are not conducted (though in 2007, three such hearings did occur), and the Parliament generally does not issue recommended actions to the executive (instead they make note of Auditor General findings).

What does using a standardized assessment tell us about PFM in Norway?

Using a standardized assessment such as PEFA has the advantage of assuring the same set's of issues are examined, against a common framework. Where differences from the 'expected' results are identified, it enables a clear focus on the performance of the PFM system in these areas, and a dialog of whether the different practices represent a true weakness, or only a differing set of practices.

For Norway, the PFM system assessed as robust, with some very specific areas of markedly differing practice. In some of the areas, such as medium-term budgeting and planning, the system is not broken by any means, but with a few additional enhancements, the multi-year planning and budgeting could be further strengthened.

In procurement, there is no evidence of a procurement system working badly (though the report does not cite any evidence of it working well, either, such as any data on typical public sector price for common goods and services versus market prices. While not required by PEFA, such data might be used as a substitute to support a better rating.) The 'weakness' at this stage seems primarily an information system design or data collections issue. The data exists, but has not been routinely collected for this purpose. Indeed, it might not be necessary or relevant for Norway to collect the data on competitive contracting -- if average public price for common goods and services are at or lower than market prices for these goods, the system is likely working well and producing value for money, regardless of the percentage of contracts being competitively tendered. Competitive contracting is only a proxy measure, for data likely to be more readily available than market versus public-purchase price. However, the Norwegian Auditor General has made observations of some procurement short-comings.

For legislative oversight, it might be sufficient in the Norwegian context that the Auditor General reports are produced, tabled before Parliament, and reviewed. Hearings are perhaps less important. When there is a significant issue, the Parliament might then get engaged.

More generally, some of the assessment ratings for Norway reflect the highly deconcentrated and decentralized service delivery structure, with local governments having more responsibility. Local accountability arrangements for service delivery might be more important measures in this context, rather than a centralized reporting and accountability model. However, even where there is high decentralized authority, if the majority of funding comes from the central government, but the accountability is local, there is not infrequently a flaw in the accountability structure. Local populations have an incentive for more or less efficient spending, as the cost is not borne locally. In other countries, the absence of central accountability mechanisms in such an asymmetrical setting has led to problems of fiscal discipline. We are not suggesting this is the case in Norway, only pointing out that the issue of financing and accountability arrangements need to be examined in tandem.

How are the Norwegian authorities going to use the findings?

In the PEFA report, the authorities have noted they discussed the findings internally, and have concluded that in three areas, there is interest in strengthening those areas that would improve PFM system performance in the Norwegian context. These areas are: procurement practices, legislative scrutiny of external audit reports and follow-up to the external audit report findings.

Similarly, the authorities discussed other areas that assessed less well, and concluded that these were not significant risks or problematic in the Norwegian context. These include no central collection (ex ante) of municipal budget information, no central regulation to make sure that information on resources available to local service delivery units are publicized, lack of multi-year budgeting at disaggregated level, internal audit functions being optional for agencies and lack of a central consolidated assessment of risks in public corporations and autonomous agencies.

What are important lessons for PEFA?

Some valuable lessons for PEFA from the Norwegian effort include:

• the framework and indicator calibration are applicable to highly-developed countries
• self-assessment can be done credibly. Evidence-based assessments put the onus on providing the evidence upon which the assessment is based. If done properly, self-assessment can be done reliably (similarly, external assessments can be less credible if the supporting evidence is not detailed).
• assessment scores are not enough. These need to be followed by a dialog on relative weaknesses, and relative priorities, in the country context. Building on the findings, what do they mean for the country, for its PFM system performance? And what are the one or two strategic priorities to focus reform efforts on?

The Norwegian authorities receive very high-marks indeed for undertaking the assessment, doing an extremely credible assessment, and publishing the results. These facts themselves attest to a robust PFM system, able to undertake the assessment and be transparent on the results, and use the findings to target some PFM system improvements.

We would encourage other OECD countries, and middle-income countries, to follow Norway's lead and undertake a PEFA assessment. These add immensely to our understanding of PFM systems and contexts, and will add much to the topic of PFM reform.