Public Financial Management and Fiscal Outcomes In Heavily Indebted Sub-Saharan African (SSA) Countries

Posted by Tej Prakash

A substantial amount of donor aid, estimated to be around US$60 billion from bilateral and multilateral sources, is expected to flow to SSA in the coming years to help these countries alleviate poverty and achieve the Millennium Development Goals (MDG). Also, to provide relief from debt burden, the International Monetary Fund (IMF) and the World Bank (WB) decided to forgive debt to these countries. However, the Bank and the Fund wanted to ensure that these countries had the capacity both to spend this money meaningfully, and to track the actual spending at the lowest level. Hence improvements in PFM systems in these countries was an essential part of debt forgiveness initiative.

In this paper on PFM and Fiscal Outcomes In Heavily Indebted sub Saharan African (SSA) Countries, we try to determine the effect of PFM systems on key fiscal outcomes such as budget balance and overall debt. We use data from two PFM assessments by the IMF and the World Bank in 2000 and 2004 as a part of the debt forgiveness exercise for this group of 22 countries in SSA.

The Accra High Level Forum – a PEFA Perspective

Posted by Frans E. Ronsholt, Head of the PEFA Secretariat

In the 2005 Paris Declaration, partner countries committed to strengthening their national PFM systems while donors committed, to support partner countries’ efforts to enhance the capacity of such systems, and both parties committed to jointly implement harmonized diagnostic reviews and performance assessment frameworks in PFM. In other words, the Paris Declaration confirmed donors’ and partner countries’ commitment to the three main principles of the Strengthened Approach to Supporting PFM Reform, which constitutes the foundation for the PEFA Program. Donors also committed to using country systems to the extent possible and avoid parallel structures.

The PFM Performance Measurement Framework (PEFA Framework) provides a foundation from which to build reform programs to strengthen a country’s PFM system and to monitor progress towards reform targets. As the PFM system is strengthened, it will create an enabling environment for donors to increasingly use national PFM systems. The PEFA Framework also contributes to the Paris Declaration targets of reduced transaction costs in diagnostic work through harmonized analytical instruments and joint missions.

Forward Estimates: the Most Fundamental Tool of Medium-Term Budgeting

Posted by Marc Robinson

CABRI has just published the proceedings (Download cabri 2007.pdf) of a seminar on medium-term budgeting held in Ghana last December, under the title Are We Asking the Right Questions? Embedding a Medium-Term Perspective in Budgeting (Download cabri_2007_ch1.pdf) . It’s an interesting read.

I was particularly struck by comments in the overview paper—by Alta Fölscher from South Africa—on the fundamental importance of good forward estimates for successful medium-term budgeting. Alta stresses that a fundamental obstacle to the success of MT budgeting in African countries has been that:

the quality of forward estimates is poor. They consist far too frequently of the proposed budget for the first year of a multi-year framework, followed by inflation adjusted projections of cost for the outer year ...they pay little attention to, for example, the likely phasing of policy implementation, changes in demand that will effect spending unevenly or the impact of once-off capital spending on the base-year estimates. ...A key aspect of embedding a medium-term perspective therefore is deciding what the rules are for rolling over and adjusting and determining the forward estimates.

She is spot on – as I’m sure that anyone who has looked at a representative sample of MTEFs from around the world can attest.

Hype and Reality: "The" Medium-term Expenditure Framework in Developing Countries

Posted By Salvatore Schiavo-Campo, LL.D., Ph.D.

A recent paper by Salvatore Schiavo-Campo, presented at the East-West Center and Korea Development Institute Conference on “Sustainability and Efficiency in Managing Public Expenditures”, Download MTEFpaperFinal.doc assesses MTEF implementation in developing countries over the last decade. After tracing the conceptual roots of multiyear expenditure programming to the “High Development Economics” of the 1950s and 1960s and to the more recent antecedents—particularly Australia’s “forward estimates”—the paper notes that very few of the prerequisites for effective MTEF implementation are present in developing countries. The evidence is now conclusive that pushing the MTEF as fashionable “cutting edge”, “state of the art” “best practice”--in disregard of institutional considerations and capacity limits--has produced fiscal Potemkin Villages and mountains of red tape with no improvement in macroeconomic balances, financial control and predictability, or efficiency of allocation and use of public funds.

A scorecard of the last decade does suggest three positive impacts of attempts at MTEF introduction: awareness of the need to look beyond the immediate budget issues; some encouragement of intra-governmental coordination; and greater orientation toward the results of spending rather than solely the process. It also carried three negative impacts: little or no local ownership; damaging distraction from basic PFM problems; and heavy strain on limited budgeting capacity.

However, a suitable medium-term fiscal and expenditure perspective remains essential to frame annual budget preparation. Thus, and related to the disregard of institutional capacity, the core of the problem so far has been the failure to make distinctions between different MTEF variants. Unbundling the MTEF leads the paper to advance operational recommendations on which variant is suitable to different country circumstances, and specifically what gradual steps can be taken to produce, in time, a robust medium-term programmatic frame for sound budgeting.

Does Public Sector Efficiency Matter to Growth? Some New Evidence

Posted by Francois Michel

In a recent paper published in Public Choice, Konstantinos Angelopoulos, Apostolis Philippopoulos and Efthymios Tsionas provide a welcome addition to the empirical growth literature by enlarging the traditional focus on fiscal size to introduce measures of public sector efficiency. Two such measures of public sector efficiency are used.

The first one follows the “output-to-input” (or, as it might be more appropriately denominated, outcome-to-input) approach used by Afonso, Schuknecht, and Tanzi in two famous papers ("Public sector efficiency: an international comparison," Public Choice Volume 123, Number 3-4, June 2005; and "Public Sector Efficiency: evidence from new EU members states and emerging markets," ECB Working Papers number 581, January 2006) governements’ socio-economic outcomes are related to resources used, proxied by public sector spending, for major functions—limited by data availability, in the article’s case, to four basic roles of administration, education, infrastructures, and economic stabilization. The sample consists of 64 developed and non developed countries during four five-year periods between 1980 and 2000.

The second measure of government efficiency to which the model is applied is obtained by applying a stochastic production frontier approach as discussed in Lovell and Kumbhakar’s book (2000). The sample consists here of yearly data between 1995 and 2000 for 52 countries.

Addressing Infrastructure Challenges and Managing Fiscal Risks from PPPs

Posted by Gerd Schwartz, Ana Corbacho, and Katja Funke (all IMF staff)

Governments face important challenges to upgrade public infrastructure and improve the delivery of public services. As in other regions of the world, countries in the European Union (EU) and several non-EU economies in Europe have been facing strong demands to strengthen the quality of public infrastructure to accelerate economic development and income convergence. At the same time, tight budget constraints have raised incentives to rely on private sector resources to supply infrastructure. In this context, public-private partnerships (PPPs) are being used more and more as an alternative to traditional public procurement. While this has created new business opportunities for the private sector, it has also given rise to new fiscal, macroeconomic, and reputational risks for governments.

How then should governments address these infrastructure challenges and manage associated risks? Edited by Gerd Schwartz, Ana Corbacho, and Katja Funke Public investment and Public-Private Partnerships: Addressing Infrastructure Challenges and Managing Fiscal Risks brings together the perspectives of academics, practitioners, and members of several international organizations. It is based on the proceedings from a high-level international seminar for government officials, which was organized jointly by the Fiscal Affairs Department of the IMF, the Hungarian Ministry of Finance, and the International Center for Economic Growth, European Center (ICEG-EC), and with some financial support from the European Investment Bank.

PEFA Training in Perspective

Posted by Franck Bessette, PEFA Secretariat

The PEFA Monitoring Report 2007 extensively documented a substantial increase in the overall quality of the PEFA performance reports. This trend has continued, contributing to a wide recognition of the PEFA Framework as the core assessment tool adopted in more than 90 countries for PFM performance measurement and reform monitoring.

The partners of the program were convinced from the start that only high quality assessments of PFM performance could lay the basis for a pool of information on PFM reform that would be shared by the donor community and the partner governments. Training has been considered, since the launch of the PEFA Framework in June 2005, as one of the main pillars of this quest for quality, along with a solid mechanism for report reviews, involving all stakeholders and the PEFA Secretariat. For this reason, a training strategy was prepared by the program and approved by the PEFA Steering Committee. This post would like to give a short overview of this PEFA training activity and some insight into its near future.

Progress on the Use of Country PFM Systems: an OECD-DAC Joint Venture Report

Posted by Sanjay Vani, World Bank

A recent OECD-DAC Joint Venture on Public Financial Management commissioned report on the Use of country PFM systems takes stock of the progress made in meeting targets specified in the Paris Declaration.

The Report (Download report_on_use_of_country_systems_in_pfm.pdf )finds that there has been progress:many countries and donors have taken positive action toward strengthening and using country PFM systems, and the Public Expenditure and Financial Accountability (PEFA) partnership has developed a performance measurement framework that can help countries determine where they need to concentrate their efforts. At the same time, the aggregate numbers on donors’ use of country systems have not changed much; it is clear that there is much work to do.

Medium-Term Expenditure Ceilings: are they an Essential Part of Medium-Term Budgeting?

Posted by Marc Robinson

We often hear it said that medium-term expenditure ceilings for ministries or sectors are an essential part of good medium-term budgeting. Spending ministries, it is said, know what budget funding they will receive not only this year, but next year and the year after. The funding certainty this will give them will improve their planning and management, thereby boosting service delivery. Such increased funding certainty, the line runs, is the #1 objective of medium-term budgeting.

This is, with respect, wrong. Multi-year funding certainty for spending ministries is something which only the most advanced countries can aspire to. And while reduced funding uncertainty is a goal of medium-term budgeting, it is not the most fundamental goal.

Measuring Performance In Public Administration

Latvian 4th International Public Management Summer Institute

Posted by Bill Dorotinsky

The Latvian Government held its 4th annual International Public Management Summer Institute from August 25-29, 2008, in Tukums, Latvia. The theme of this year's Institute was "Measuring Performance in Public Administration." The Institute was attended by Latvian Government staff from line ministries and central agencies, as well as staff from various agencies of seven regional governments (Bosnia-Herzegovina, Georgia, Lithuania, Macedonia, Poland, Turkey, and Ukraine). The Institute was supported with financing and experts by the World Bank, OECD, Latvian Ministry of Foreign Affairs, Embassy of The Netherlands, Corporate & Management Consulting Group, The Soros Foundation, and Embassy of Ireland.

There were many lessons of experience and practical guidance arising from the seminar, too numerous to summarize here. The presentations and country cases are available below, and the readers can draw their own conclusions. The Institute program can be downloaded here Download Preliminary_program_2008.doc

Over-all, the Summer Institute was well planned and executed. The Institute was a good opportunity to get an overview of where participant countries are in terms of performance reforms. Some are only just beginning to wrestle with introducing performance measurement/management reforms (Bosnia), while new EU Member States are trying to make the performance reforms meaningful. The new member states are very much in the same position as most OECD countries, where performance measurement systems are in place and generating large amounts of data, but there is very little information of use in decision-making.

The Road Less Travelled to an MTEF

Posted by Ismail Manik, consultant, World Bank Institute*

The case of Tajikistan is illustrative of a not too ambitious yet well-sequenced attempt at introducing a Medium-Term Expenditure Framework (MTEF). The Ministry of Finance started initial work on an MTEF in 2000 but the effort did not have a major impact on improving budget planning. The rating from a recent PEFA assessment for the indicator PI-12, ‘Multi-year perspective in fiscal planning, expenditure policy, and budgeting’, is a D+. Another major problem was the fragmentation of the budget; for example the Ministry of Education and the Ministry of Health controls only around 9 and 10 percent of their sectoral budgets,** respectively.

A PER performed in 2007 provides a realistic assessment;

"The full introduction of the MTEF will take many years, and will need to be accompanied by complementary reforms to public financial management, such as strengthening of treasury systems, auditing, monitoring and evaluation and payroll management. One of the important findings of the World Bank study on the implications of weak PEM capacity for the PRSP approach, is that PEM reform should be undertaken in a holistic manner: improving one link in the PEM system will not generate better budget outcomes if other links in the system are unreformed and remain weak (Andrews and Moon, 2003).*** The Government will need assistance to implement the MTEF, and complementary PFM reforms, from donors; in particular, it will need technical assistance for the MOF and the line ministries in the pilot sectors."

Another Warm Welcome to Daniel Kaufmann Who Does It Again

Posted by Michel Lazare

In a March 11, 2008 post titled "Warm Welcome to the Kaufmann Governance Post", we announced the launch of Daniel Kaufmann's personal blog on governance issue.

Although this personal blog is still active, Dani Kaufmann has now created a World Bank blog on governance : "Governance Matters" which defines itself as "A Blog about Governance and Development for All."

The key difference between the two is that, while the Kaufmann Governance Post (KGP) was, initially at least, a one man show, Governance Matters is more an institutional and team approach. A number of Bank's experts on governance issues have already posted at least one article on this post. This difference should however not be overestimated as the KGP blog has now welcomed a number of guest bloggers and as Dani Kaufmann appears to be the key writer of the new Governance Matters.  Actually, convergence between the two blogs is such that most of Dani Kaufmann's latest posts have been posted on both blogs.

PFM blog likes the new Governance Matters as much as it liked the initial KGP. We wish long life and full success to both.

France’s Announces Details of its First Multi-Year Budget

Posted by Richard Hughes

Last month saw French Budget Minister Eric Woerth confirm his government’s plan to press ahead with the biggest reform to French fiscal policy-making since the adoption of the LOLF (Loi Organique Relative aux Lois de Finances) in 2001 - the introduction of the country’s first multi-year budget (budget pluriannuel).

Speaking at the opening of the National Assembly’s Budget Orientation Debate on the 15th of July, Woerth announced that the government will be introducing a new “expenditure planning law” (loi de programmation) that will set out in detail the French government’s spending plans for the year 2009, 2010 and 2011. Following some initial questions about its constitutionality, the legal path for this multi-year expenditure planning law was subsequently cleared as part of a series of revisions to France’s 1958 Constitution ratified by both houses of Parliament on 23 July. The stage is therefore set for the publication of France’s first multi-year budget in the autumn.