By Bill Dorotinsky
In recent years, the World Bank and IMF have undertaken reviews of ministry of finance (MoF) organizational structure, with an eye to strengthening the operation of the ministry and putting public financial management (PFM) on a sound footing. Creating strong ministries of finance able to manage national finances can better position countries for achieving their national policies and weathering weak economic conditions. Relatively less attention has been paid to building strong ministries of finance compared to strong central banks or even strong supreme auditing institutions. However, building strong MoFs has been an area of increasing requests for international assistance, and a coherent approach is needed for the task. Leaving recommendations to individual professions, or the absence of a framework for review, often means fragmented advice and ministries.
In some cases, country requests for advice arose from a realization that PFM system evolution and broader public sector changes have left the MoF with an outdated organizational structure ill-equipped for new roles. In other cases, the request came from more simple issues, such as the minister of finance not having adequate information for managing national finances.
At least for several countries, a common methodology has been applied to looking at ministries of finance and their role, and developing recommendations. This methodology is not the only approach that could be taken, but is one that has yielded good results across several countries, in different cultural and developmental environments. This post presents the general outline of the approach used, which involves using several methods to evaluate the ministry, develop options for improvement, and “triangulate” a reform direction:
- Reviewing the assignment of basic public finance functions in government
- Comparison with regional ministries of finance for relevant patterns
- Reviewing the five central business processes of a comprehensive ministry of finance
- A MoF and budget user staff survey to identify strengths and weaknesses of processes and organization
Basic Public Finance Functions
Starting with a general review of the basic public finance functions of government, assuring the functions exist and are clearly assigned somewhere, helps to not only assure there are no gaps in assignments that might impair PFM system operations, but helps place the MoF in the national public finance administrative framework.
Though terminology may differ, the basic functions can be summarized as:
Core MoF functions
- Macro-fiscal coordination and policy
- Budgeting Function
- Treasury Functions
- Management of Government Revenue
Other MoF/PFM functions (sometimes assigned to MoFs)
- Financial Sector Regulation
- International Aid management
- Personnel management
- Procurement
- Oversight of State Owned Enterprises, Extra-budgetary funds
- Internal Audit
- National economy
[Download functions_and_organizational_responsibilities_in_the_ministry_of_finance.doc ]
Regional Comparison
Comparing organizational structures of regional MoFs, at least at a broad level, offers some insights into how relevant comparator countries have tried to solve some organizational challenges, and perhaps also reflects some regional or cultural traditions in PFM. Each country is unique, but the sets of challenges faced by MoFs are generally the same. In some cases, immediate neighboring countries may not be the relevant comparator, particularly if GDP per capita or population differ widely. In these cases, other comparator countries can be chosen that represent better matches, either in terms of size, level of economic development, or perhaps simply because they are deemed good practice countries.
The basic variables used give a basic organizational framework for comparison, and is information readily available or easily gathered. Definitions are flexible, as terms do differ across countries, but the basic ideas should be clear. The variables used are:
- Number of MoF employees
- Size and organization of senior MoF management (top 2 levels, commonly political appointees, including minister, vice minister and deputy ministers or their equivalent)
- Number of second-level officials (those below deputy minister, frequently ‘director’-level or equivalent; typically career civil servants)
- Number of major operational departments and their grouping (particularly grouping under senior management and second-level officials)
- Number and type of ‘corporate’ functions/offices (functions serving the entire ministry, often common services such as ministry financial management, human resource management, legal services, procurement, IT systems)
- Whether tax, customs, and treasury operations are under the MoF sphere of responsibility (either within the MoF or subordinated to it)
- Number and type of units subordinated to MoF
Central Business Processes
Numerous functions and activities comprise a national PFM system (detailed above). These can be organized along four business lines or core product and services of a ministry of finance:
- macrofiscal coordination and policy;
- budget formulation;
- budget execution (including treasury, accounting policy, maintaining the public accounts, debt and cash management),
- revenue policy and management.
- A fifth business line, necessary for any organization, is management and administration.
MoFs will differ in their scope of duties, but a strong MoF has many levers to influence policy, and has the core PFM functions within its sphere of responsibility. If it has the core functions, then five core business processes can be identified and evaluated. In addition to looking at the processes themselves, examining how the processes fit together, and how the organization structure either supports the five processes or impedes them, can suggest organizational improvements.
Staff Survey
Often, MoF staff have a clear picture of the problems of organization and processes in the MoF and with other PFM agents. Unfortunately, staff are rarely asked for their views. A simple approach to help validate the other approaches, and identify areas for deeper study, is a simple survey of staff or unit managers in MoF. A side benefit of the survey is that, by engaging staff in problem identification, they are more prepared to support problem resolution. In at least one case, the staff survey helped create openness to change and some staff interest in seeing solutions implemented --- they had helped frame the problem definition and suggest solutions.
A very basic survey has been used in several cases, and proven more than sufficient to the task. The questions included open questions on the most recent budget cycle, and soliciting views from the MoF staff and line ministries (e.g. health) budget staff on how well the process worked, and what impeded work. [Download questionnaire_for_mof_and_budget_user_finance_staff.doc ]
Lessons
From the situations where the approach has been applied, a few additional rules of thumb in doing the work and lessons from its application have emerged. These include:
- Prepare options for discussion, not the one ideal model. Numerous factors go into organizational decisions, and there is rarely one right way to organize a ministry. Teams should prepare several options for discussions, including the pros and cons of each.
- Organization size, complexity. The degree of specialization and organizational complexity will vary by size of the entity and country. The important issue is that all important functions exist and are clearly assigned. Staff with adequate skills and training should be performing the functions. Often times, advisors will simply look to OECD country MoF organizations, and seek to replicate these same structures in developing country MoF’s, resulting in fragmentation and very complex structures ill-suited to the environment. For example, limited macroeconomists in a country might necessitate shared responsibility for forecasting and analysis with the central bank and ministry of economy. Or, the office responsible for macroeconomic analysis and forecasting might also be assigned roles for revenue, debt and fiscal risk forecasting and analysis. Insisting on separate offices for each task fragments the ministry, stretches limited resources too thin, and undermines performance.
- Modernization. Like any organization, MoFs reflect accumulated tradition – they are often among the oldest departments in a country. Often times, the organizational structure will reflect the tradition rather than rational arrangements for meeting core objectives or supporting core business processes. At least in one case, a senior ministry official reported the problem as “Reality has overtaken the organizational structure of the ministry.” Developments in public administration, automation, and legal and processes changes have occurred, but the organizational structure and staffing have remained unchanged. For example, the MoF may have very large accounting staffs, reflecting older mechanisms of control and reporting – when automation of the general ledger and control systems has made the requirement for accounting staff much less.
- Streamlining. In many cases, MoF’s accumulate various ‘finance-related’ functions unrelated to their core mission. Finance-related may mean simply payment functions, and no other government organization was identified for the task, so these were assigned to the MoF. In other cases, donor project implementation units are created, all reporting to the minister of finance, cluttering the organizational structure and reducing the ministers effectiveness with many peripheral direct reporting relationships.
- Management and administration. Modern ministries of finance do tend to have a professionalized senior official for internal ministry management and administration, responsible for the various ‘corporate’ functions such as human resource management, information technology, legal advice, work flow management, etc. In many developing countries, these functions are not professionalized, and various tasks are dispersed across numerous senior officials. With no one attending to modernization of the ministry or internal management with regularity, efficiency and effectiveness suffer. In several cases, long-standing structural personnel issues arose, with the ministry workforce comprised of both civil service and better-paid contractual staff often doing similar jobs, but for different pay and degrees of accountability and responsibility. Morale and productivity suffer. In smaller organizations, senior management must do more multi-tasking, with less organizational specialization. But, grouping administrative functions together and professionalizing management a bit more can help improve ministry efficiency.
- Ensuring a good fit between the MoF and its clients. Even as attention is paid to internal MoF organization and improvement in MoF and government-wide PFM business processes, paying attention to key MoF clients (chief executive, peers, legislature, general public, line ministries) is essential. In some case, ministers of finance eager to reform have forgotten the service-nature of the MoF, and sought to build the perfect MoF – but one no one wanted (ill-suited to serve its clients).
Further work is warranted in this strenghtening MoFs, particularly pay and staffing structures. Various options for improving MoF staffing and pay have been tried, and some analysis of these options would be useful. Situations vary by country, and include
- Delaying MoF pay issues due to government-wide pay reform
- downsize the MoF and use savings to raise pay of MOF staff
- some parts of MoF (e.g. tax administration) have been converted to arms-length agencies with higher pay schemes, but complicating reporting and accountability arrangements
- Maintaining government-wide pay schemes, but raising the average grade of MoF staff because of their central role and involvement in handling public finds (reduce potential for corruption)
Generally, countries with support of international insistutions have been successful in creating strong central banks and improving moentary policy. A similar effort for ministries of finace and central fiscal institutions and fiscal policy would round-out the tools available to countries for managing the economy.
