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March 29, 2010

Optimal Structures for Ministries of Finance

Posted by Ian Lienert 

The need for internal restructuring of ministries of finances (MoFs) arises from time to time in the Fiscal Affairs Department’s (FAD) discussions with country authorities. Existing structures may no longer be conducive for attaining the desired outcomes of the ministry in the most effective manner. Ministerial restructuring needs a high-level political decision. For mergers of two ministries (e.g., planning and finance) one minister of the Cabinet of Ministers loses his post. When a ministry is split into two ministries, a new minister may be added to the Cabinet. Such mergers or splitting of the MoF are not common. It is more frequent for the MoF to undergo an internal restructuring, to “modernize” the ministry or rationalize its functions. For example, new business processes may have been developed (MTEF, performance budgeting, modernized treasury management, etc.) and now need to be embedded in the organizational structure.

Are there any guidelines that could be used for restructuring a MoF?  Clearly a starting point is to examine the generic functions of any MoF. The attached listing of core and non-core functions of a MoF could be a starting point for national authorities that may be considering an organizational restructuring of its MoF. I would like to solicit your comments on this proposal.

In particular:

• Is it possible to draw up generic functions of a ministry of finance to cover all situations? Or would it be better to draw up a “model” of such functions for a MoF with a “modern” budget system, i.e., one for which the budget process is geared towards performance, where the MoF plays an important oversight role, and a different model when there is a more “conventional” or “traditional” budget system, i.e., one in which the emphasis is on budget control, including of detailed line item budgets?

• Is the “planning” function so distinct from the “budget and PFM” functions that a separate model “ministry of planning” or “ministry of economy” is needed, especially for accommodating the “non-core” functions of a MoF? More fundamentally, could clarity and consensus ever be reached on the definition of a “generic” MOF?

• Is it possible to distinguish core functions from specialist functions, as proposed in the attached document?  For example, some people consider that the function intergovernmental coordination is a core function under decentralized regimes, while aid management is a core function in all countries where external resources constitute a significant share of resource envelope.

• Finally, is the presented framework useful for considering organizational restructuring of the MOF of a particular country when the following situations apply: (a) it is believed that there is no single best model; (b) institutional setups are very different across countries and “our country” does not fit any model ; and (c) politics is considered to rule decisions in this area so why bother to be too “scientific”  about seeking the “ideal” structure?

Your comments on these questions are welcomed!

Download Core MOF Functions

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Comments

You may want to develop a typology concerning governance structures: centralized or decentralized (not in an intergovernmental sense); but about devolving power over budgetary decisions to line ministries and publicly funded bodies.While some FAD reports have dabbled with the pros and cons for different countries, I would like to see a more systematic discussion of the issues, preconditions as well as transition trajectories from one extreme to another (if that were the desired objective--and that is not at all clear, given the posts from Richard Allen recently). Best.

The list of generic functions is very useful. However, before it can be applied in practice there is a need to consider the very different circumstances in which "restructuring" of an MoF may be needed.

The four major typologies in this regard comprise: transition economies (where the MoF has traditionally played a modest financial administration role), market-oriented developing economies seeking modernization of the government sector, including rationalization of the functions of some public institutions, post-conflict countries (where the MOF may be an essentially new institution within a fractured system of governance) and developed economy MoFs where there is a need to augment new or more sophisticated policy or operational functions.

Clearly, the core functions of the post-conflict MoF can be much more narrow and operationally-focused than in the other cases. Similarly, reforms within transition economy MoFs are likely to involve a significant mix of organizational restructuring (to perform new functions) plus re-engineering of many existing processes (e.g Teasury functions).

The question of bringing economy and finance into one ministry is an "old chestnut" for which there is still not (and probably never can be) a prescriptive approach. Experience shows that the quality of economy policy and planning functions are not dependent on organizational location. What is important, however, is determining an effective residual role for the planning agency when key policy functions are transferred to the MoF. There is often a risk that the planning agency retains better capabilities, information and resourcing but without a clear mandate.

While a distinction between "core" and "specialist" functions for MoFs is theoretically possible, it seems unlikley to have much practical application. The economic and governance strcutures in each country will determine the necessary (and possibly unique) mix. This can (and does) vary considerably even within the four typologies outlined above. Perhaps a framework which emphasises different functional requirements under different stages of economic and institutional development might be more instructive.

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