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September 03, 2010

A New PEFA Drill-down Diagnostic Emerges

Posted by Holger van Eden and Duncan Last

The World Bank recently published a diagnostic framework for assessing public investment management systems. The diagnostic can be seen as a “drill-down” exercise building on the PEFA (Public Expenditure and Financial Accountability) framework, which has become the main PFM diagnostic in the developing world. While PEFA gives a general overview of the strengths and weaknesses of the PFM system of countries, it often provides insufficient guidance for the design of concrete TA reform programs. Such limitations are evident, for example, in the procurement area which is covered in the PEFA by just one indicator. It is also true for many other parts of the PFM system such as MTEF, treasury management, and internal audit, where further work is required, post-PEFA, to identify specific shortcomings in the existing sub-system that need to be corrected. Of course, the PEFA was always intended as broad diagnostic. The question is should further in-depth diagnostics be developed on the basis of indicator systems or not. Indicators always give only a partial impression of processes and institutions, and can be quite cost intensive to monitor in a consistent way across countries. As one drills down into institutional architecture differences between countries are usually magnified. Descriptive analysis could perhaps provide a richer basis for reform planning and be more focused on the country in question. On the other hand indicator systems have obvious benefits for cross-country analysis, and identifying good practice approaches.

On public investment the new drill-down identifies the need for indicators in the areas of (1) strategic guidance, and preliminary screening, (2) formal project appraisal, (3) independent review of appraisal, (4) project budgeting and selection, (5) project implementation, (6) project adjustment, (7) facility operation, and (8) completion review and evaluation. These can be readily identified by most practitioners as the key stages in the project cycle, a concept that was first developed in the 1980s. While the component elements are assessed, the approach does not (as yet) assess whether a “holistic” system for public investment management exists or not. The paper also does not yet operationalize the assessment indicators, although internally the Bank, it seems, has done substantial work on doing just that for a number of trial countries. In a number of areas operationalization will be difficult. The quality of project implementation will be difficult to measure, for example. Is the fact that the resources in the capital budget are expended as planned really an indication that individual projects are implemented efficiently? Adequacy of capital maintenance (captured under the facility operation area) will also be very hard to measure. Even measurement of somewhat basic indicators such as timeliness of project completion could present major challenges in many developing countries. Often the conclusion could be that one needs a rather advanced public investment management system to be able to fully monitor it. Another challenge will be to focus indicators on the investment process. Does the quality of the overall internal or external audit process say anything about the audit of investment projects? Ideally, the drill-down indicators would really need to focus on the processes and intuitional arrangements for public investment.

It is a good sign that the Bank is returning to its roots as it were with this rediscovery of the importance of public investment management and the project cycle. Evidence is rising that the level and, importantly, the quality of public investment influences economic growth substantially. See for example the recent IMF Working Paper by Arslanalp et al. on Public Capital and Growth. The Bank invested heavily in public investment management diagnostic and reform tools twenty years ago (think: Public Investment Programs or PIPs), before turning its back on these instruments and fully embracing MTEF reforms. After the mixed success of MTEFs in developing countries is it now time for the Bank’s TA delivery to turn full-circle? Only time will tell.   

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.

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