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September 13, 2010

With 17 “gold medals” Brazil beats Norway on the PEFA assessment!

Posted by Mario Pessoa

Gold medals are the objective reference for success in the world of sports. In PFM, you may measure success by the number of “A”s scored on the PEFA assessment. A recent World Bank PEFA report gives Brazil the lead with 17 A's! Even better than solid, dependable Norway! Is the PEFA representation accurate? Is Brazil world leader on PFM, or is reality a bit more complex?

Brazil has been reforming its public financial management systems since the 1980s. The implementation of the fiscal responsibility law (FRL) in 2000 can be considered the major landmark that put the country in the forefront of PFM good practices. The FRL improved substantially the coverage of the budget and fiscal reports, imposed macrofiscal safeguards on debt management and public expenditure, provided for the preparation of a fiscal risk analysis to support the budget process, and pushed for timely and reliable fiscal reports. The impact of the FRL is clearly perceptible in three of the six pillars of the PEFA assessment (credibility of the budget; comprehensiveness and transparency; and accounting; recording; and reporting). From 14 indicators in theses three dimensions Brazil scored “A” in 11.

The PEFA assessment highlights the strong debt management; publication of comprehensive and timely periodic and annual fiscal reports; a comprehensive treasury single account; and a webpage transparency portal with details on government expenditures. It has also noticed the comprehensive and reliable integrated financial management information system (SIAFI) and general government fiscal information covering all states and almost all municipalities.

But not everything is perfect. The main weaknesses are on the management of fiscal risks related to state owned enterprises, lack of multiyear perspective in fiscal planning, insufficient predictability of funding of executing entities, accounting standards not in line with international standards, and almost inexistent legislative scrutiny of external audit reports. In all these indicators Brazil scored “C” or “D”.

From the fiscal perspective, the most risky area is the one related to the control of fiscal risks. Public companies, subnational governments, and the pension funds are main areas of vulnerability. With more than one hundred public companies, and overall revenues approaching 10 percent of GDP, the public companies controlled by the federal government are together similar in size of the whole municipal sector in Brazil. In some sectors the influence of government is particularly pronounced  such as in the oil, power generation, and financial sectors. The complexity and size of state owned enterprise represent a challenge in terms of supervision, control, and transparency even considering a legal framework that imposes sophisticated governance rules.

Regarding the accounting standards, the government announced an ambitious reform recently to implement accrual accounting for the general government by 2014. This reform should hopefully improve substantially PEFA indicator 25 on the quality of the financial statements.

The major weakness revealed by the PEFA assessment is related to the almost inexistent scrutiny of the legislature regarding the follow-up on the external audit reports findings. There is no indication in the assessment that this is an area that the government is implementing changes. In this regard, Brazil should learn from the best international experiences. For example, the US Congress is very active in terms of permanent scrutiny of the executive. It promotes public hearings, investigations, and intensive research. Canada, UK, and other Westminster-type parliaments are also good examples on how a specialized audit commission can play a relevant role on overseeing government performance and compliance.

Brazil should be commended for this evaluation and excellent results achieved so far. More importantly, this assessment shows that even more advanced countries can benefit immensely from an independent, transparent, and candid evaluation of their PFM system.

You can read the entire PEFA report on the following World Bank webpage: www.worldbank.org/brazil

If you want to know more about the PEFA assessment methodology and access other reports go to www.pefa.org

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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