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December 29, 2011

The PFM Blog Top Ten of 2011: A diverse bunch…….

Posted by Holger van Eden, with support from Sasha Pitrof

If there is a theme in the best read blog posts of 2011, it is perhaps the continuing struggle in the PFM profession to improve the performance of government expenditure. Given the ongoing major adjustments of governments around the world, and especially in Europe, it is perhaps not surprising that doing “more with less” or even doing “less with even less” is high on the agenda. At number 7 our colleague Guilhem Blondy describes how in a developing country as Mali the budget has only gradually become more effective, more aligned with the strategic objectives of government, by introducing program budgeting, but not forgetting to improve basic budget functions. At number 6 Sanjay Vani from the World Bank describes how waste and inefficiency plague even advanced countries’ public sectors through a lack of incentives and excessive zeal for procedure. Blog post number 4 from David Gentry, the Fund’s PFM Advisor in Mongolia discusses the dilemmas of actually rewarding success in the government. If agencies achieve all their objectives isn’t that a sign that they could do with a smaller budget? But if this is carried through then of course no agency will want to perform well. Performance management and budgeting remains an area were the profession is still looking for practical approaches.

The top three this year is a very diverse bunch. The World Bank’s Cen Dener reports at number 3 that the Bank now understands better how to make the development of Financial Management Information Systems a success, and perhaps that criticism on the Bank in the past has been overdone. At number 2, one of our star bloggers, Richard Allen, describes how on the one hand national planning systems are essential for development (even for advanced economies?), but on the other hand should, in developing countries, be less directive and more aligned with medium-term budgeting. Finally, many congratulations to the winner of the best read blog post of the year, Carla Sateriale, our talented, research assistant in the PFM divisions of the Fiscal Affairs Department (FAD). In an interview with our former director, Vito Tanzi, she managed to elicit some sage advice on how academics and policy makers should remain grounded in reality, and know there history.

If you haven’t read up on all these interesting topics, please find the top ten blogs of the year below. On behalf of us here at the PFM Blog, I would like to thank all our authors for their productivity and our readers for their attention. Happy New Year to all!

     10. Duke University and the IMF Support Capacity Building in Liberia (March 10, 2011)

9. International Journal of Government Financial Management (February 4, 2011)

8. The Australian Budget: Getting the Above-the-line Balance Back Above the Line (May 20, 2011)

7. Developing Program Budgeting AND Getting the Basics Right: Lessons from Mali (June 8, 2011)

6. Waste in Government Expenditures (April 18, 2011)

5. Asian Regional Seminar: Promoting Fiscal Sustainability through Improving the Efficiency and Effectiveness of Public Spending (March 18, 2011)

4. How Should Success in Government Be rewarded (May 16, 2011)

3. Financial Management Information Systems: 25 Years of World Bank Experience on What Works and What Doesn’t (May 13, 2011)

2. Planning and Budgeting in Developing Countries (January 31, 2011)

1. Interview with Vito Tanzi (August 2, 2011)

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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This is very useful blog though “the PFM Blog Top Ten of 2011: A diverse bunch…….”, should really be entitled “The PFM Blog Top Ten of 2011: A not so diverse bunch …” as the issues raised reflects the on-going pursuit of an accurate understanding of what works to get PFM systems to deliver on the promise of more efficient and effective government. Given that public economics is both a backward and forwarding looking discipline, my comments on the blog are structured in a similar way: A) a review of the insights from the top ten blogs of 2011; and ii) a personnel reflection of the top ten objectives for the PFM field in 2012.


A. A review of insights from the top ten blogs of 2011

Three key thematic questions emerge from a review of the issues raised in the top ten blogs. These are: i) how to introduce and develop a medium term perspective in PFM systems; ii) how is PFM capacity released and built; and iii) how can reform of PFM systems drive more efficient and effective government. These three themes are revealed in the following summary of the key issues raised in each of the blogs.

10. “Duke University and the IMF Support Capacity Building in Liberia” emphasizes the importance of mainstreaming long-term capacity development partnerships with strong institutions including the IMF and good universities.

9. “International Journal of Government Financial Management” underscores the importance of classification standards and helping different stakeholders speak the same PFM language.

8. “The Australian Budget: Getting the Above-the-line Balance Back Above the Line” highlights the benefits and some of the problems of Australia’s MTEF (the 1970’s system of which is really the grandfather of most if not all MTEF approaches around the world) and recommends good examples of how risk statements can be structured (though I would argue is well short of what a good practice statement would look like) and how cash and accrual information can work together to provide high levels of transparency in reporting of government fiscal policy intentions.

7. “Developing Program Budgeting AND Getting the Basics Right: Lessons from Mali” argues that Mali was an example of badly sequenced reform and poorly implemented quasi-program budgets (fragmented results based quasi-programs set against unlinked input budgets). The blog supports Schick’s long standing view of getting the basics right first and goes on to argue that more reliable accounting systems and basic controls were needed before embarking on program budgeting reform. It also highlights a few important observations including the non-use of massive amounts of information stored in in-house databases. Moreover, the blog ends with an interesting point that poorly progressing advanced reforms can be reinvigorated by getting foundation components functional (in Mali’s case an FMIS, a TSA and more appropriate program classifications). The blog was silent on how the business processes underpinning the new FMIS would deliver more reliable accounts.

6. “Waste in Government Expenditures” focused on the problem of technical inefficiencies (and to some extent distributive inefficiencies) in governments of both developed and developing countries and how to better structure incentives to minimise such inefficiencies. The blog argues that: i) certain incentives are lacking in PFM systems that would work better to deliver technical efficiency; and ii) procurement rules are focused on procedural compliance rather than a demonstrable concern for value for money. The blog interestingly implicitly reveals a way to easily hold agencies better to account for technical inefficiencies – simple forensic accounting/auditing techniques can quickly find occurrences of very bad value purchases of goods and services (i.e. it should be a standard internal and external audit practice to do some basic forensic accounting to identify and follow-up on technical inefficiencies).

5. “Asian Regional Seminar: Promoting Fiscal Sustainability through Improving the Efficiency and Effectiveness of Public Spending” underscored that MTEFs in OECD countries are far from perfect. Other key messages include: i) there is difference between functional and non-functional MTEFs; ii) sequencing MTEF reform paths need to be well founded on country contexts; iii) embracing the power of evolution will support successful reform; iv) new governments/administrations change PFM arrangements that they believe don’t work or are need of greater attention; v) PFM systems need to better address the economic cycle, vi) the choice of big pushes or a nudge (i.e. through reform pilots) is country specific (e.g. a big push may be warranted if the political elite knows what needs to be done and is willing to risk significant resources – time, money and political capital - to move in one particular direction); and finally vi) people and accountability mechanisms matter.

4. “How Should Success in Government Be rewarded” argues that there are lessons to be learned from the private sector approach to Management By Objectives (MBO) for public sector approaches to performance budgeting. It goes on to contend that more powerful political forces in the public sector weakens the link (relative to the private sector) between performance and resource allocation.

3. “Financial Management Information Systems: 25 Years of World Bank Experience on What Works and What Doesn’t” highlights three types of pre-conditions for successful FMIS implementation: functional, technical and human resources and presents a series of recommendations to improve FMIS design and implementation. The blog then goes on to summarize 10 key conclusions around political commitment, design and implementation and argues the paper provides more in depth analysis of success and failure factors than that were provided in the earlier circulated draft in 2003 (which presented a more troublesome storyline for World Bank supervised FMIS projects).

2. “Planning and Budgeting in Developing Countries” stresses that national development plans in developed countries died out two generations ago in favour of MTEFs and then goes on to ask the question: why have PIPs and NDPs once again become fashionable paradigms in development? Without actually answering the question directly, the blog: i) emphasises that planning and budget frameworks are desirable when set within the country context; ii) PIPs, NDPs and fragmented planning and finance ministries could be appropriate in certain circumstances – but not at the exclusion of MTEFs and other modern planning techniques; and iii) hints that prescriptive planning will naturally be reduced as a country’s PFM system develops.
1. “Interview with Vito Tanzi” stresses that to achieve progress in applied public economics, critical analysis of direct observations should informed by theory but not wedded to it.


B: A personnel reflection of my top ten objectives for the PFM field in 2012

10. Better use of country and international systems by bilateral and multilateral donors:
a. Aim to get all cash and in-kind grants and loans channelled through the public sector on consolidated budgets and in final consolidated accounts.
b. Multi-year donor financed projects to better support and establish foundations for central and sectoral MTEFs. Key areas here include good use of a recipient government’s budgeting and accounting chart of accounts, better understanding of obligation and cash-based appropriation systems with clear and timely commitments, forecast disbursements and expenditures and actual disbursements and expenditures.
c. Shorten the 2 year wait for commitment data to be published on OECD DAC/CRS database. Here donors need to commit to delivering multi-year disbursement forecasts following cash based appropriation system principles. (One donor could take the lead in coordinating donor reporting for the country rather than trying to get recipients to resolve that difficult administrative burden). Revisions to commitments and forecast disbursements need to be recorded and tracked.
d. Work towards establishing standards for: a) addressing non-calendar fiscal years to facilitate cross country comparisons; and b) mapping OECD/DAC purpose or sector classifications to CoFOG functions of government (or preferably, donors required to report in their DAC returns additional dimensions to their aid activity - by CoFOG function and GFS economic and recipient country administrative unit (were aid is to be and was channelled through the public sector).
e. Allow the budget to be the primary resource allocation device by de-fragmenting donor and recipient budget cycles– by simply allowing best estimates to be provided in line with recipients budget cycle and in-accordance with their budget CoA (attached with a statement of uncertainty around each donor’s estimate).
f. Enabling independent audit – under the single audit principle - to be the most important monitoring and evaluation tool – by expanding and aligning the scope of external audit (financial, statistical, performance and agency and project specific and reporting on size and number of ex-post adjustments and corrections);
g. Help make a recipient country’s budget be the primary strategic and flexible resource allocation tool, reduce the incidence of donor driven poverty reduction strategies and national development plans) and a deliver a big push towards mainstreaming the use of portfolio/sectoral/agency budget statements (noting the explosive size of budget papers that is evident when budgets remain centralized over a significant period time). This would help achieve of transparency in national budget papers and would support devolution of responsibilities and accountability.
h. Prioritize function budgeting and account estimation to facilitate trend analysis that can be most useful when telling storylines to stakeholders. Function budgeting is a lot easier than program budgeting. Arguable, it also allows more sovereignty to be retained as it provides greater freedoms to drive administrative structural change, while at the same time facilitating long-term (past and present) trend analysis in a way that facilitates a better understanding of what policies are working and what are not. Further guidance is warranted on function attribution and estimation techniques (e.g. from administrative and program structures, staffing profiles, payroll interrogation, infrastructure size etc.)
i. Deliver realism in sector strategies: A good start would be that costing of sector strategies be done in a way that kick starts sector MTEFs (by using properly the key dimensions of the countries CoA (administrative – i.e. down to appropriation/budget holder), economic/budget chapter, function, fiscal year and location). Two other key feature required in sector strategy costing: i) build in an ability to prioritize and sequence costed programs/activities once a resource constraint is imposed (prefer to establish the resource envelope first); ii) bring macro and social statistics that are already being collected routinely or semi- routinely in to the costing database; and iii) look many years back and look many years forward.

9. IMF, World Bank, academia and governments (donor and recipients) work better together to better understand the performance of country’s PFM system – this could focus on quality of systems and the relative merits of existing and new metrics for outputs and outcomes and more informative trend-based analytical techniques. The idea underlying this view is that there is need to direct PFM system performance analysis in a way that enables advice that can better speaks to a diverse range of stakeholders (requiring different types of briefings for different audiences).

8. A bigger push for PFM processes to: i) support learning from both “trial and error and expert opinion”; ii) demonstrate when proposed and existing policies and interventions are or are not sustainable, survivable, cost-effective and opaque; iii) deliver top-down strategic nudges and big pushes (where appropriate) and work with bottom up innovation and integrated accountability; and iv) comply with increasingly higher local and international standards for reporting, data collection and collation, v) and more innovative analysis of country specific, regional and international data to help identify earlier and more surely of what works, what isn’t working and what doesn’t work etc. Flexibility and adaptability within systems being key with implementers and visionaries both central to the process. With statistics – central and sectoral, economic and social, macro and micro – forming the critical foundation for informed decision making.

7. Using existing understanding of aid absorptive capacities better and learning more – especially around the dynamics over time of absorptive capacities and agency/sectoral level of absorptive capacities.

6. Gaining a better understanding of sufficient conditions to introduce technical and political reforms and how to best engage with political elite – government, legislators, citizens and vested interests etc

5. Collecting and collating better and more comprehensive set of objective PFM metrics. A good start here would be for IFI’s to start collecting and collating on a global scale detail budget, budget review, budget final and audited accounts data, non-tax revenue performance, fiscal risk of state owned enterprises (QuaNGOs), contingent liabilities, gender budgeting, fiscal responsibility etc – focusing on one reduced set may miss an important story line that would be interesting to political elites and vested interests. Another area would be to beef up PEFA around key areas of current concern (e.g. conflicts of interest in audit and procurement, fiscal risk identification and monitoring of QuaNGOs and contingent liabilities and for resource rich countries – transparency and management of resource revenues, and for sectoral integrity issues, transparency and operations of non-tax revenues. In addition, it will be important for the IMF to strengthen its forecasting framework to include other dimensions than fiscal year, economic, financing and other various balance sheet items. This push is arguably very consistent with the Fund’s macroeconomic stability mandate given the linkages between fiscal policy and macroeconomic stability. Additional dimensions would include functional and administrative and require centralized tracking of budget cycle points (e.g. budget and budget review appropriations), macro-fiscal assumptions (including own and country GDP forecasts), forward year allocation and actual spending estimates, socio-economic forecasts and more detailed review of country balance sheets including their management.

4. Achieving a better understanding and quantification of fiduciary, development, sovereign, reputational, fiscal and geopolitical systemic risks for point and over-time (i.e. current year and for 1-5 previous decades). This would also involve a big nudge towards more robust statement of risks in budget papers including around quantifiable contingent liabilities and economic cycles and reporting of realized and unrealized risks in final outcome statements.

3. Delivering more effective tension between top-down and bottom up approaches to budgeting and review. Here I am of the view that a big nudge towards Longer-Term Expenditure Frameworks (LTEFs) is necessary – with top down elements focusing on allocative efficiency (using needs and performance based approaches) and these being well linked to bottom up sectoral frameworks featuring top-down and bottom up elements that focus on delivering technical and distributive efficiency. Here it would be important to do a big push on: i) data collection and collation during sectoral public expenditure reviews and sector strategy costings; ii) getting better at delivering relatively easy to use but constantly refining evidence based forecasting models; and iii) demarcating LTEFs in terms of business process and analysis (in order to build in sustainability in low capacity environments). Within the long-term past and future contexts, it would also be important to start building evidence based generic and country specific models that attempt to link good and bad policies to development. Debt and fiscal sustainability frameworks have proven effective (though refinement opportunities remain). However, work towards additional models are warranted {e.g. Models with GDP, tax and non-tax revenue and poverty reduction being independent variables with range of possible dependent variables including: PFM system and governance quality (fiduciary and development risks), ease of doing business for international competitiveness and inclusive growth, aid and foreign direct and capital investment absorptive capacity limits and others including historically appropriate service delivery financing ranges and output measures. These models would supplement market based forecasting models utilized by investment banks, which could also be mainstreamed into strategic analysis.)

2. External audit of large private sector firms finally being treated as a public good – this would involve, inter alia; breaking conflict of interests and oligopolies, unleashing the power of innovation to detect and follow up on irregularities, and ensuring auditing standards are able to increase transparency and not reduce it. (To break conflicts of interest and oligopolies various mechanism are available such as through the use of lotteries/random selection for choice of auditor, 3rd party payer/government financed arrangements for audit utilizing a quasi-hypothecated tax, audits being reviewed in the following year(s) by the different auditing firm etc), audit scope increased (audit of previous audits, better linkages between internal and external audits and a greater focus on auditing, reporting and quantification of relative risks).

1. A greater focus on understanding then releasing the binding constraints to successful PFM reform. This would include: i) better remote and field level supervision and long-term partnerships; ii) better use of consolidated finance and socio-economic statistics and annual action/conditionality data; iii) greater understanding and use of politics of reform. Progress in this direction would involve greater cross discipline cooperation. For example: i) the health field has a lot to offer public finance economists in terms of cost-effective analytical techniques and processes for dangerous product prior-approval and review; ii) economic history has a lot to offer in relation to analysing long term historical trends using all available data; iii) political science can help gain a better of understanding decision making, power dynamics and internal and external interests; iv) corporate finance risk ratings systems have a lot to offer in helping to quantify and track institutional and country risks; and v) adult learning and business management fields have a lot to offer in terms of releasing unrealized potential capacities from individuals, teams and institutions.

The above are just my initial ideas for a top ten. Challenges to these are of course expected and warranted.

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