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January 30, 2013

Good Practice Note on Sequencing PFM Reforms – Taking on Board Comments Received

Posted by Jack Diamond

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Following the posting of a  draft Guidance Note on Sequencing PFM Reforms on the PEFA website  and on this blog (along with two Background Papers by Messrs. Tommasi and Diamond), the PEFA Steering Committee met on 15 November, 2012 to review the response to a number of comments received. Comments came both from development partners (such as SECO, DFID, the Inter-American Development Bank), as well as PFM experts in the field. Most of the comments dealt with specific issues, and were generally aimed at ensuring greater clarity in the text. Accordingly, the majority of these comments were easily accommodated in revised drafts of the Guidance Note and Background Papers, 1 and 2. There were, however, a number of general issues raised that were more thoroughly discussed by the Steering Committee, which are summarized in this blog.

The first issue raised concerned the title. Reflecting some comments, there was a consensus within the Steering Committee that the term "Guidance Note" may imply a degree of determinateness that was unjustified. Rather they felt the Note should be viewed as a useful approach that can help provide direction to reformers by offering an analytical framework to resolve PEM sequencing challenges. They felt that increased emphasis was required that this Note is only a first step in improving the sequencing of reforms, and that the practical applicability of its recommendations would require further empirical work. It was agreed these caveats would be contained in a revised more extensive preface. It was proposed to call the Note a Good Practice Note, rather than a guidance note. (Along the same lines, the title of the background paper 1would be re-titled “Sequencing PFM Reforms").

Several commenters wanted to widen the scope of the note and the associated background papers to examine the reasons for reform failure and hence turn the note more into a "how-to-do reform" piece. Some even offered detailed frameworks of how this might be accomplished. While not doubting that there may be some value in such approaches, the PEFA Steering Committee felt that this suggestion should be resisted as being too ambitious. It was pointed out that in the note it is emphasized that sequencing is only one element in reform design, and a whole chapter in Background Paper 1 deals with how this one aspect relates to other components in reform design. The argument for singling out sequencing for more detailed treatment was that several donors expressed concern that there were different views on sequencing, and these were causing problems/conflicts on the ground. It was felt that while individual reforms being advocated were not wrong technically, or by themselves, they were failing because they were not being carried out in the right order. The Good Practice Note is targeted at answering these concerns. The Steering Committee agreed to add some words to stress this more in the note’s introduction.

An evident area of confusion and contention that emerged in the comments received lay in the general analytical framework used to describe the PFM system's deliverables. In this regard, most of the perceived problem with the note’s approach arose from a lingering confusion, resulting from the failure to distinguish ultimate PFM policy objectives from management inputs (or deliverables) required to reach those objectives. This may be linked to the widely circulated 1997 seminal World Bank paper by Pradhan and Dos Campos that was incorporated in the development of the PEFA's analytical framework. The Steering Committee agreed that the distinction between policy objectives and management deliverables has been adequately described and clarified in Background Paper 1, although only briefly mentioned in the note. It was felt there is a case for bringing more of this part of the Background Paper into the note to explain the threefold management deliverables that shape the discussion there; namely,  enforcing  financial compliance, medium-term planning, and ensuring efficiency and effectiveness in resource use.

Accordingly, the new draft includes a new paragraph and a new figure along these lines.

The role of accounting and the reform of the accounting system were highlighted in many of the comments. Some argued that the accounting system and financial reporting are the primary points of reform and did not feel the note gives enough attention to them, pointing out that they feature only in two paragraphs. However, the Steering Committee noted that the very detailed chapter in Background Paper 1 dealing with the move from core PFM functions adequately emphasizes the importance of a solid accounting system as a basis for further PFM reform.

Moreover, there is a whole section on the various phases of moving from cash to accruals. The speed of reform in this area was also contentious. Some commented on the note’s emphasis on the IPSAS cash standard as a target for most countries' accounting systems, but others felt that all the IPSASs should guide reform actions at each stage of PFM reforms, and indeed argued that certain jurisdictions should "leap-frog" to more robust accrual accounting systems immediately. This the Steering Committee felt could prove dangerous in most client countries, where Alan Schick's paper entitled "Look before you Leap-frog" seems a most relevant warning. Others, on the other hand, argued that even the cash IPSAS standards were too ambitious a target as set in the note and pointed to this standard being currently under review. Their main concern lay with the cash IPSAS requiring consolidation of government cash accounts with those of lower level governments and with parastatals under government control. They pointed out that this has proved difficult if not impossible for most LICs. The Steering Committee was sympathetic to this argument, and suggested drafting changes that will qualify the outright target of cash IPSAS by limiting the cash IPSAS standard to central government accounts.

Another wider issue raised concerned the intended audience for the note. The Steering Committee recognized that the genesis of this work was the donors' wish to have some clarification and reach agreement on the best approach to sequencing PFM reforms. However, some in their comments have suggested that the note is too donor-centric and should be made to appeal to a wider audience. It was decided, however, at this stage of the note’s development to simply clarify its purpose and leave any refocusing of the document to a possible later stage.

Several comments were directed to the details of Background Paper 2 that identifies core PFM functions, and maps them against the PEFA scoring system. In this way target PEFA scores were derived for core PFM functions that all countries should aim to achieve as a base-line in PFM reform. Most comments received asked for greater clarity on the conceptual framework used to define the “core functions” and the mapping system proposed. For the most part these comments were incorporated in the revised draft. There were much fewer issues raised on the assignment of target scores for PEFA indicators to reach core PFM functionality, while this issue represented the major part of this paper. Accordingly, the Steering Committee endorsed the core PFM functions identified in the paper and their corresponding target scores.

The revised set of documents was published yesterday on the PEFA website and on the IMF PFM Blog

Good Practice Note on Sequencing Public Financial Management (PFM) Reforms (Jack Diamond - January, 2013)

Background Paper 1: Guidelines for Sequencing PFM Reforms (Jack Diamond - January, 2013)

Background Paper 2: The Core PFM Functions and PEFA Performance Indicators
 (Daniel Tommasi - January, 2013

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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Will the Good Practice Note be translated in French?

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