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March 15, 2013

CARTAC Discusses PFM Reform Strategies and State Enterprises

Posted by Eileen Brown and Matthew Smith

Cartac
Senior finance officials from several CARTAC countries participated in a lively CARTAC workshop in Trinidad from February 25-27 with international experts Richard Allen and David Shand. The workshop discussed how to best structure finance ministries to meet demands to sustain economic growth; how to design their PFM reform strategies and get the most from technical assistance; and how to manage the fiscal risks of state-owned enterprises (SOEs). The countries represented were Antigua, British Virgin Islands, Cayman Islands, Dominica, Haiti, Jamaica, Nevis, St Lucia, St Vincent and Suriname. There were 22 participants as well as the two presenters and two facilitators.

“This workshop really worked for me,” said Devon Rowe, Jamaica’s Financial Secretary (FS) “because it verified some options I was considering and it opened me up to new ideas based on what worked for my Caribbean colleagues.  Mostly it persuaded me that we all benefit when we share experiences. There are mistakes that we will not have to repeat because Dominica, St. Lucia, Antigua and BVI have shared their missteps as well as their successes with us.”

“Dominica always learns something and I am gratified we were able to share so much of what we learned with others” said FS Rosamund Edwards.

“I could write a book of do’s and do not’s in reform,” said Deputy FS John Edwards.  “I like the structure of this workshop – experts tell us about new thinking and world experience, and then respond constructively when we tell them what obtains in the region.”  Antigua and Barbuda had enjoyed a wealth of technical assistance funding and worked hard to properly sequence it.

Day 1 – The Organization and Management of Modern Ministries of Finance

Can the organizational structure of an MoF contribute to the effectiveness of PFM reforms? Richard Allen presented various models, compared them, and pointed out benefits and challenges.  The main points were as follows:

  • Ministries of finance in advanced countries spend substantially less resources than developing countries on transactional functions (such as processing payment orders, and managing cash) and increasingly more on policy-related functions such as fiscal analysis, budget strategy and tax policy. Over time, transactional functions are out-sourced to line ministries or semi-autonomous agencies, or sometimes transferred to the private sector. This transformation is partly linked to the computerization of operational tasks such as payment processing and internal control. Finance ministries also need to have confidence that spending agencies will execute the budget efficiently without jeopardizing the safety and control of public money. However, for developing countries such a transformation is likely to take many years. In the meantime, finance ministries in the region can begin the gradual process of building up their capability in key policy areas such as macroeconomic and fiscal forecasting and analysis.
  • The size of an MoF is less important than that it has strong leadership and conducts its functions efficiently and effectively. Some of the most efficient MoFs in the world have only a few hundred staff. In some of the very small countries of the Caribbean an even smaller number of staff would be appropriate.
  • Modern MoFs have relatively flat organizational structures, together with strong vertical and horizontal lines of communication within the organization, and an effective network of communications with external stakeholders such as the offices of the president and prime minister, line ministries, parliament and citizens’ groups. Some of these important connections have yet to be fully developed in the region.
  • Efforts to reform MoFs in advanced countries have been led from the top but need to involve all levels of staff. Reform is always controversial, and often painful to certain groups of employees who find that their jobs are eliminated or changed. The leadership needs to handle such situations with care and sensitivity. Finance ministries that have gone through extensive organizational reform have invested heavily in counseling staff who are adversely affected, and in managing the reform process through all its stages.

Jamaica’s FS Devon Rowe presented his vision for a remodeled MoF in Jamaica that would promote faster and more effective decision-making based on delegated responsibility and authority within an accountability framework.

Local officials noted that reform efforts are limited by the time required carry out the basic functions of government: time is only available for reform ‘after their real jobs are done.’  They counseled that a dedicated team is needed to manage any reform process because attention to mundane but operationally critical issues will always trump efforts to create a better future – “there really is no choice to getting the debt payments out” one official illustrated. 

Day 2 – The Design of PFM Reform Strategies and Getting the Most from TA

Richard Allen presented a series of frequently-observed problems and pitfalls with traditional forms of PFM reform strategy and TA provision:  

  • Entrenched, inflexible ways about thinking about and doing PFM reform are common, and generally unhelpful to the reform process.
  • The ‘cargo cult’ idea of transposing reforms from advanced countries to developing ones has achieved much popularity with reformers, but needs to be treated with great caution.
  • ‘Best practice’ solutions do not generally provide a sound basis for reform in developing countries.
  • Starting PFM reform early doesn’t guarantee success.
  • Reform is often initiated as a ‘signal’ to attract international recognition and the support of donors. This partly explains why reform efforts are often not sustained and their impact is poor.
  • Reforms that are internalized and ‘embedded’ in local officials are much more likely to be successful.
  • Donors generally pay insufficient attention to the vitally important institutional and political aspects of the reform process: reform is not primarily a technical issue.
  • Focusing reform on ‘formal’ elements such as laws and regulations is useful but only deals with part of the problem, and not normally the most important part.
  • Focusing reform only on a narrow range of counterparts – generally technocrats in the MoF – often leads to poor results because little effort is made to consult officials in other agencies who are heavily involved in the budget process and other financial policies. As a result, line ministries often resist attempts by the MoF to implement reforms such as a new FMIS or a TSA.
  • Existing modalities of delivering TA need to be rethought. Shipping in international experts with little local knowledge for short periods of time generally adds little value. More regular and sustained support, as provided by CARTAC for example, brings better results.
  • Starting with locally perceived problems rather than externally imposed solutions is likely to provide a stronger basis for sustained PFM reform.

Richard presented several models of PFM reform strategy, as well as the benefits and limitations of each. These models include Allen Schick’s “back to basics”, the “platform approach”, the “modified platform approach” (applied for example, to the gradual development of an MTEF, through three stages), and the problem-driven, iterative and adaptive (PDIA) approach developed by Matt Andrews in a forthcoming book. PDIA involves a large element of “muddling through” or trial and error in the reform process, replicating how reform has historically taken place on a slow, step-by-step basis in now-advanced countries. It offers perhaps the most promising route to successful reform in developing countries, but requires a substantial change in the attitude and behavior of development partners. Donors tend to have an entrenched notion of what is right for a country (focusing on solutions rather than problems), together with a bias toward projects that include large disbursements of financial resources and TA.   

Participants in the workshop conducted spirited debates about reform strategies that work and those that are less effective. Some complaints were universal, including a trio of braided opinions about development partner funding:  gratitude; impotence and being overwhelmed.  “We could not do much reform at all without the support of donors”, said one thoughtful local official, “but they offer solutions before [or despite] our definitions of our most pressing problems.”

One country related an example that was shared by others: they had been the recipient of numerous diagnostic studies by various bilateral and multilateral development partners.  They found the prescriptions dauntingly complex yet without a simple action plan they could follow.  The country had asked for immediate, specific help to implement a direct mandate of the premier – instead, they received another diagnostic mission.  One country official intoned, ‘”I just wish we could say – no thank you, we know what we need. Why can’t you give us money for that, not what you want to do?”

In order to say ‘no’ to any specific donor proposal, the group concluded that the finance ministry must display strong leadership, and develop their own sequenced PFM reform strategy with prioritized timelines. They would then be well placed to explain to a development partner why a particular proposal does not fit with the government’s strategy, or can be postponed until a later time, and what form of assistance would be really helpful instead.  “A real bonus,” said one participant, “is that this approach makes it less of a diplomatic feat to try to contain the overlapping and ‘competing’ activities of several donors.”

The group focused on how to develop a PFM strategy that can actually be implemented rather than one that simply looks good on paper. Such a strategy needs to be easily understood and accepted by the various parts of the government. “A 40-page action plan is really not much use to us,” said one exasperated local official.  “We need a strategy that many people understand when they are facing daily choices – something that tells them a change is on the priority list or they should be prepared to wait.’

The group suggested that key elements of a practical reform strategy should comprise: identifying problems that need to be solved, in priority order; and involving a widely-defined stakeholder group to brainstorm on the problems that arise in different parts of government and discuss potential solutions. “Setting priorities is key” said one country’s reform leader. An effort to reach out and listen to stakeholders is critically important, local officials concluded, and leads to best fit solutions. Such approaches, however, are not popular with donors because they are time consuming, do not require substantial disbursements of cash (at least in the early stages), and are outside the ‘comfort zone’ of donors. The single largest problem, countries agreed, was the ‘travelling salesmen’ who successfully pitched ‘solutions’ unmatched to the countries problems, priorities, practices and resources.

Participants also stressed that a successful reform strategy needs to figure out how to get people to do things differently.  “People always find numerous rationales for finding ways to resist change: it is human nature.” BVI’s Patlian Johnson summed up the general mood by noting that “Tradition is simply the way we are currently doing things – and if it is not giving us the results we want, then we need to find a better way.”    

Day 3 – State Enterprises – Managing the Risk and Getting the Benefits 

David Shand noted  that the term SOE could apply to all statutory bodies as well as only to those operating in a market and that this appeared to be the Caribbean terminology.  Although his presentations focused mainly on the latter he noted that both have similar issues of performance and accountability.  

David spoke of the importance of the government acting as an active owner of SOEs and developing sound arrangements for their monitoring and accountability. He noted that whereas some countries derive considerable budget revenue from their SOEs, in other countries SOEs area significant drain on the budget, as well as a source of ongoing fiscal risk through government guarantees of their debt. He stressed that the key factor in managing this fiscal risk is improving the financial performance of SOEs.

Participants identified their own examples of the budgetary costs of poor SOE performance.

David then discussed common institutional and substantive issues in poor SOE performance and noted good practices for SOE’s corporate governance developed by OECD and others. He discussed how a performance regime might be developed for SOEs – based on assigned levels of autonomy, reliable and timely financial reporting using international accounting standards, setting of clear financial and operating objectives and targets and strong monitoring of performance– by SOEs themselves, by sector ministries and by the MOF. Identification of SOE quasi-fiscal activities was also discussed along with arrangements for monitoring SOE debt.

The New Zealand State Owned Enterprises Act which requires SOEs to operate as successful businesses and provides substantial operating autonomy with strong monitoring by a special unit located in the MOF and independent directors was presented as a model at one end of the possible spectrum of arrangements.  Participants were invited to consider to what extent such a “commercial” approach could be implemented in their country.

The importance of well qualified boards and senior management was also stressed as an important factor in SOE performance. The need for active monitoring of fiscal risk arising from SOEs including possible statements of fiscal risk as part of budget documentation was also emphasized.

The issues discussed by participants included; developing a useful e-classification of the various types of SOE and treating the enterprises within each category in a consistent manner rather than with different provisions in separate laws; developing performance targets; letting enterprises run themselves and then holding them to their targets; and integrating the financial management of SOEs into the government’s overall PFM strategy.

The role of SOE boards and board members was discussed at length.  David explained the reasoning behind emerging good practice that boards should comprise independent directors chosen for their professional skills and not include government officials.  Some participants emphasized the importance of having MoF and sector ministry officials on the boards so that the government has ready access to information on SOE operations. Small countries also tend to have a limited pool of talent for independent directors. In response David stressed the importance of MoF having receiving good information on SOE performance through other mechanisms, with a strong MoF being key to managing fiscal risk, monitoring performance against targets, reviewing financial statements and getting regular briefings from the SOE. In many countries, it was useful to set up an SOE monitoring unit in the MoF. 

It was noted that Antigua and St Lucia have an SOE monitoring unit, although the latter appears to lack teeth, and that Jamaica is currently setting one up. 

CARTAC participants left the workshop focused on how they could better integrate the benefits and risks of their state enterprises into the overall fiscal management of their countries. 

Links to all the workshop presentations can be found at www.cartac.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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