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December 02, 2013

Is There a “New Consensus” on PFM Reform?

Posted by Richard Allen

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The Overseas Development Institute’s annual CAPE Conference (the eighth in the series) on Budgeting in the Real World took place in London from November 13–14, 2013. The Conference attracted an impressive group of 110 national and international public servants, consultants and academics who work on budget institutions. For many practitioners, CAPE is the definitive PFM event of the year. The keynote speech, which was featured in a recent blog post, was given by Antoinette Sayeh, Director of the IMF’s Africa Department. Other notable presentations were made by Matt Andrews of the Harvard Kennedy School, and Allen Schick of the Brookings Institution and University of Maryland.

The Conference included sessions on the form and functionality of budget systems, what constitutes a capable ministry of finance, how reform can deliver change in the budget process, and how improved budget systems impact on development outcomes. Much of this is familiar ground and there was a sense of déjà vu in some of the presentations. One participant asked rhetorically why there were no feedback loops in our profession, why the same messages kept on being repeated from one year to the next, and why PFM practitioners appeared to learn so little and did not change their attitudes or behavior. Nevertheless, while the agenda had a familiar look on the surface, there were encouraging signs that an important if uncomfortable truth about the nature of budget reform is beginning to sink in to the collective mind of the PFM community. Indeed, the Conference may prove to be a watershed in the development of thinking on PFM reform, though much work remains to be done to flesh out the details of the new approach—an emerging “New PFM Consensus”—and put it into practice.

The uncomfortable truth to my mind is that the old consensus on budget reform (stemming from the 1990s), based broadly on the idea that developing countries should follow the approach to reform followed in advanced countries, has proved largely unsuccessful. According to the World Bank’s CPIA ratings, PFM systems in developing countries hardly increased during the last ten years. PEFA scores generally paint a similar disappointing picture. African countries include many notable examples of this failed approach and it was encouraging that the Director of the IMF’s Africa region confronted this challenge directly in her speech.

The main features of a new approach to building budget institutions can be found in recent writings by Matt Andrews, Allen Schick and others. What would a well-defined PFM reform strategy look like under the “New PFM Consensus”? Antoinette Saheh nicely pulled together the main elements in addressing the Conference.

First, budget institutions cannot be changed like computer software systems.  Many years and in some cases many decades are required to implement substantive and sustainable changes. The experience of advanced countries demonstrates this simple truth—Rome was not built in a day, nor was the Australian, British or French system of PFM. Accounting reforms now being discussed in developing countries were being introduced in some advanced countries more than 100 years ago. One of Ms. Sayeh’s key messages, a hard one for many donors who like to package reforms into large projects and then churn out the financing, was to “be realistic about the pace of reform”. 

Second, political economy issues, together with the history and culture of a country, are now recognized as enormously important factors in determining the success of a reform strategy. Strong PFM systems are not created out of weak institutions. These institutional issues represent the informal or “soft” side of PFM—the unseen part of Matt Andrews’ iceberg that is below the waterline—but are no less important. Ms. Sayeh noted that changing laws consistent with what a “good” budget should look like is appealing “to the executive boards of the Bank and IMF, but changing institutions is a much longer and more tedious task”. In addition to country-specific political and institutional constraints being taken into account, reforms have to be well tailored to the country and genuinely owned by national governments. The role of donors needs to be critically rethought so that they become the facilitators not the well-intentioned but misguided leaders of the reform process.

Third, prioritization and sequencing is essential for the success of any reform strategy. Cutting-edge concepts such as program budgeting, MTBFs, and accrual budgeting are often premature if the basic elements of a sound budget system are not in place. People may have different ideas of “basics” but the suggestion of some participants that it would never be possible to reach agreement on the components of such a list seems greatly exaggerated. Ms. Sayeh’s priorities would include well-functioning input budgeting and accounting, efficient cash management (and a treasury single account), comprehensive and reliable internal controls that avoid arrears and a robust (and independent) system of external audit. To these items one might add a reliable and transparent system of financial reporting, together with a budget preparation process that generates a credible annual budget and spending ceilings that are consistent with a country’s fiscal policy and targets.       

Fourth, capacity constraints in the public administration of low-income countries play an important role. Strengthening capacity is not about training alone. Capability is a wider concept embracing the idea that entities such as finance ministries need to utilize all their resources (finance, personnel and IT systems) in an efficient and effective way, as well as paying attention to the importance of strong internal communications and coordination with external partners in the budget process.

Matt Andrews added another important idea, namely that reformers should start from problems not ideas of best practice. In addition, indeed feedback lops are missing so that reformers and TA providers don’t learn from the past, or even draw on experience. How do we improve the functionality of budget institutions, and make the PFM reform process more successful? Andrews proposed two models—the blueprint (BP) approach, drawing from some model of good practice, and the learning approach (PDIA—“problem-driven, iterative adaptive”, as Andrews calls it) in which reform is approached as a series of steps, or sequences. Andrews has been testing empirically what path in practice is followed in different countries. His preliminary results suggest that successful change is often a mixture of BP and PDIA. In some successful reforms, little steps were taken up front to test out ideas and responses before a formal project process was launched. Most institutions develop out of a process of “bricolage”—a hybrid approach—picking out elements of best practice that are relevant and adapting them to the local context and culture.

Allen Schick’s presentation complemented that of Matt Andrews. Reform strategies developed so far have been based on a rational approach that defines what is logical, what makes sense. The focus is on defining a “good” process (taking as a model what is done in advanced countries), on the assumption that developing countries will readily apply or adapt these advanced practices. This process feeds off “rose-tinted success stories” and takes insufficient account of failures. Actual experience is largely ignored, which explains why donors go on injecting large amounts of funding for projects such as IFMIS developments covering all of government that have not succeeded in the past.

If the elements of an emerging consensus are fairly clear, and increasingly recognized, the ways of implementing it are less so. It can be hard to convince both recipient countries and donors to change their ways when their incentive structures point in the opposite direction. Ministers of finance would prefer to work on gleaming new multi-annual results-oriented budgeting systems even though none of the preconditions for making such systems effective are in place. Donors want to measure outputs and outcomes in neatly delineated logframes (a methodology developed by engineers for building bridges—is engineering really comparable to PFM!?). Nevertheless, it is important for reformers to find a way around these constraints. According to one participant “Implementing the consensus will require a pretty drastic re-organization and re-tooling on the part of development agencies.” One of the key missing pieces in the research and policy agenda involves looking at the political economy of donor reforms and at internal incentives within donor agencies. It is also vital that institutional analysis be integrated into the work of technical assistance work so that the advice given on specific solutions to problems, or the overall design of a PFM reform strategy, takes account of institutional conditions and the experience of countries in implementing PFM solutions in the past.

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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