GAO Explains It All: Towards Enhanced Understanding of U.S .Government Financial Report

Posted by Abdul Khan

Making sense of the finances of what the U.S. Government Accountability Office (GAO), without undue modesty, refers to as the “the most diverse, most complex, and arguably the most important entity on earth” is not meant to be easy. However, this is precisely what the GAO, the so-called congressional watchdog, has set out to do through its publication Understanding the Primary Components of the Annual Financial Report of the United States Government.[1] Written in non-technical language, this guide to the U.S. government financial report should go a long way to help citizens and other interested parties achieve a broad understanding of the federal government’s finances.

UNICEF Visits FAD to Discuss Collaboration and Best Practices in PFM and Expenditure Management

Posted by Mario Pessoa and Duncan Last.

A team from UNICEF spent a day with the Fiscal Affairs Department (FAD) of the IMF on October 8, 2009 to learn about FAD’s work in expenditure policy and public financial management and to discuss possible forms of collaboration.

Evaluating PFM Performance at the Sub-National Level

Posted by Franck Bessette

Located in Northern India, Himachal Pradesh (HP) is a small mountainous state, with a population of 6.6 millions, 90 percent of whom reside in rural areas. The government of HP recently decided to publish a report evaluating its PFM performance according to the PEFA Framework. The report was produced with the help of the World Bank and is available here. There is currently a growing interest in sub-national PFM systems, given the increasing importance of sub-national government in resource allocation and service provision. The PEFA Framework, though initially designed to be used at central government level, is sometimes used to evaluate PFM performance at sub-national level. There are various modalities and circumstances in which the Framework has been used so far at this level:

A. The PEFA framework has been used at the state level within federal countries. This is the case for Nigeria, Brazil (Caera, Distrito Federal, Minas Gerais, Pernambuco and four more on-going assessments), Pakistan (Sindh, Punjab, North-West-Frontier-Province), India (Maharashtra, HP) and other countries like Argentina which are following the same path. An interesting and recent example is the Canton of Lucerne’s “analysis of the cantonal financial management using the PEFA Framework” conducted in Switzerland by the Universities of Applied Sciences and Arts of Lucerne and Zurich. The report is not yet public but seems to have triggered a number of interesting discussions among Lucerne Canton’s authorities. This blog will give an account of the assessment as soon as it is publicly available.

Fiscal Responsibility Laws – More Popular Than Ever Thanks to the Crisis

Posted by Holger van Eden

Fiscal Responsibility Laws (FRL) are presently being developed or considered in countries as diverse as Mongolia, Jamaica, Romania, Ghana, and The Maldives. In Germany, while the country already functions within the Maastricht framework – which has been put in a more accommodating stance in the present crisis – a return to a more restrictive fiscal policy path has recently been enshrined into the Constitution. Many larger emerging market and developing economies –Brazil, India, Argentina, Nigeria –  have introduced some form of fiscal responsibility legislation in the past years. Some of these laws focus on a concrete set of numerical fiscal policy rules, i.e. a maximum deficit, debt or expenditure growth rule, others are more focused on enhancing fiscal transparency and accountability.

The repeated fiscal problems that these countries have faced, are no doubt a major contributor to these legislative initiatives. The present financial crisis seems also to have stimulated the interest in FRLs considerably. Perhaps because countries with fiscal responsibility laws seem to have fared better, and kept their deficits better in check than the countries without such laws. At present the deficits in the Eurozone are about half the size of those in the Anglo-Saxon world. Further research on this hypothesis is needed, and in the past evidence has been inconclusive,[1] but quite a few countries seem to have already made the decision that FRLs are helpful in supporting fiscal discipline.

The argument against fiscal responsibility laws has always been that a fiscal framework doesn’t substitute for “enlightened”, or first-best fiscal policy. Fiscal frameworks are always somewhat crude and 2nd best because: (a) they are developed to withstand numerous types of shocks to the economy, and (b) they need to be simple and straightforward to be politically effective. Most FRLs would not guide fiscal policy as well as a “first best” policy makers. Nominal deficit rules, for example, ignore the desired counter-cyclicality of fiscal policy. For these reasons, economists have often disliked FRLs. In real life, however, fiscal frameworks usually do not have to compete against the best fiscal policy or “enlightened” policy makers. The reality of fiscal policy is that there is a strong political and institutional bias for unduly loose fiscal policy. Thus fiscal responsibility laws have to compete, against 3rd or fourth best competitors, and compared to  these, fiscal responsibility laws can be quite successful.

Emerging practice reveals a number of rules-of thumb for developing FRLs.

Does the German Welfare State need another Fitness Program?

Posted by Christian Schiller, Blogger Emeritus

Despite seen by many as  still a tad overweight, the German welfare state has actually performed well  in recent years, reflecting a major reform effort. The present crisis is hiding those results, but further “weight loss” might be beneficial, and is certainly on the political agenda.

The German Government has just published a new Social Spending Report (“Sozialbericht”). The report is a comprehensive and detailed overview of the Government’s activities with regard to its social policy objectives. It is a 300 pages plus document with a wealth of information on social policies and spending in Germany. The last Social Spending Report dates back to 2006. You can find a German version of the new report on the web site of the German Ministry of Labor and Social Affairs.

Social spending accounts for roughly 1/3 of GDP in Germany. The ratio of social spending of the government and GDP is a good indicator of the redistributional efforts of a government via the expenditure side of the budget. Many OECD countries are at the same high level as Germany or even higher, such as neighboring France and the Scandinavian countries. By contrast, the United States, as is well known, has a much lower ratio. Here, government social spending accounts for only roughly 1/5 of GDP.

Nicaragua: Progress in Public Financial Management and the Road Ahead

Posted by Israel Fainboim Yaker

 Despite capacity constraints, including a limited number of staff fully familiar with modern financial management techniques, the Ministry of Finance (MoF) of Nicaragua has continued since 2005 to roll out wide-ranging public financial management (PFM) reforms. These reforms have resulted in a gradual improvement of the country’s PFM practices. The existence of a number of “champions” for reform within the MoF, including the Minister himself. and other high level officials, mostly explains this progress. Even though important challenges remain, if political reform ownership is sustained, and training widely provided, additional significant improvements are to be expected in the next few years.

A positive sign of the authorities’ commitment to carry on with these reforms is the preparation of a medium-term plan (2008-12) for strengthening PFM (Plan of Modernization of the Financial Administration System; in Spanish Plan de Modernizacion del Sistema de Administracion Financiera-PMSAF). Even though adopting such a plan was part of the IMF’s Poverty Reduction and Growth Facility (PRGF) conditionality[1] and a consultant was involved in its drafting, the MoF took a leadership role in the Plan’s preparation with a very active participation from all the MoF Directorates. As a result, ownership of the Plan is strong. The authorities have looked for financial support from multilateral institutions for funding the implementation of the plan; they have now received positive responses from the World Bank, the IADB and other donors. An agreement with these institutions could soon be reached to fund most of the Plan’s activities.

Consolidation of Central Bank Operations into the Government's Financial Statements: Practice in Selected Countries

Posted by Ian Lienert.

During the current crisis of the financial system, central banks have not only been playing their traditional role of providing liquidity to banks, but some have been playing non-conventional roles, including: exchanging liquid assets for illiquid assets such as mortgage-backed securities, accepting unusual or no collateral, or directly purchasing and guaranteeing bank issued debt. These activities carry considerable risks. Will these risks eventually be a cost to government? 

If central banks carry out quasi-fiscal activities, would it not make sense to consolidate the balance sheets of the central bank with that of the government? Such consolidation would make it easier to ascertain which institution -- the central bank or the government -- is bearing the quasi-fiscal risks of the sovereign. There is often reluctance to consolidate, given central bank independence. However, a few countries, mainly in Latin America, but also Australia and New Zealand, buck the usual practice and consolidate central bank balances into fiscal accounts.

Managing Crisis-related Fiscal Risks Borne by Central Banks: the Case of the United States

Posted by Ian Lienert.

The consolidated balance sheet of the United States Federal Reserve Banks (“the Fed”) more than doubled during 2008. The Fed’s response to the financial market crisis has transformed it from a key, though small, money market participant into the largest actor and fundamental linchpin of that market and, indirectly, of the world financial system.

What are the fiscal risks and costs of this balance sheet expansion? Could the Fed possibly make a loss? By bailing out financial institutions, including those with “toxic” assets, has the Fed taken on risks that eventually will need to be paid for from budgetary resources? Has the Fed’s role become confused with that of the U.S. Treasury, or vice versa? What exit strategy needs to be developed? A new IMF working paper examines relevant issues.

A Computerized Pacific

Posted by Suhas Joshi.

Three countries, the Cook Islands, Tuvalu, and Vanuatu, requested IMF Pacific technical assistance center (PFTAC) to assess, analyze and audit their existing financial management information systems (FMISs). In all three countries, the host nation governments were operating relatively sophisticated off-the-shelf financial software products which had been in successful operation for over 5 years. The purpose of the mission, conducted by PFM regional advisor Suhas Joshi and a consultant, John Moore, was to determine what enhancements or changes might be needed in order to develop and implement an Integrated Financial Management Information System in each of these countries.

Ministries of Finance in Small, Developing Economies – Their Role and Structure

Posted by Tej Prakash.

The Ministry of Finance (MOF)[1] has been the keeper of the public purse in nearly all countries almost as long as nation states have existed. Its role and mandate has evolved over time reflecting requirements of political and economic management. This article looks at the core roles of MOFs, specifically in small developing economies, and asks the question how best can they perform this role given the constraints faced by these economies

While there is no standard model for the organizational structure of a MOF, it is generally agreed that there is a set of core tasks that any MOF should fulfill. This includes (1) budget formulation and implementation, (2) collection, custody, management, accounting, control and disbursement of public monies, (3) management of public assets and liabilities, (4) revenue and expenditure policy and management, and (5) design and implementation of macroeconomic and fiscal policies of  government. MOFs have also added many other tasks such as donor coordination, oversight of domestic financial markets (often by establishing regulatory bodies) [2], managing fiscal risks arising from various sources, financial oversight of public enterprises, and relations with international organizations such as the World Bank and the IMF. It also often takes a lead role in designing and implementing the government’s overall economic policies. The global financial crisis will cause governments in many countries to review the roles and responsibilities of the finance ministry, and how these are carried out.

Government Actions in Response to the Financial Crisis: An Emphasis on Transparency and Accountability

Posted by Abdul Khan

“Politicians will not be forgiven by future generations if liabilities and obligations incurred today are hidden from them today, but paid for tomorrow,” cautioned Mike Hathorn, the Chair of the International Public Sector Accounting Standards Board (IPSASB). Speaking at a seminar organized by the Fiscal Affairs Department of the IMF on May 22, 2009, he indicated that the IPSASB believes that transparency and accountability are crucial to explain to citizens the range of actions governments are taking in response to the financial crisis. In a frank assessment of the current state of affairs in public sector financial reporting, he said that, in his opinion, “most governments do not have the financial reports necessary to communicate to citizens in a transparent way….”

US Government Annual Financial Report

Posted by Eivind Tandberg

Comprehensive, transparent and reliable financial reporting is a cornerstone of good public financial management. The US Government financial report for fiscal year 2008 (October 2007 - September 2008) was released in December 2008. The report provides many examples of good international practices. However, the accompanying audit report from the US Comptroller General, which includes negative opinions for key government sectors, illustrates that it may be difficult to meet all requirements in this area, even for an advanced economy government with significant financial management resources.

Are Governments Obliged to Bail Out their Central Banks?

Posted by Ian Lienert

With a worldwide financial crisis in full swing, central banks are being called upon to provide support to an ailing financial sector. In some cases, central bank credit is being provided directly to financial institutions. What are the risks that the central bank itself will not be able to support the financial cost of these operations? Will the government have to step in and bail out its central bank? Is there any chance that the central bank will become bankrupt?

An IMF Working Paper published in February 2008 examines government legal obligations to recapitalize central banks when their balance sheets became seriously impaired. The paper indicates that even in cases where the government is nominally responsible for maintaining the financial strength of the central bank, it may do so only in a cosmetic fashion. In a number of countries, governments have not provided central banks with financial support on a timely basis, leaving them excessively reliant on seignorage to finance their operations and/or forcing them to abandon monetary policy objectives.

IMF Conference on “Fiscal Risks: Sources, Disclosure, and Management” (Paris, October 28–29, 2008)

Posted by Ricardo Velloso

The IMF’s Fiscal Affairs Department and the Offices in Europe organized a conference on “Fiscal Risks: Sources, Disclosure, and Management,” at the IMF’s Paris Office on October 28 and 29, 2008. The conference was attended by high-level officials from ministries of finance representing twenty European countries as well as representatives from international institutions, rating agencies, think tanks, and academia. The opening address was delivered by Mr. Saleh M. Nsouli, Director of the Offices in Europe, followed by former FAD Director, Mrs. Teresa Ter-Minassian's keynote speech.

Norway’s Government Pension Fund–Global

Posted by Thomas Ekeli

A recent post by Mauricio Villafuerte and Jon Shields described newly established guidelines for sovereign wealth funds (SWFs). One of the best known SWFs is the Norwegian Government Pension Fund–Global, formerly known as the Government Petroleum Fund. The Petroleum Fund was established in 1990 as a fiscal policy tool to support a long-term management of the petroleum revenues. Renaming the Fund the Government Pension Fund–Global in 2006 was part of a broader pension reform, highlighting also the Fund’s role in facilitating government savings necessary to meet the rapid rise in public pension expenditures in the coming years. However, the Fund is not earmarked for pension expenditures.

Strengthening Political Economy Analysis to Address the Resource Curse

Posted by Teresa Dabán

photo by Ellie Sandercock (CC)

The chances of resource-rich countries to avoid the resource curse hinge on the existence of sound institutions. While several initiatives have emerged to promote the transparency and sound management of natural resource revenues (NRR)— including IMF’s Resource Revenue Transparency Guide and the EITI, there is still a need to develop an overall framework for the assessment of NRR-related political economy and governance challenges. Against this background, the Bank has launched a project to develop a framework to assess and promote good governance in each of the stages of the “value chain” of NRR, from their extraction to their use, and incorporate political economy issues in the dialogue with resource-rich client countries. To refine such a framework, and concretize the timeframe for its implementation, the Bank held a workshop on October 16, 2008. The workshop revealed that the adoption of the usually proposed mechanisms to mitigate NRR-related governance challenges raises complex issues.

The Santiago Principles: Generally Accepted Principles and Practices for SWFs

Posted by Mauricio Villafuerte and Jon Shields

Do you still wake up in the middle of the night, worried that your country is about to be gobbled up by a rampaging, politically-inspired Sovereign Wealth Fund (SWF) from the other end of the world? Or do you dream that the current financial crisis is going to be solved by massive, daredevil rescues by charitable white knights from Sovereign Wealth Funds? In either case, maybe it’s time to rest peaceably again. Because 23 countries with SWFs agreed, in October 2008, on a set of “generally accepted principles and practices” (GAPP) that would commit them to operate purely on commercial principles. And, as part of this commitment, SWFs abiding by the GAPP would make their objectives, governance structures, and investment practices visible to all.

Budget Amendment Powers Being Reexamined in South Africa

Posted by Ian Lienert

The South African Parliament currently votes on budget appropriations in their entirety. It could, in principle, reject an allocation to a particular department. However, the outright rejection of a departmental allocation would necessarily be interpreted as a vote of no confidence in the government. With a view to changing this situation, in August 2008 the South African Parliament received submissions on the new draft Bill that would provide Parliament with power to amend the executive’s proposed budget.

In an article recently featured in the International Budget Partnership’s 45, Len Verwey of the Institute for Democracy in South Africa (IDASA) highlights pros and cons of the draft legislation. Submissions by other organizations made similar points to those summarized below. For example, the National Treasury emphasized its desire to support Parliament in this process, as well as the need for a “fiscal responsibility” clause that would establish the parameters for any budget amendments by parliament.

How Effective are Aid Agencies?

By Tej Prakash

During the past decades, the total amount of external aid going to developing countries has increased greatly, and a great deal more has been committed in the coming years as a part of the Millennium Development Goals. The effectiveness of this aid depends upon many factors: the absorptive capacity in the recipient countries, their governance and managerial systems, and the effectiveness of their institutional framework. There is much literature on this subject. However, there is another side to the story that has not been explored as much: how much of the blame or credit goes to the aid giving agencies; can any lessons be learnt from the experience so far, both from the policy and the practice of giving aid.

Two related papers, one by Easterly and Pfutze (Easterly, William, and Tobias Pfutze, 2008, “Where Does the Money Go? Best and Worst Practices in Foreign Aid,” Journal of Economic Perspective, Vol. 22, Number 2 (Spring), pp. 29—52)and the other by Easterly (Easterly, William, 2007, “Improving Aid Agencies,” Economic Policy, UK, pp. 635—678), explore this issue and examine the track record of aid agencies in the past decades, both in establishing aid policy and in the actual flow of funds. Based on the past experience of successful and not-so-successful aid, they ask three questions: what is an ideal aid agency, what are best aid giving practices, and have the aid agencies followed the best practices.

Poland Pushes Ahead With Performance Budgeting

By Marc Robinson

Poland is on the path towards performance budgeting (PB). This was the key message to emerge from a conference on Performance Budgeting—Prospects for Poland which was held by the Polish Ministry of Finance in Krakow on 2-3 October. The conference was attended by hundred of delegates from Polish ministries. They were joined by international guests who outlined developments in France, the USA, Canada and Denmark. I represented the IMF, and made a presentation (Download M.Robinson.pdf) on the relationship between PB, medium-term budgeting and strategic planning.

Quality of Development Aid - Accra Meeting 2008 – What are the Issues and How to Get There.

Posted by Mario Pessoa

The Facts

The Accra Agenda for Action

The Third High-Level Forum on Aid Effectiveness has just concluded its works in Accra, Ghana. More than 1,500 delegates from 85 countries reached an agreement denominated the "Accra Agenda for Action" (Download AAA.pdf ) on how to make foreign aid to developing countries more effective. The key elements agreed in the Agenda are:

Predictability – donors will provide 3-5 year forward information on their planned aid to partner countries;

Country systems – partner country systems will be used to deliver aid as the first option, rather than donor systems;

Conditionality – donors will switch from reliance on prescriptive conditions about how and when aid money is spent to conditions based on the developing country’s own development objectives; and

Untying – donors will relax restrictions that prevent developing countries from buying the goods and services they need from whomever and wherever they can get the best quality at the lowest price.

PEFA Training in Perspective

Posted by Franck Bessette, PEFA Secretariat

The PEFA Monitoring Report 2007 extensively documented a substantial increase in the overall quality of the PEFA performance reports. This trend has continued, contributing to a wide recognition of the PEFA Framework as the core assessment tool adopted in more than 90 countries for PFM performance measurement and reform monitoring.

The partners of the program were convinced from the start that only high quality assessments of PFM performance could lay the basis for a pool of information on PFM reform that would be shared by the donor community and the partner governments. Training has been considered, since the launch of the PEFA Framework in June 2005, as one of the main pillars of this quest for quality, along with a solid mechanism for report reviews, involving all stakeholders and the PEFA Secretariat. For this reason, a training strategy was prepared by the program and approved by the PEFA Steering Committee. This post would like to give a short overview of this PEFA training activity and some insight into its near future.

Another Warm Welcome to Daniel Kaufmann Who Does It Again

Posted by Michel Lazare

In a March 11, 2008 post titled "Warm Welcome to the Kaufmann Governance Post", we announced the launch of Daniel Kaufmann's personal blog on governance issue.

Although this personal blog is still active, Dani Kaufmann has now created a World Bank blog on governance : "Governance Matters" which defines itself as "A Blog about Governance and Development for All."

The key difference between the two is that, while the Kaufmann Governance Post (KGP) was, initially at least, a one man show, Governance Matters is more an institutional and team approach. A number of Bank's experts on governance issues have already posted at least one article on this post. This difference should however not be overestimated as the KGP blog has now welcomed a number of guest bloggers and as Dani Kaufmann appears to be the key writer of the new Governance Matters.  Actually, convergence between the two blogs is such that most of Dani Kaufmann's latest posts have been posted on both blogs.

PFM blog likes the new Governance Matters as much as it liked the initial KGP. We wish long life and full success to both.

Extending Research on Corruption to Specific Features of PFM Systems

Posted by Francois Michel

If one wanted to summarize briefly how research on corruption has evolved in recent years, one could say that it has made progress in four different areas:

• The search for determinants of corruption and its transmission mechanism to growth and the exploration of linkages between corruption and other economic—GDP per capita, capital flows, aid, income distribution, inflation, etc.—or political variables. This is often achieved through panel data analyses;
• The improvement of transparency indexes—see Daniel Kaufmann and Aart Kraay’s recent article on "Governance Indicators: Where Are We, Where Should We Be Going?";
• Efforts to leverage insights from the corruption literature into sectoral, country-specific reform plans, and that have formed the core of the World Bank’s strategy in recent years. As the Bank’s recent flagship publication on corruption makes clear, public financial management reform are instrumental in tackling corruption;
• New microeconomic models explaining how corruption can originate in auctions of procurement contracts—e.g. on allowing ex-post collusion opportunities between the bureaucrat and one bidder.

Canada Strengthening Strategic Reviews of Spending

Posted by Bill Dorotinsky, World Bank

In a July 21, 2008, post, Ian Lienert blogged about Canada's recent establishment of a Parliamentary Budget Office. We'll, there are broader reforms of Canadian public financial management (PFM) underway. PFM Blog has run across a February 2008 presentation by Ivan Blake, Executive Director of Management Accountability with the Canadian Treasury Board Secretariat, on Management Reform in the Canadian Public Service. The presentation was delivered at the Tenth Annual Government Performance Summit 2008, held in Arlington, Virginia. PFM Blog has asked the Treasury Board Secretariat to itself prepare a blog on the reform, but pending more detail, we thought it useful to bring this interesting development to our readers attention.

The Good, the Bad and the Ugly of MTEFs?

Posted by Ismail Manik, consultant, World Bank Institute

An interesting recent working paper by Clay G. Wescott, of the Asia Pacific Governance Institute, has a good review of country experiences with MTEF implementations. The working paper is a background paper to the World Bank’s Independent Evaluation Group’s report ‘Public Sector Reform: What Works and Why?’ 

Norway's public financial management system

-- a PEFA-based assessment

Posted by Bill Dorotinsky, World Bank

In previous posts, we've blogged about the Public Expenditure and Financial Accountability (PEFA) Performance Measurement Framework, launched in 2005 and applied in over 80 developing countries (see our April 21 and August 4, 2008 posts).

Norway has supported the development of this framework to assess the performance of a country’s public financial management system. This PEFA assessment of the Norwegian public financial management is the first time the framework has been applied in a high income OECD country. The aim of the assessment was to get further experience with the framework by using it in another country context. A special section on management of Norwegian petroleum revenue is included in the report.

IMF to prepare Guidelines for Fiscal Risk Disclosure and Management

Posted by Aliona Cebotari

On June 16, 2008, the Executive Board of the International Monetary Fund (IMF) held a seminar on “Fiscal Risks—Sources, Disclosure, and Management”. The topic has gained importance in many IMF member countries, as interest in promoting fiscal sustainability and transparency grows. The staff paper on which the discussion was based reviews the experience with fiscal risks in a wide range of countries and provides practical advice on risk identification, disclosure and management. This includes a set of Guidelines for Fiscal Risk Disclosure and Management, and a possible Statement of Fiscal Risks.

Keeping-Up with Governance Issues -- World Bank Institute Governance Newsletter

Posted by Bill Dorotinsky

Stepping-back from core public financial management issues, there are frequently other public administration or 'governance' issues that emerge when trying to implement public financial management reforms. Civil service, parliamentary roles and responsibilities, and administrative reforms fit together to either enable or in some cases prevent PFM reforms.

For those interested in the broader context of governance, a useful resource is the World Bank Institutes monthly Governance and Anti-Corruption Newsletter, featuring recent, ongoing and upcoming events, publications and research, data and capacity-building issues, links, etc.

For example

• the recent May 2008 newsletter noted an upcoming Parliamentary Indicators and Benchmarks - International Seminar and Workshop at Griffith University, Brisbane, Australia (September 21 - 23, 2008). The workshop "will bring together key organizations working to develop parliamentary indicators and benchmarks with the aim of developing a generally accepted framework to measure parliamentary performance." This is an exciting development, building on the other indicator work we've blogged about (see the April 21, 2008 PEFA post).
• the June 2008 newsletter noted a recent event on Building Transparency and Reducing Corruption Related to Defense Establishments, Geneva, Switzerland (May 5-7, 2008). The workshop is part of a new, developing body of knowledge and practice that seeks to promote best practice and address the negative problems caused by corruption in defense establishments. This event was hosted by Geneva Centre for Security Policy (GCSP), the Geneva Centre for Democratic Control of Armed Forces (DCAF) and Transparency International UK (TI-UK).

Events include training for civil society and the media in budget monitoring, support to establish parliamentary budget offices, training for parliamentarians in the financial oversight roles, and many other relevant topics.

Interested readers can subscribe to the newsletter at the web site link above.

World Bank Report on Public Sector Reforms - What works and Why?

Posted by Sanjay Vani

On July 17, 2008, the World Bank held a seminar to discuss a recent World Bank  Independent Evaluation Group (IEG) Report on Public Sector Reforms - What works and Why? It attracted about 50 participants, including from Peru, Columbia, and Ghana.

The IEG is an independent unit within the World Bank; it reports directly to the Bank's Board of Executive Directors. IEG assesses what works, and what does not; how a borrower plans to run and maintain a project; and the lasting contribution of the Bank to a country's overall development. The goals of evaluation are to learn from experience, to provide an objective basis for assessing the results of the Bank's work, and to provide accountability in the achievement of its objectives. It also improves Bank work by identifying and disseminating the lessons learned from experience and by framing recommendations drawn from evaluation findings

Implicit Contingent Liabilities May Be Costly for the United States—New CBO study

Posted by Ian Lienert

In many countries, the true financial position of the public sector is obscured when there are off-balance sheet items that pose a threat to fiscal sustainability. Although there is increasing awareness of the potential budgetary consequences of contingent liabilities, “hidden deficits” have reared their ugly heads in a number of countries, resulting in unexpected government expenditure. Contingent liabilities can be explicit or implicit. Whereas the former are based on contracts, laws or clear policy commitments, the latter are political or moral obligations that arise from the expectation that the government will step in when the cost of not intervening is considered to be unacceptably high. The evidence suggests that implicit contingent liabilities can be particularly costly for government budgets.

In the United States, the mortgage-related financial crisis has activated the implicit contingent liabilities of the federal government. In particular, the implicit guarantee to bail out Government-Sponsored Enterprises (GSEs) involved in mortgage financing has recently been triggered. Although privately-owned, the U.S. federal government has proposed to provide temporary authority to the Secretary of the Treasury to purchase any amount of obligations and other securities issued by three GSEs, two of which are commonly known as Fanny Mae and Freddie Mac. The Congressional Budget Office (CBO) has estimated that the probability-weighted cost of the bail-out could be $25 billion in the next two years. The uncertainty in the estimates is high: the CBO study indicates that under optimistic assumptions there may be no cost to the federal budget; at the other extreme, there is a 5 percent chance that the cost could exceed $100 billion.

Canada creates a Parliamentary Budget Office

Posted by Ian Lienert

In countries where the legislature is strongly independent from the executive, a strong case can be made for establishing an independent Budget Office, as it can assist the legislature to scrutinize the draft annual budget proposed by the executive and provide analytical support to the legislature for alternative budget proposals. In countries where parliament’s budgetary powers are limited, there is less incentive for members of parliament to scrutinize the governments’ draft budget proposals, since the “alternative budget” function is less, or possibly non-existent (in a few countries, parliament can make no changes in the draft budget without the authorization of the government). Even in these countries, parliament can still benefit from the existence of an independent office that provides analytical support for clarifying to parliamentarians the complexities embodied in a government’s draft budget.

With this in mind, legislation was recently adopted in Canada to create a Parliamentary Budget Officer, whose main mandates are to provide objective analysis to parliament on the government’s macro-fiscal estimates and analytical support on budget-related issues to members of parliament and certain parliamentary committees. Staffing of the new office is currently taking placing.

Empirics of Governance -- World Bank Seminar

Posted by Bill Dorotinsky

On May 1 & 2, 2008, the World Bank hosted a conference on the Empirics of Governance. Governance is a popular topic, and the seminar took stock of the theoretical underpinnings of governance research and measurement, practical experience in measuring aspects of governance, and good practices and lessons in developing and applying indicators.

The conference agenda can be downloaded here [Download Agenda-GovernanceSeminar.doc ].

The IMF FAD (Bill Dorotinsky) presented in Session II on the Public Expenditure and Financial Accountability (PEFA) indicators (see our April 21, 2008 post). The presentation can be downloaded here [Download Dorotinsky.ppt ]

Other sessions of particular note for PFM aficionados were

• Session III on Corruption measures, and
• Session VI on Anti-corruption, Budget and Public Financial Management.

The World Bank recently made videos of the seminar available via its B-Span network.

Republic of Korea Merges its Budget and Finance Ministries

Posted by Ian Lienert

There are a variety of ways in which countries organize ministries for performing the planning, budgeting and public financial management functions. Many countries have a single “ministry of finance” covering all functions. The Republic of Korea (RoK) and Brazil were amongst the few countries that had a Ministry of Planning and Budget, separate from the Ministry of Finance. This changed in the Republic of Korea in March 2008 when the new government decided to merge the two ministries into a single Ministry of Strategy and Finance.

Going hybrid! A practical approach to setting government accounting standards?

Posted by Holger van Eden

In the Netherlands, but also in a number of other OECD countries, the debate on the usefulness of accrual accounting standards, both for financial reporting and budgeting, has led to a hybrid set of accounting standards being used in government. This hybrid approach has been questioned by the Dutch Supreme Audit Office, and is generally not appreciated by accounting purists. However, the hybrid approach, in which part of government works under accrual standards, and part remains under cash, may be a practical way to reap some of the benefits of accrual reporting and budgeting, while not incurring the substantial costs of implementing accrual accounting standards government-wide. Accountability and transparency at the national level may also be better served by a straightforward cash-based approach.

Increase in Food and Fuel Prices---Macroeconomic Impact and Policy Responses

Posted by Christian Schiller

In my PFM Blog posting of June 18, 2008, I reported that the IMF was working on the impact of higher oil and food prices. Now the IMF has released two comprehensive studies and presented them to the public on July 1, 2008 in Washington D.C. The presentation was introduced by the IMF’s MD, Dominique Strauss-Kahn; five IMF senior staff members summarized the work done by the IMF staff and answered questions.

One study is a broad assessment of the impact of the surge in food and fuel prices on the balance of payments, budgets, prices and poverty in a large sample of  (roughly 150) countries. The other study is a country-by-country assessment of the implications of the price shocks for the balance of payments in sub-Saharan Africa. Both studies are available at the IMF’s web site (click links above).

Performance Budgeting Reforms Gather Pace in Latin America

Posted by Marc Robinson

Performance budgeting reforms are being pursued with impressive vigour in Latin America today. This was made very clear to the thousand or so participants from 41 countries who attended an International Conference on Performance Budgeting held Mexico City on June 9-10, 2008. The conference heard in detail about developments in Mexico, Colombia, Brazil, as well as in various OECD countries outside the region.

Bill Dorotinsky on Public Financial Management Reform -- Trends and Challenges (Video 3)

Posted by Michel Lazare

You liked Bill Dorotinsky's post of June 27 "Public Financial Management Reform -- Trends and Challenges"?

Well, you'll then love the video of this presentation delivered at the ICGFM meeting. Here is the third part of this YouTube video; parts 1 and 2 appear in other posts published today.

Bill Dorotinsky on Public Financial Management Reform -- Trends and Challenges ( Video 2)

Posted by Michel Lazare

You liked Bill Dorotinsky's post of June 27 "Public Financial Management Reform -- Trends and Challenges"?

Well, you'll then love the video of this presentation delivered at the ICGFM meeting. Here is the second part of this YouTube video; parts 1 and 3 appear in other posts published today.

Bill Dorotinsky on Public Financial Management Reform -- Trends and Challenges (Video 1)

Posted by Michel Lazare

You liked Bill Dorotinsky's post of June 27 "Public Financial Management Reform -- Trends and Challenges"?

Well, you'll then love the video of this presentation delivered at the ICGFM meeting. Here is the first part of this YouTube video; parts 2 and 3 appear in other posts published today.

Germany: Fiscal Reform Commission II presents report

Posted by Christian Schiller

My PFM Blog posting of February 29, 2008 reported on the reform of the intergovernmental system that is currently underway in Germany. It is a two-stage reform process. The first stage was completed in 2006.  Monday, June 23, 2008 was a milestone for the second stage, when the Federalism Reform Commission II presented its report to the public.

The Federalism Reform Commission II was constituted on March 8, 2007 and is co-chaired by Guenther Oettinger, the Minster President of Baden-Wuertemberg, one of the richer Laender, and a leading figure of the CDU, and Peter Struck, the chairman of the SPD group in the Bundestag, the German lower house. CDU and SPD form currently a Grand Coalition in Berlin.

Public Financial Management Reform -- Trends and Challenges

Posted by Bill Dorotinsky

On June 18, 2008, I spoke on Public Financial Management Reform: Trends at the the International Consortium on Government Financial Management (ICGFM) monthly speaker series in Washington, D.C.

I took the opportunity to share my personal views on current trends and challenges in public financial management (PFM) reform, drawing on my experience across the globe and multiple institutions. (As I noted, these are not the views of the IMF, or any other institutions with which I have been associated.)

The presentation covered three broad areas:

1. Common PFM reform recommendations, seen across all donors, consultants, etc.
2. Information on what reforms countries have been implementing in recent years
3. Challenges ahead for improving PFM

The PowerPoint can be downloaded here Download public_financial_reform_trends_icgfm_June_2008.ppt

The ICGFM Blog also posted a summary and video of the presentation on their Blog (CLICK HERE).

International Journal on Governmental Financial Management Available

Posted by Bill Dorotinsky

The latest issue of the International Journal on Governmental Financial Management (Volume VIII, No. 1, 2008) --- formerly known as the Public Funds Digest --- is now available. The Journal, sponsored by the International Consortium on Government Financial Management (ICGFM), is available for download in PDF format from the ICGFM website link above.

This issue has some interesting articles, covering a range of topics from anti-corruption to gap analysis on auditing standards. Specific articles include

• diagnostic tools for auditing and accounting, enabling gap analysis between national and international standards
• the Europe and Central Asian peer-assisted learning initiative in public expenditure management
• measuring and improving supreme audit institutions in developing countries
• two articles related to accrual accounting, one of which explains the 'German' cameral accounting model as an alternative to accrual accounting
• as well as articles on fighting corruption in Nigeria, Nigerian pension reform, and bureaucracy in Bangladesh.

A good collection of articles for public finance aficionados.

Mozambique’s Encouraging Progress on Fiscal Transparency

Posted by Teresa Dabán

In May 2008, the IMF published, on its external web site, a reassessment of Mozambique's fiscal transparency—i.e. a completely updated Report on the Observance of Standards and Codes- Fiscal Transparency Module ("fiscal ROSC"). The overall conclusion of the report is encouraging: although several weaknesses remain, Mozambique’s fiscal transparency has improved significantly since the first fiscal ROSC conducted in 2001. Aside from this positive result, Mozambique’s fiscal ROSC reassessment is of special interest and relevance. Why? Because (i) it has been one of the few fiscal ROSC reassessments conducted since the Fund’s fiscal ROSC was launched; (ii) it shows how the Fund’s technical assistance (TA), in close coordination with donors, contributed to improve fiscal transparency; (iii) it was conducted in close coordination with the PEFA Re-Assessment; and (iv) it provides guidance on how to strengthen transparency of future resource revenues.

Banking on Accountability?

Posted by Carlos Santiso, Sector Manager, Governance (AfDB)

"Banking on Accountability? Strengthening Budget Oversight and Public Sector Auditing in Emerging Economies," by Carlos Santiso in Public Budgeting and Finance, 26(2), pp.66-100, 2006.

In a relatively recent article (“Banking on Accountability? Strengthening Budget Oversight and Public Sector Auditing in Emerging Economies” Public Budgeting and Finance, 26(2), pp.66-100, 2006), Carlos Santiso reviews multilateral development banks’ support to parliaments and external audit agencies in Latin America. The analysis reveals a learning curve in multilateral assistance to budget oversight institutions, including in the choice of strategies and the combination of instruments. It underscores the importance of the underlying political economy context for strengthening checks and balances in the management of public finances.

MDBs have traditionally centered their attention on the modernization of financial management within the executive and the bureaucracy (finance ministries, central budget offices, central banks, and tax authorities). They nevertheless realize the limitations of an exclusive focus on the executive and the need to balance executive discretion with external accountability and, as a consequence, are increasingly supporting the infrastructure of accountability within the state - those institutions outside the executive branch of government and tasked with scrutinizing government and overseeing the budget.

Fiscal Reform.net -- Useful USAID Reference Site

Posted by Bill Dorotinsky

Always on the hunt for useful PFM reference material, PFM Blog has run across another useful site -- the USAID Fiscal Reform & Economic Governance Project web site. The site encompasses a wide range of PFM issues, including

• "Tax policy and revenue administration
• Budgeting and expenditure control
• Decentralization and inter-governmental finance
• Fiscal oversight and audit
• Public procurement
• Civil service reform
• Other issues related to government financial systems, e-government,
  and economic governance"

Contracts, Budgeting, and Transparency: Lessons from Municipal Budgets in the United States

Posted by François Michel

In a relatively recent survey of how five major US cities handle contracts in their budget (Public Budgeting & Finance Review, March 2006 - Vol. 26 Issue 1), Professor Irene Rubin from Northern Illinois University makes a convincing call for increasing contract reporting standards.

The survey’s results are a hard pill to swallow for budget savvy citizens or other interested taxpayers: even in municipalities with the most developed and transparent budgets, complex contracts remain practically unreadable in budget documents and are thus barely subject to any external scrutiny. This lack of transparency prevents any credible assessments of contract performance or comparison between in-house and external provision of public services. It also allows easy—and potentially manipulated—claims of costs savings by government officials. In response, Dr. Rubin recommends that each individual contract be systematically reported on an individual basis, with its scope, duration, cost, and performance requirements. Contract theory adepts would add that performance specifications should cover quantity, quality, cost and timeliness.

Managing Post-Natural Disaster Reconstruction Finance

-- World Bank Working Paper

Posted by Bill Dorotinsky

Recent PFM blog posts have focused on post-conflict public financial management (PFM) issues. The World Bank East Asia Region recently published a working paper on a somewhat similar topic, Managing post-disaster reconstruction finance, in January 2008. The paper examines eight post-disaster cases (Aceh-Indonesia, Yogyakarta-Indonesia, Sri Lanka, Maldives, Pakistan, Colombia, Grenada, and Honduras) and draws some general lessons for future events. Though the title indicates an emphasis on post-disaster reconstruction, a case studies annex includes post-conflict efforts as well.

Welcome to the new ICGFM Blog

Posted by Bill Dorotinsky

This week, the International Consortium on Government Financial Management holds their  22nd conference in Miami, Florida. (See our December 12, 2007, blog post on the ICGFM fall Washington, D.C. Conference on IFMIS.) The focus of this year's Miami Conference is on accountability, and is entitled “Joining Forces for Responsible Leadership to Enhance Good Governance:  Citizens, Public Officials, Private Sector and the Press”.

As part of this years event, ICGFM has introduced a blog spot, with daily coverage of presentations, including access to the presentation material and YouTube video's. Well worth a visit!

Public Finance: Why Do Countries Decentralize?

Posted by Mario Pessoa and Bill Dorotinsky

Decentralization is a popular reform, with implications for public financial management, fiscal policy, as well as governance and political economy. Recent events in Bolivia are an example of the continuation of the trend. Despite all of the rhetoric, how far is decentralization proceeding? And what can we say about the reasons countries pursue decentralization?

In a 2005 article entitled "Public Financing in Developing and Transition Countries" (Public Budgeting & Finance, Silver Anniversary Edition 2005, pages 83-98), Roy Bahl and Sally Wallace, explore the reasons why countries decentralize, including data on the share of subnational public spending.