Sustainability in PFM Capacity-Building in Post-Conflict Countries – Afghanistan’s Experience

Posted by Sailendra Pattanayak

Post-conflict countries typically lack both capacity and infrastructure in the area of public financial management (PFM). International institutions, donor organizations and NGOs play a crucial role in rebuilding the financial and fiscal institutions in such countries. Contributions generally come in the form of financial support and technical assistance (TA), through the funding of a large number of advisors/consultants to build PFM capacity. However, the continued heavy reliance on contracted technical assistance appointments (through donor-financed projects) for operational activities, raises the question of the sustainability of PFM capacity-building.

Afghanistan is a clear example of the pivotal role being played by international institutions and donors in the development of governance and public finance institutions in a post-conflict environment. The Ministry of Finance (MoF) has been a large recipient of TA from a range of donors and international organizations in fields such as strategic advice, operational support, and capacity-building. The use of TA has enabled significant gains in the PFM area, but there are considerable concerns about the effectiveness and sustainability of the current approach.

No Suit, No Mission

The IMF Fiscal Affairs Department provides technical assistance to the IMF member countries on public financial management, expenditure policy, revenue administration and tax policy issues. Interaction between countries and IMF staff takes place mainly through “missions”, staff visits governed by a well-defined process of meetings with the authorities, other government officials, donor representatives, followed by presentation of mission recommendations summarized in a technical assistance report, the Aide Mémoire. In the coming months FAD staff will recollect some of their more memorable mission experiences.     

Posted by Suhas Joshi

“I arrived in the country in question just months after the last dictator had finally been forced out by popular revolt, aided by the international community. The country had just emerged from 15 years of war and 80% of the population was living in the capital city in pretty desperate conditions, with no public transport system, and few, if any, basic services. We advised extensively on the budget formulation process, and made a point about a budgetary allocation to provide for rebuilding public transport in the capital.

Debt Brake for Germany--Could it be too Strict?

Posted by Christian Schiller

When the Federalism Reform Commission II presented its report to the general public on June 23, 2008, it was clear that a debt brake for the federal government and the governments of the Länder (the federal states) would come, but how tight remained open (see my posting Germany: Fiscal Reform Commission II presents report of June 30, 2008). Now, on February 12, 2009, the federal government and the governments of the Länder have agreed on the specifics. It is expected that the new debt brake will be incorporated into Germany’s basic law in June 2009 and become effective on January 2011.

Agreement has been reached on a zero limit on net borrowing for the Länder and a limit of 0,35 percent of GDP for the federal government budget deficit. These are the general rules. But there will a transition period and there will be exceptions.

Performance Budgeting Seminar in Sao Paulo Discusses Experiences Worldwide

Posted by Mario Pessoa

The government of the State of Sao Paulo, Brazil, promoted a seminar on performance budgeting in partnership with the IMF and the Interamerican Development Bank, from December 1 to 3, 2008. Experiences in Latin America and OECD countries, in the Brazilian States of Sao Paulo and Minas Gerais, and in the City of Curitiba, were discussed. The main conclusion is there is no unique approach and it is essential to consider local circumstances. Additionally, to implement a performance budgeting approach it is necessary to count on high-level political support, clear leadership to implement the methodology selected, good information systems, realism in the targets, define few and very clear performance indicators, have a good communication strategy, and have a long-term perspective. To be more effective, it is also important to establish incentives, such as flexibility to remunerate personnel and manage budgetary resources and eliminate disincentives such as a set of formalistic compliance regulations that used to be present in many parts of developing countries. The presentations (some of them available only in Portuguese or Spanish) can be assessed by cliking on this link.

Public Financial Management Performance Assessment Report for South Africa

Posted by Davina Jacobs

I. Assessment of the PFM strengths and weaknesses in South Africa

In a recent PEFA assessment Report (Download final_sa_pefa_report_2008.pdf,) South Africa scores well when viewed from the perspective of the three main objectives of a sound PFM system, namely aggregate fiscal discipline, strategic allocation of resources and the efficient delivery of services, especially in regard to aggregate fiscal discipline. The PFM systems in South Africa are capable of allocating resources in accordance with priorities. The utilization of a three year macro fiscal framework, with a definite budget calendar that facilitates the meaningful bottom-up participation by Departments, along with the very successful integration of cash management and debt management, and the achievement of predictable budget releases and effective payroll management all point to efficient delivery of services. However these positives are negatively impacted by some procurement and non salary expenditure management challenges.

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.

World Bank—Sovereign Debt Management Forum (October 27-29, 2008)

Posted by Brian Olden

The World Bank hosted the Fourth Sovereign Debt Management Forum between October 27–29, 2008 in its Washington, D.C. headquarters. Despite the ongoing turmoil in world financial markets, the event was well attended, with representatives from over 55 advanced OECD, emerging, and low-income countries (LICs), as well as representatives from international institutions, including the IMF and the EU.

The forum was very timely, given the current market turmoil, and naturally much of the discussion centered around the impact of the crises on economies, in general, and on debt management operations, in particular.  Much of the focus was on what the role of debt managers will be in helping to mitigate the effects of the crises on economies in the short and medium-term.

Decentralization: The Bad Things Have not Happened.... Yet?

Posted by Luc Leruth

On June 26, 2008, I took part in a Banque de France Workshop on the Impact of Decentralization on Public Finances in St. Germain-en-Laye, near Paris (Download Workshop_programm_decentralization.doc, Download List_of_participants.pdf). The Workshop looked at a number of critical issues related to decentralization, including the role of fiscal rules, the impact of decentralization on economic growth, and the pre-conditions for successful decentralization. It was attended by about 50 senior representatives of international organizations, central banks, the private sector, and academia. The discussions were opened by Mr. Ophele, Deputy Director General of Economic Studies and International Relations at the BdF and I was invited to take part in the concluding roundtable chaired by Mr. Franco of the Banca d’Italia.

Having been asked to be a little provocative, I observed in my presentation (integrating comments from Messrs. Keen and Norregaard of FAD) (Download Decentralization_and_tax_competition.ppt)that the bad things associated with decentralization and discussed in academic circles had not really happened (much) yet. For example:

• Empirical evidence showed that vertical tax rate competition had remained limited (although it existed, but only a little bit)
• As sub-National governments took over more responsibilities, the fiscal base had tended to remain stable (although even a very immobile base eventually became mobile).

I argued that the reason for which this had not happened was that the environment in which decentralization had taken place had been largely stable and predictable in the last decades.

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).

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.

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.

Keeping up-to-date with civil society budget work

The International Budget Project Newsletter

Posted by Bill Dorotinsky

In a March 24, 2008, post by Duncan Last, we blogged about the International Budget Project's (IBP)new budget briefs series, as well as their numerous other initiatives and information resources.

Last week, the IBP released its most recent bimonthly newsletter -- a good way of keeping-up with some of the developments in the public financial management field. The recent issue, for example, includes articles on

• district-level budget information service in India
• social auditing in Rajasthan, and
• civil society efforts to improve education funding transparency in Argentina.

The current and previous issues of the newsletter (and e-subscription arrangements) are available at:

http://www.internationalbudget.org/resources/newsletter.htm

Fiscal Discipline and Subnational Borrowing: the Case Study of Brazil

Posted by Mario Pessoa

Decentralization of borrowing authority to local government and fiscal sustainability are two issues in permanent tension in public financial management. On the one hand, it is positive to give local authorities room for raising financial resources in order to finance investment and provision of goods and services to local communities. On the other hand, the lack of institutional capacity, history of defaults, and lack of controls pose to the central government an argument to restrict autonomy. In other words, there is a fear that decentralization can weaken fiscal discipline. Therefore, is it possible to built a safe net in order to prevent problems? Can both objectives be met?

A recent article by C.R. Martell entitled "Fiscal Institutions of Brazilian Municipal Borrowing" (Public Administration and Development 28, 30-41; 2008) examines the effectiveness of Brazilian fiscal institutions (constitution, fiscal responsibility law, and borrowing arrangements) in light of 2001 policy recommendations for strengthening efficiency and fiscal discipline in subnational borrowing by means of fiscal policies that encourage efficiency, discipline, and controls.

Intergovernmental Finance System Reform in Germany

Posted by Christian Schiller

A two stage reform of the intergovernmental system is underway in Germany. The German model of intergovernmental relations is based on the principle of uniform spending standards financed by horizontal transfers across Laender, together with vertical redistribution by the federal government Although the Laender have no control over tax policy, they actually administer the main shared taxes.

The first stage focused on clarifying spending responsibilities across different levels of government. Financing and revenue aspects were put aside by the first federalism commission. A compromise was reached to clarify legislative authority across levels of government. The compromise reflected the differences of interest across the Laender. However, the compromise did not significantly alter the overlapping functional responsibilities. One such area of overlap in Germany is primary education.

The second stage, which is currently under way, will focus on revenue and financing issues. On the administrative side, a fundamental reform is the proposal to centralize the tax administration. Another proposal of the second federalism commission is to provide Laender with some access to own-resources revenue. Measures are also suggested to control sub-national debt.

"Reforming Intergovernmental Fiscal Relations" is the main topic of the latest Newsletter of GTZ , which was sent out in December 2007 (No. 10). It includes, inter alia, an interview with the German emeritus professor and FAD panel expert Bernd-Paul Spahn on the topic against the background of the reforms already undertaken and still under discussion in Germany, but also touches on what role technical assistance can play in the reform of intergovernmental relations in developing countries. To subscribe to the GTZ newsletter, you have to send a short e-mail to public-finance@gtz.de.

Finally, the concluding statement of the most recent IMF mission contains some discussion of the German efforts to improve the system of intergovernmental relations (see www.imf.org Germany: Article IV Consultation, concluding statement of the IMF mission), with probably more to come in the forthcoming IMF Board papers. The IMF mission encouraged the government to use the second stage of reforms to improve incentives for increased efficiency and to contain long-term risks to the budget. It also reminded the German authorities that timely and consistent data on Laender finances are needed for transparency and monitoring.

Governor Arnold Schwarzenegger and California's Budget

Posted by Michel Lazare

To further illustrate our February 1, 2008 post on the difficult fiscal outlook in a number of US states and the harsh measures that states are considering to adjust their fiscal position, here is a YouTube video on the bugetary measures proposed by the Governor of California, Arnold Schwarzenegger.

This video is not dated, but was posted on YouTube on January 26, 2008.

Fiscal Double Whammy: Combination of Balanced-Budget Rule and Economic Slowdown Forcing U.S. States to Make Tough Fiscal Decisions

Posted by Michel Lazare

A majority of US states are facing a difficult fiscal situation according to the survey made by the Center on Budget and Policy Priorities (CBPP).

In a January 28, 2008 revision of a survey of states fiscal outlook (prepared by Elizabeth C. McNichol and Iris J. Lav ), CBPP indicates that "19 states face a total budget shortfall of at least $32 billion in fiscal year 2009; 9 others expect budget problems." These dire projections were made by the states themselves and were aggregated by CBPP.

Because they have passed a fiscal rule, which forces the state legislators to adopt a balanced budget, "the vast majority of states cannot simply run a deficit or borrow to cover their operating expenditures."  They have to resort to fiscal retrenchment--not a very pleasant perspective at times when the US economy is noticeably slowing down--, which could in turn negatively affect economic growth prospects (procyclical effects).

Rebuilding Fiscal Institutions in a Post-conflict Setting

Developing Economic Stabilization

Posted by Bill Dorotinsky

"The reconstruction of fiscal institutions can contribute to macroeconomic stabilisation and create a conducive environment for further institution building." That's the central idea of a recent note on "Rebuilding Fiscal Institutions in Post-Conflict Settings" by Sanjeev Gupta, Senior Adviser in the IMF's Fiscal Affairs Division, published in Capacity.org (Issue 32, December 2007) -- the on-line publication of the European Centre for Development Policy Management (ECDPM), SNV Netherlands Development Organisation, and the United Nations Development Programme (UNDP). The publication, including this article, is available in English, French, and Spanish.

Automating Public Financial Management Systems for Results

Posted by Bill Dorotinsky

Over the past few decades, governments and development agencies alike have invested enormous financial and human resources into automating public financial management (PFM) systems, and often the results have been less than hoped. Governments have had difficulty implementing systems, and not achieved desired functionality. And development partners have invested large sums of money, only to find systems delayed in implementation, having limited impact, and often with real challenges to the sustainability of the systems. On December 2-4, 2007, the International Consortium of Governmental Financial Management (ICGFM) held a two-day workshop entitled "Use of Financial Management Information Systems (FMIS) to Improve Financial Management and Accountability in the Public Sector".  While the conference title and topic might cause eyes to glaze over with visions of technical issues, the conference was a useful glimpse into current thinking on PFM system automation, and full of practical advice to those concerned with PFM system automation.

Conference presentations from government authorities, international organizations, and consultants covered topics such as how FMIS fits within the over-all PFM reform agenda, planning for FMIS development, FMIS design components, IT alternatives, project management, procurement, and capacity building. The conference program and all the presentations made are available on-line at the ICGFM website under Winter Conference.

Public Investment: Good Project Management is an Issue of ...Capital Importance

"Unexpected changes to payment schedules related to capital projects can create significant difficulties for finance officers responsible for cash management" remarks Steven R. Kreklow (*) in his short article ("Capital Project Cash Flow Management") of the August 2007 issue of the Government Finance Review, the membership magazine of the US-based Government Finance Officers Association.

This adverse impact on cash management and more generally budget execution can be mitigated by good budget and project management techniques described in Steven R. Krelow's article.