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).

Common PFM Reform Recommendations

There are a handful of PFM reform recommendations that commonly appear in donor PFM reports and country reform strategies. These include:

• Medium-Term Expenditure Frameworks
• Performance, Program budgeting
• IFMIS, automation
• Fiscal Responsibility Laws
• Treasury Single Account
• Budget classification, chart of account
• Reporting/ Transparency
• Procurement
• Internal control/audit
• External audit
• Accrual Accounting

There are several reasons for the commonality of recommendation. One is a tendency in the PFM field for recommending 'commonly accepted' reforms, replicating them everywhere. A second is the tendency for countries to seek to be cutting-edge, adopting the latest fashion in PFM reform. In other cases, it is a specific profession or field that has a best-practice reform as its' standard. And, there are some fashionable recommendations that also seem to play to incentives within a given country's PFM system -- for example, public-private partnerships, which can be seen as one means of escaping the public budget constraint for investment by 'leveraging' private resources.

The concern is that, given the diversity of challenges faced by countries in managing their PFM systems, and diversity of country PFM approaches and systems, it seems incredulous that the same recommendations or reform solutions fit all countries. If a doctor recommended the same medical treatment (take two aspirins) regardless of the patient's complaint (broken foot or headache), the patient should rightly be suspicious.

One trend over the past decade or so has been the fragmentation of ministries of finance, with different functions being hived-off into independent agencies or parallel operations. Some of this reflects the new public management separation of policy from implementation, and some the particularistic views of different PFM specialty areas. Sometimes it is done it increase pay for the specialty, or to improve independence of the activity. As with the broader trends, it seems inappropriate that the same model of dispersed PFM functions applies to all countries. More fragmented PFM systems increase the cost of information, the cost of coordination, for the ministry of finance, making it more difficult to manage public finances. For upper-income countries, they may have surplus human resources to pay the price, but for smaller countries, this may not be the case.

In the classic economic Theory of the Firm, the bottom-line is that small enterprises do not have (or need) the same degree of organizational complexity and specialization of functions as medium or large firms. All of the core functions are present, but frequently the same person does multiple functions, rather than separate offices. The same holds for countries. Why would we expect a small developing country to need or have the same degree of complexity or specialization as an OECD country? Many would agree they should not, but in practice, the paradigm used for judging developing country PFM systems is implicitly OECD country systems and practices.

Understanding of PFM systems and PFM generally is sufficiently advanced that we can and should be able to develop more nuanced recommendations and reforms, and better fit solutions to problems, and appropriate reforms to individual country circumstances.

Recent Country Reforms

Drawing on information from recent PFM reforms across some 80 countries, some interesting general trends appear that warrant some further research. The information is drawn from IMF documents not developed for this particular use, so some caution is warranted in interpreting the results.

In budget formulation, for example,

• developing medium-term fiscal frameworks have been underway in many countries over the past few years, but this particular reform has been more popular in lower middle income countries (Gross National Income per capita between US$906–3,595). It is not clear if this reflects the particular demands of micro-fiscal management in these countries, but it seems so. The higher income the country, the less aid dependent they are, and the more able to shape their own PFM reform agenda.
• medium-term expenditure frameworks (sector ceilings and strategies and other reforms) are also common across all income levels, but a markedly higher level of activity has been underway in recent years in upper middle income countries (Gross National Income per capita between US$3,596–11,115).
• performance and program budgeting reforms have been actively pursued in low-income countries, and higher levels of activity appearing in upper-middle income countries. The level of activity is interesting, and might be explained by low-income countries with higher aid dependence being pushed into performance budgeting, or perhaps adopting the fashionable performance budgeting reforms. The surge in activity for upper middle income countries might be explained by actual country interest, increase in demands for more efficient public services, and moves from extensive to intensive economic development.

In budget execution, there are also some interesting trends.

• Cash management and treasury system development has been a priority in a majority of low-income countries, perhaps reflecting the need to get the basic PFM system components in place for managing cash, controlling spending, accounting and reporting. Commitment controls similarly have received more emphasis in low-income countries than middle income countries, though these do remain areas of improvement for all income levels.
• Payroll and personnel management system improvements show a bi-modal distribution of activity, with low income and upper-middle income countries actively working on this area. This might be explained by lower-income countries focusing on basic personnel registration and payroll management systems, will upper-middle-income countries focus more on greater efficiency in use of personnel, pay reforms, and similar civil service improvements.

Other areas where PFM reforms of been actively underway, such as reorganizations of ministries of finance, new budget and PFM laws, improvements to transparency, and implementation of public-private partnerships, are much more common in lower-middle income countries than either upper or lower-middle income countries.

These patterns might suggest that, despite the common, once-size fits all sets of recommendations that commonly appear for countries, in practice, countries of different income-levels in practice move forward on reforms in their PFM systems of greater relevance for them, at least when less aid dependent and able to chart their own course.

Observations and Challenges Ahead

Some summary observations are

• Low-income countries struggle to get the basic PFM systems in place. Do recommendations for more advanced reforms detract from their ability to do this?
• Middle income countries, in my experience, frequently have some of the basics in place, but often struggle with overcoming legacy systems that exist and may impede further PFM reform progress, such as separate planning and finance ministries, or fragmented PFM systems. This might be reflected in the higher reform activity in ministry of finance reorganization and PFM legislation in middle-income countries.
• There seems to be a slight movement away from some of the standardized, one-size-fits all recommendations, towards more nuanced, or pragmatic reforms. Examples include discussion of "financial management information systems" or limited automation of PFM systems, instead of the 'integrated' FMIS, and also more discussion of the underlying components of medium-term expenditure frameworks and a focus on getting this individual building-blocks in place.

Some of the challenges for further improving the design and implementation of PFM reforms include:

• more holistic views of the entire PFM system are needed, including identification of weakest links, rather than seeking cutting-edge reforms in one more more narrower aspects of the PFM system
• more work on sequencing reforms is needed, and the linkages across the PFM systems to support any specific reform agenda
• there is a need to limit the adverse impact of cutting-edge, fashionable reforms being advanced across the globe, regardless of suitability to circumstances or country needs
• realistic time horizons -- reform is happening, and there may be some 'quick wins, but the full impact of reforms will be seen over the medium to longer term
• the concept of country ownership can be somewhat murky and hard to define or measure. It is certainly more than just convincing a country of the merits of a particular set of reforms. A better starting point might be having the country identify their most pressing PFM management challenges, and helping them solve that with practical solutions, rather than advancing a specific set of reform measures.
• more work is needed to right-size reform measures to country size and circumstances. Understanding of PFM systems is sufficiently advanced that this customization is possible, but the field has not paid sufficient attention to it.