Posted by Eivind Tandberg
An FAD mission to the Maldives in February 2009 made a presentation on the development of central fiscal institutions, in particular ministries of finance. The purpose of the presentation was to familiarize the authorities with international trends and issues related to these institutions, and to provide inputs to their future discussions. The presentation focused on general developments across different countries and did not provide any specific assessments or proposals related to the Maldives. It presented a simplified picture of some potentially interesting trends, and did not attempt to capture all the different varieties and nuances in the structure of the central fiscal institutions in different countries.
The presentation outlined some of the key drivers for institutional developments, and discussed how these drivers could influence the situation in countries at different levels of development. For simplicity, it concentrated on three groups of countries entitled “developing”, “emerging” and “advanced”. The presentation offered some specific comments about the roles of planning ministries and the location of administrative functions.
Objectives are the first set of main drivers for institutional development. An MOF with a strong control focus will tend to have a different structure than one which concentrates on efficiency. Short-term crisis management may require different solutions than long-term fine-tuning of well-established economic policies. The degree of deconcentration of functions to line ministries, or decentralization of responsibilities to lower levels of government, has institutional implications. Finally, economies of scope and scale may define how broadly objectives are defined, which again has institutional implications. For instance, there may be benefits to establishing a strong, consolidated internal audit function in the MOF, in stead of splitting the function among many institutions, in particular in the early stages of development.
Capacities are the second major set of drivers. If it is difficult to employ well-qualified staff, the ministry must focus on a few, fairly simple functions, whereas an ample supply of skilled staff will allow it to pursue broader and more complex objectives. Staff also need to be effectively managed, and weak management skills create significant bottlenecks in many countries. Technology has become importantly important over the last few decades, and is critical for providing efficient government services, as well as in ensuring the transparency and accountability of fiscal management. Finally, the existence of markets for procurement of services, including for outsourcing of specific functions, has major impacts on institutional structures.
The presentation suggests that the central fiscal institutions in many developing countries will tend to have a strong control focus, because financial irregularities are common, and a focus on short-term crisis management. The institutions will also tend to be quite centralized. There will often be significant constraints on staff or management skills, information systems may be quite basic and fragmented, and there is limited scope for outsourcing of services. These finance ministries will tend to be operationally oriented, with low strategic capacity. Treasury departments will tend to be more influential than budget or macroeconomic departments, and there will often be many, partly overlapping control departments. Delegation and decentralization will often be limited. Although financial procedures tend to be quite simple, lack of enforcement capacity undermines effective application. Developing country MOFs tend to have many in-house service and administrative departments.
In emerging economies (including transition countries),the central fiscal institutions tend to have broader and more balanced objectives. While control against financial irregularities continues to be a major concern, spending efficiency is gradually given more emphasis. The time horizon is extended to also cover the medium term. Skill levels are often quite mixed in the institutions, with some areas being able to attract good quality staff. Information systems are gradually becoming more coordinated and integrated, and outsourcing is more common than in developing countries. These ministries will strive to address operational and strategic issues in a coherent fashion, and the influence of the treasury and budget departments may be quite balanced. The institutions will often be working to introduce internal control, and delegation is gradually becoming more common. However, financial procedures are often quite complex and enforcement capacity may be insufficient, and the institutions continue to include many administrative, non-core functions.
In advanced countries, the ministries of finance will usually have a strong focus on expenditure policy choices and on spending efficiency, and on medium to long-term fiscal developments. There is often extensive deconcentration of functions and decentralization of responsibilities. These countries are often able to recruit highly skilled staff and management, and to maintain advanced, integrated financial management information systems. The macroeconomic department will often be the dominant department in the ministry. In many countries basic treasury functions have been automated and outsourced to line ministries or to specialized agencies, in particular for debt and cash management. Internal control is usually seen as a regular line management function. Separate control departments are quite uncommon, but there will often be internal audit sections reporting directly to the minister or senior civil servant. Financial procedures are quite advanced and enforcement is generally effective. There is extensive out-sourcing of functions, for instance for information systems, and the number of non-core, administrative departments is often limited.
Planning ministries are quite common in developing countries, but become less common as countries develop. Across the world, there has been a shift from traditional detailed planning, as reflected in 5-year plans and similar instruments, towards strategic coordination. This coordination is increasingly done by finance ministries or by prime ministers’ offices. This is often accompanied by a gradual integration of planning, strategy development and budgeting into a single, coordinated process, and a unified, strategic budget document. Planning ministries were often involved in project preparation, but this function is shifted to line ministries as their capacity develop. Macroeconomic forecasting is often transferred to the emerging macrofiscal and macroeconomic departments in the finance ministries, and statistics are increasingly produced by independent statistics agencies. The presentation is attached. (Download Strengthening central fiscal institutions).
