Good Practice Note on Sequencing PFM Reforms – Taking on Board Comments Received

Posted by Jack Diamond


Following the posting of a  draft Guidance Note on Sequencing PFM Reformson the PEFA website  and on this blog (along with two Background Papers by Messrs. Tommasi and Diamond), thePEFA Steering Committee met on 15 November, 2012 to review the response to anumber of comments received. Comments came both from development partners (suchas SECO, DFID, the Inter-American Development Bank), as well as PFM experts inthe field. Most of the comments dealt with specific issues, and were generally aimedat ensuring greater clarity in the text. Accordingly, the majority of thesecomments were easily accommodated in revised drafts of the Guidance Note andBackground Papers, 1 and 2. There were, however, a number of general issues raisedthat were more thoroughly discussed by the Steering Committee, which aresummarized in this blog.

The first issue raised concerned thetitle. Reflecting some comments, there was a consensus within the SteeringCommittee that the term "Guidance Note" may imply a degree ofdeterminateness that was unjustified. Rather they felt the Note should beviewed as a useful approach that can help provide direction to reformers byoffering an analytical framework to resolve PEM sequencing challenges. Theyfelt that increased emphasis was required that this Note is only a first stepin improving the sequencing of reforms, and that the practical applicability ofits recommendations would require further empirical work. It was agreed thesecaveats would be contained in a revised more extensive preface. It was proposedto call the Note a Good Practice Note, rather than a guidance note. (Along thesame lines, the title of the background paper 1would be re-titled “SequencingPFM Reforms").

Several commenters wanted to widen thescope of the note and the associated background papers to examine the reasonsfor reform failure and hence turn the note more into a "how-to-do reform"piece. Some even offered detailed frameworks of how this might be accomplished.While not doubting that there may be some value in such approaches, the PEFASteering Committee felt that this suggestion should be resisted as being too ambitious.It was pointed out that in the note it is emphasized that sequencing is onlyone element in reform design, and a whole chapter in Background Paper 1 dealswith how this one aspect relates to other components in reform design. Theargument for singling out sequencing for more detailed treatment was thatseveral donors expressed concern that there were different views on sequencing,and these were causing problems/conflicts on the ground. It was felt that whileindividual reforms being advocated were not wrong technically, or bythemselves, they were failing because they were not being carried out in theright order. The Good Practice Note is targeted at answering these concerns. TheSteering Committee agreed to add some words to stress this more in the note’s introduction.

An evident area of confusion and contentionthat emerged in the comments received lay in the general analytical frameworkused to describe the PFM system's deliverables. In this regard, most of theperceived problem with the note’s approach arose from a lingering confusion, resultingfrom the failure to distinguish ultimate PFM policy objectives from managementinputs (or deliverables) required to reach those objectives. This may be linkedto the widely circulated 1997 seminal World Bank paper by Pradhan and DosCampos that was incorporated in the development of the PEFA's analytical framework.The Steering Committee agreed that the distinction between policy objectivesand management deliverables has been adequately described and clarified inBackground Paper 1, although only briefly mentioned in the note. It was feltthere is a case for bringing more of this part of the Background Paper into thenote to explain the threefold management deliverables that shape the discussionthere; namely,  enforcing  financial compliance, medium-term planning,and ensuring efficiency and effectiveness in resource use.

Accordingly, the new draft includes anew paragraph and a new figure along these lines.

The role of accounting and thereform of the accounting system were highlighted in many of the comments. Someargued that the accounting system and financial reporting are the primary pointsof reform and did not feel the note gives enough attention to them, pointingout that they feature only in two paragraphs. However, the Steering Committeenoted that the very detailed chapter in Background Paper 1 dealing with themove from core PFM functions adequately emphasizes the importance of a solidaccounting system as a basis for further PFM reform.

Moreover, there is a whole section onthe various phases of moving from cash to accruals. The speed of reform in thisarea was also contentious. Some commented on the note’s emphasis on the IPSAScash standard as a target for most countries' accounting systems, but othersfelt that all the IPSASs should guide reform actions at each stage of PFMreforms, and indeed argued that certain jurisdictions should"leap-frog" to more robust accrual accounting systems immediately.This the Steering Committee felt could prove dangerous in most client countries,where Alan Schick's paper entitled "Look before you Leap-frog" seemsa most relevant warning. Others, on the other hand, argued that even the cashIPSAS standards were too ambitious a target as set in the note and pointed tothis standard being currently under review. Their main concern lay with thecash IPSAS requiring consolidation of government cash accounts with those of lowerlevel governments and with parastatals under government control. They pointedout that this has proved difficult if not impossible for most LICs. TheSteering Committee was sympathetic to this argument, and suggested draftingchanges that will qualify the outright target of cash IPSAS by limiting thecash IPSAS standard to central government accounts.

Another wider issue raised concerned theintended audience for the note. The Steering Committee recognized that the genesisof this work was the donors' wish to have some clarification and reachagreement on the best approach to sequencing PFM reforms. However, some intheir comments have suggested that the note is too donor-centric and should bemade to appeal to a wider audience. It was decided, however, at this stage ofthe note’s development to simply clarify its purpose and leave any refocusingof the document to a possible later stage.

Several comments were directed to thedetails of Background Paper 2 that identifies core PFM functions, and maps themagainst the PEFA scoring system. In this way target PEFA scores were derivedfor core PFM functions that all countries should aim to achieve as a base-linein PFM reform. Most comments received asked for greater clarity on theconceptual framework used to define the “core functions” and the mapping systemproposed. For the most part these comments were incorporated in the reviseddraft. There were much fewer issues raised on the assignment of target scoresfor PEFA indicators to reach core PFM functionality, while this issuerepresented the major part of this paper. Accordingly, the Steering Committee endorsedthe core PFM functions identified in the paper and their corresponding targetscores.

The revised set ofdocuments was published yesterday on the PEFA website and on the IMF PFM Blog

Good Practice Note on Sequencing Public Financial Management (PFM) Reforms (Jack Diamond - January, 2013)

Background Paper 1: Guidelines for Sequencing PFM Reforms (Jack Diamond - January, 2013)

Background Paper 2: The Core PFM Functions and PEFA Performance Indicators
 (Daniel Tommasi - January, 2013

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.