CARTAC Discusses PFM Reform Strategies and State Enterprises

Posted by Eileen Brown andMatthew Smith

Senior finance officials fromseveral CARTAC countries participated in a lively CARTAC workshop in Trinidad fromFebruary 25-27 with international experts Richard Allen and David Shand. Theworkshop discussed how to best structure finance ministries to meet demands tosustain economic growth; how to design their PFM reform strategies and get themost from technical assistance; and how to manage the fiscal risks of state-ownedenterprises (SOEs). The countries represented were Antigua, British VirginIslands, Cayman Islands, Dominica, Haiti, Jamaica, Nevis, St Lucia, St Vincentand Suriname. There were 22 participants as well as the two presenters and twofacilitators.

“This workshopreally worked for me,” said Devon Rowe, Jamaica’s Financial Secretary (FS) “becauseit verified some options I was considering and it opened me up to new ideasbased on what worked for my Caribbean colleagues.  Mostly it persuaded me that we all benefitwhen we share experiences. There are mistakes that we will not have to repeatbecause Dominica, St. Lucia, Antigua and BVI have shared their missteps as wellas their successes with us.”

“Dominicaalways learns something and I am gratified we were able to share so much ofwhat we learned with others” said FS Rosamund Edwards.

“I couldwrite a book of do’s and do not’s in reform,” said Deputy FS John Edwards.  “I like the structure of this workshop –experts tell us about new thinking and world experience, and then respondconstructively when we tell them what obtains in the region.”  Antigua and Barbuda had enjoyed a wealth oftechnical assistance funding and worked hard to properly sequence it.

Day 1 – The Organization andManagement of Modern Ministries of Finance

Can theorganizational structure of an MoF contribute to the effectiveness of PFMreforms? Richard Allen presented various models, compared them, and pointed outbenefits and challenges.  The main pointswere as follows:

Jamaica’sFS Devon Rowe presented his vision for a remodeled MoF in Jamaica that wouldpromote faster and more effective decision-making based on delegatedresponsibility and authority within an accountability framework.

Localofficials noted that reform efforts are limited by the time required carry outthe basic functions of government: time is only available for reform ‘aftertheir real jobs are done.’  Theycounseled that a dedicated team is needed to manage any reform process becauseattention to mundane but operationally critical issues will always trump effortsto create a better future – “there really is no choice to getting the debtpayments out” one official illustrated. 

Day 2 – The Design of PFM ReformStrategies and Getting the Most from TA

Richard Allenpresented a series of frequently-observed problems and pitfalls with traditionalforms of PFM reform strategy and TA provision:  

Richardpresented several models of PFM reform strategy, as well as the benefits andlimitations of each. These models include Allen Schick’s “back to basics”, the“platform approach”, the “modified platform approach” (applied for example, tothe gradual development of an MTEF, through three stages), and theproblem-driven, iterative and adaptive (PDIA) approach developed by MattAndrews in a forthcoming book. PDIA involves a large element of “muddlingthrough” or trial and error in the reform process, replicating how reform hashistorically taken place on a slow, step-by-step basis in now-advancedcountries. It offers perhaps the most promising route to successful reform indeveloping countries, but requires a substantial change in the attitude andbehavior of development partners. Donors tend to have an entrenched notion ofwhat is right for a country (focusing on solutions rather than problems),together with a bias toward projects that include large disbursements offinancial resources and TA.   

Participantsin the workshop conducted spirited debates about reform strategies that workand those that are less effective. Some complaints were universal, including atrio of braided opinions about development partner funding:  gratitude; impotence and being overwhelmed.  “We could not do much reform at all withoutthe support of donors”, said one thoughtful local official, “but they offersolutions before [or despite] our definitions of our most pressing problems.”

Onecountry related an example that was shared by others: they had been therecipient of numerous diagnostic studies by various bilateral and multilateraldevelopment partners.  They found theprescriptions dauntingly complex yet without a simple action plan they couldfollow.  The country had asked forimmediate, specific help to implement a direct mandate of the premier –instead, they received another diagnostic mission.  One country official intoned, ‘”I just wish wecould say – no thank you, we knowwhat we need. Why can’t you give us money for that, not what you wantto do?”

In orderto say ‘no’ to any specific donor proposal, the group concluded that thefinance ministry must display strong leadership, and develop their ownsequenced PFM reform strategy with prioritized timelines. They would then bewell placed to explain to a development partner why a particular proposal doesnot fit with the government’s strategy, or can be postponed until a later time,and what form of assistance would be really helpful instead.  “A real bonus,” said one participant, “isthat this approach makes it less of a diplomatic feat to try to contain theoverlapping and ‘competing’ activities of several donors.”

Thegroup focused on how to develop a PFM strategy that can actually be implementedrather than one that simply looks good on paper. Such a strategy needs to be easilyunderstood and accepted by the various parts of the government. “A 40-pageaction plan is really not much use to us,” said one exasperated localofficial.  “We need a strategy that manypeople understand when they are facing daily choices – something that tellsthem a change is on the priority list or they should be prepared to wait.’

The groupsuggested that key elements of a practical reform strategy should comprise:identifying problems that need to be solved, in priority order; and involving awidely-defined stakeholder group to brainstorm on the problems that arise indifferent parts of government and discuss potential solutions. “Settingpriorities is key” said one country’s reform leader. An effort to reach out andlisten to stakeholders is critically important, local officials concluded, andleads to best fit solutions. Such approaches, however, are not popular withdonors because they are time consuming, do not require substantialdisbursements of cash (at least in the early stages), and are outside the‘comfort zone’ of donors. The singlelargest problem, countries agreed, was the ‘travelling salesmen’ whosuccessfully pitched ‘solutions’ unmatched to the countries problems,priorities, practices and resources.

Participantsalso stressed that a successful reform strategy needs to figure out how to getpeople to do things differently.  “Peoplealways find numerous rationales for finding ways to resist change: it is humannature.” BVI’s Patlian Johnson summed up the general mood by noting that“Tradition is simply the way we are currently doing things – and if it is notgiving us the results we want, then we need to find a better way.”    

Day 3 – State Enterprises – Managingthe Risk and Getting the Benefits 

DavidShand noted  that the term SOE couldapply to all statutory bodies as well as only to those operating in a marketand that this appeared to be the Caribbean terminology.  Although his presentations focused mainly onthe latter he noted that both have similar issues of performance andaccountability.  

David spokeof the importance of the government acting as an active owner of SOEs anddeveloping sound arrangements for their monitoring and accountability. He notedthat whereas some countries derive considerable budget revenue from their SOEs,in other countries SOEs area significant drain on the budget, as well as asource of ongoing fiscal risk through government guarantees of their debt. Hestressed that the key factor in managing this fiscal risk is improving thefinancial performance of SOEs.

Participantsidentified their own examples of the budgetary costs of poor SOE performance.

Davidthen discussed common institutional and substantive issues in poor SOEperformance and noted good practices for SOE’s corporate governance developedby OECD and others. He discussed how a performance regime might be developedfor SOEs – based on assigned levels of autonomy, reliable and timely financialreporting using international accounting standards, setting of clear financialand operating objectives and targets and strong monitoring of performance– by SOEsthemselves, by sector ministries and by the MOF. Identification of SOEquasi-fiscal activities was also discussed along with arrangements formonitoring SOE debt.

The NewZealand State Owned Enterprises Act which requires SOEs to operate assuccessful businesses and provides substantial operating autonomy with strongmonitoring by a special unit located in the MOF and independent directors waspresented as a model at one end of the possible spectrum of arrangements.  Participants were invited to consider to whatextent such a “commercial” approach could be implemented in their country.

Theimportance of well qualified boards and senior management was also stressed asan important factor in SOE performance. The need for active monitoring offiscal risk arising from SOEs including possible statements of fiscal risk aspart of budget documentation was also emphasized.

Theissues discussed by participants included; developing a useful e-classificationof the various types of SOE and treating the enterprises within each category ina consistent manner rather than with different provisions in separate laws; developingperformance targets; letting enterprises run themselves and then holding themto their targets; and integrating the financial management of SOEs into thegovernment’s overall PFM strategy.

The roleof SOE boards and board members was discussed at length.  David explained the reasoning behind emerginggood practice that boards should comprise independent directors chosen fortheir professional skills and not include government officials.  Some participants emphasized the importanceof having MoF and sector ministry officials on the boards so that the governmenthas ready access to information on SOE operations. Small countries also tend tohave a limited pool of talent for independent directors. In response David stressedthe importance of MoF having receiving good information on SOE performancethrough other mechanisms, with a strong MoF being key to managing fiscal risk,monitoring performance against targets, reviewing financial statements andgetting regular briefings from the SOE. In many countries, it was useful to setup an SOE monitoring unit in the MoF. 

It wasnoted that Antigua and St Lucia have an SOE monitoring unit, although thelatter appears to lack teeth, and that Jamaica is currently setting oneup. 

CARTAC participantsleft the workshop focused on how they could better integrate the benefits andrisks of their state enterprises into the overall fiscal management of their countries. 

Links to all the workshop presentations can be found at

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