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June 16, 2010

Proposed Revisions to PEFA Indicators PI 2, 3 and 19 -- Request for Comments on Exposure Draft

Posted by the PEFA Secretariat 

The PEFA Steering Committee is seeking comments from any interested party on proposed revisions to Performance Indicators 2, 3 and 19. These three PIs have been ‘fine-tuned’ in response to feedback from practitioners, and subject to comments received, will be implemented later this year. This exposure period will close on July 30, 2010.

Comments by email to (both) pefa@worldbank.org, copied to psinnett@worldbank.org

The paragraphs below set out the reasons why these three PIs were selected, the intention of the changes, and provide a brief description of the revisions. The revised pages for the English version of the Framework (the ‘BlueBook’) and additional guidance for Assessors are available here.

NB: The database of assessment scores maintained by the Secretariat will identify instances where ratings using these revised indicators are not comparable with those from an earlier assessment.

PI-2. Composition of expenditure out-turn compared to original approved budget

Reasons for revision
In situations where all changes against the original budget are negative (for example, when there is a major cut, arising from a significant revenue shortfall) or positive (perhaps because of windfall revenues collected mid-year), the current methodology results in an ‘A’ rating, even when the changes are unevenly spread. In addition, the accounting treatment of contingencies can have major implications for the rating, depending on the size of the contingency and whether it is transferred (vired) to spending entities or spent/accounted for directly under the contingency head: again, – assuming no other variance – PI-2 will give an ‘A’ rating to a government that has a large contingency but accounts for its use directly under the contingency head, while a government which vires the contingency to spending entities will be rated lower (in other words, the scoring criterion penalizes what is generally accepted as good practice).

Basis of the change
To remedy these problems, the current basis for calculating PI-2 has been changed to reflect the good budgetary practice of according equal marginal value to all budget lines, and a second dimension added to focus on contingencies.

Dimension (i) will improve the rating of any variance from the original budget appropriations by using relative deviations from an across-the-board adjustment to the budget, to reflect the aggregate actual expenditure. However, to avoid ‘double counting’ the impact of contingencies, they must be excluded from this calculation of variances. A new dimension (ii) is calibrated to avoid penalizing ‘good practice’ by allocating an ‘A’ to a government that records little or no actual expenditure against the contingency vote (because either the contingency has not been used or it has been vired to those spending departments where actual expenditure is incurred and recorded).

PI-3. Aggregate revenue out-turn compared to original approved budget

Reason for revision
At present, PI-3 rates the percentage shortfall between the forecast and the actual revenue achieved. However, pessimistic revenue forecasts often result in excess revenue being used for spending that has not been subjected to the scrutiny of the budget process, while optimistic forecasts can lead to unjustifiably large expenditure allocations and to larger than planned fiscal deficits if spending is not reduced should revenue be under-realized.

Basis of the change
Hence the criteria used to score the indicator have been modified to incorporate both positive and negative deviations, although as the consequences of the latter are more severe, especially in the short term, more weight is given to an under-realization of revenue.

PI-19. Transparency, competition and complaints mechanisms in procurement

Reason for revision
Although several PIs impact on or are influenced by procurement, PI-19 – the only indicator devoted to the operation of the public procurement system – has been seen as inadequate given the significance of the volume of public spending that takes place through this system.

Basis of the change
PI-19 has been made more comprehensive in examining the strength, operation and openness of a national procurement system, by adding an additional dimension and completely reformulating the other three to reflect and provide linkages to the OECD-DAC ‘Methodology for Assessing Procurement Systems’ (MAPS) tool. The revised PI-19 draws on information collected as part of a MAPS exercise, or, if none has been recently completed, guides PEFA Assessors to appropriate sources of information and evidence by referring to the MAPS documentation.

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