This is PFM – Looking Good but Does it Work?

 

Posted by Richard Allen

An interesting new working paper[1] by an eclectic group of experts from Harvard University, the IMF, the World Bank, the Overseas Development Institute, the International Budget Partnership, and the Collaborative African Budget Reform Initiative (CABRI) casts new light on the meaning of PFM and approaches to reforming it. As the paper notes, it is encouraging that experts from such diverse organizations and arenas can agree—to some extent at least—on the basics of PFM. The paper coincides with the publication by the OECD of its Ten Principles of Budgetary Governance[2], a document that provides a solid overview but is more conventional in scope and focus.

The working paper is very short and easy to read. It starts with a simple and seemingly naïve overview (a “primer” as it puts it) of the main PFM processes. The reader, however, should be patient, for the meat of the paper is contained in its second half whose main theses can be set out as follows.

First, the paper argues that an assessment of whether a PFM system is good, bad, or indifferent should not rely only (or even primarily) on whether the form of the system conforms with “good international practice”, but rather on whether it delivers good results. In support of this proposition, the paper notes that public officials who cannot rely on the PFM system to produce results must rely on other, informal and unofficial means to get what they want, opening the doors to inefficiency, waste and corruption.

Second, the paper argues that the classic yardstick for measuring the “quality” of PFM, developed by Campos and Pradhan in the 1990s, needs to be reconsidered. This yardstick decomposes PFM into three components—overall economic and fiscal stability, allocative efficiency and operational efficiency. In place of the Campos/Pradhan yardstick, the authors of the paper recommend that attention be focused on four dimensions that are fundamental to a well-functioning PFM system, namely: (i) prudent fiscal decisions, (ii) credible budgets, (iii) reliable and efficient resource flows and transactions, and (iv) institutionalized accountability.

Third, existing diagnostic tools, notably the Public Expenditure and Financial Accountability (PEFA) framework—also based on the Campos/Pradhan methodology—attempt to measure whether PFM takes a form that is consistent with “good international practice”. Such tools pay much less attention, however, to the functionalities that these good practices are assumed to produce. These functionalities include, for example, the usefulness of a budget classification system for domestic policymaking, whether cash is provided to spending agencies when agreed and in the approved amount, or whether public service salaries are paid on time.

According to the working paper, the strong reliance that is placed on the good practice idea leaves insufficient room for local choice of reform types, adaptation and learning, an argument that will be familiar from recent writings of Matt Andrews and others. Comparisons with good international practice can be useful but need to be placed in perspective. The paper concludes that the challenge for future PFM reform initiatives centers on better assessing the functionality of PFM systems and working out how to shape reforms around the challenge of improving functional performance.

This shift in focus from form to functionality is important but may not be easy to capture in standard diagnostic assessment tools such as PEFA which depend heavily on evidence-based indicators. Measuring, for example, whether salaries are paid on time or internal control systems work as intended would require an audit of relevant systems that is both a resource-intensive activity and beyond the scope of traditional diagnostic instruments.

Another possible criticism of the working paper is that it doesn’t explore sufficiently the important institutional and political economy factors that lie below the surface of PFM systems. The idea, for example, that one measure of PFM effectiveness is whether “comprehensive and regular budgets are formulated that give a binding expression to government public finance priorities and plans” begs the question of how such agreements are reached and what form they will take. Binding agreements may be problematic and unreliable in the many developing countries and emerging markets that lack a strong center of government and whose cabinets are not well equipped to take a strategic view of fiscal or budget priorities.

Despite these quibbles, this working paper provides important new insights. It should be read by all policymakers and practitioners interested in PFM systems and their reform.