Sector Ministries: As Important as the Finance Ministry for Good PFM!

Posted by Lena de Stigter[1] and Jennifer Moreau[2]

Post Addis Ababa, the debate on development finance focuses in large part on the generation of the necessary additional resources to support the Sustainable Development Goals (SDGs). Improving tax systems and compliance is an important element in this regard and strongly supported by the German Development Cooperation agency GIZ. Yet, taxation is only one side of the coin. Sound public financial management (PFM), especially at the level of sector ministries, should be the other. The generation of savings through more effective and efficient budgeting and expenditure policies in sectors may be as important for countries as resource mobilization through taxes. For instance, the IMF has recently shown that there is much to gain by reducing the inefficiencies around public investment management (IMF, 06/2015, Making Public Investment more Efficient). Moreover, the Collaborative Budget Reform Initiative (CABRI), through its sector dialogues, has done important work on highlighting the possible gains of improving value-for-money in program expenditure in key parts of the public sector. Sound investment policies and development-oriented public expenditure will enhance trust of citizens in their government and increase their willingness to pay taxes. Moreover, it will have a positive impact on the socio-economic environment of a country and generally, serve as a catalyst for development. 

Sector ministries are essential for the realization of the SDGs. They are faced with a wide range of societal challenges and ambitious policy objectives but scarce resources to address them. This is compounded by the fact that they are often confronted with capacity constraints in terms of budget formulation, implementation and monitoring and evaluation as well as revenue mobilization. However, limited attention has been given thus far to strengthening their Good Financial Governance (GFG) practices. PFM reforms have a tendency to focus on the role of Finance Ministries and too often neglect the line ministries’ central role as budget holders and users. For this reason, GIZ, mandated by the German Federal Ministry for Economic Cooperation and Development, has developed a guidance note and tool titled “Good Financial Governance in Sector Ministries” (link). The guidance note is based on the three dimensions of the systemic, value-based Good Financial Governance approach of the German Development Cooperation (link).

 Here are some key messages from that document:

• Technical issues abound in sector ministries: Sector ministries have a vital role in the national budget process in spending resources efficiently and effectively, and in generating additional sources of revenue, through user fees for example. However, the guidance note highlights numerous weaknesses in their PFM systems. For instance, it has been found that the linkage between policy development and budget preparation is often weak, which can result in unrealistic budget proposals or budget allocations not matching policy goals (“unfunded mandates”). Allocative rigidity and inefficiency abound in virtually every sector. A lack of available data on sector performance and insufficient monitoring of expenditure are also key challenges. Defective procurement processes and retention of relevant information can obstruct budget execution and/or create loopholes for corruption. The implementation of modern budgeting techniques, such as program or performance budgeting often does not yield the expected results. The guidance note and tool touches upon these different PFM areas and also recognizes the common challenge of de jure vs. de facto implementation of budget reforms.

• Politics matters: The guidance note highlights the political factors that need to be taken into account to create room for reform, such as country context, institutional settings and legacies, political environment, personal interests and incentives, to name a few. On the one hand, GFG is often not seen as a priority for sector ministries. Their interest in, perception of, and incentives for GFG reforms often differ considerably from the Finance Ministry. This is the case because sector ministries at times feel strong-handed or sidelined by Finance Ministries’ decisions (e.g. on budgeting processes or resource allocations). On the other hand, it also has to be kept in mind that the policy objectives of Finance Ministries and sector ministries differ. The former is generally mainly concerned with maintaining fiscal discipline, while the latter are more focused on allocative efficiency and effectiveness, measured for example by progress in key socio-economic factors (such as improved education enrolment rates, reduced maternal mortality rates, etc.). Ineffective communication within the sector ministry as well as between the sector ministries and the Finance Ministry are recurring challenges for the development of sound GFG systems.

• Norms matter: The guidance note also stresses the fact that GFG reforms are embedded in a normative environment that can differ from country to country and may even vary among government institutions and individuals. The general governance situation in a country affects GFG reforms and outcomes. Systems are only as good as its people. Countries in which democratic governance, rule of law and respect of human rights is weak will likely show more resistance to GFG reforms. In such cases, more transparency, accountability and inclusive governance may be considered undesirable by the ruling elite. This makes it imperative to not only involve the executive branch of government in GFG reforms but to also include and empower accountability actors such as parliament (in particular public accounts committees and sectoral committees), supreme audit institutions, civil society organizations and the media.

The diagnostic tool included in the guidance note was developed with the intention to familiarize laypersons with GFG principles and their importance to sector ministry operations. It is meant to enable especially sectoral advisors and public officials in sector ministries to analyze GFG performance in sectors. Applying the tool can be a first step to engage in discussions on GFG reforms. GIZ intends to assist partner countries to better anchor GFG practices in sector ministries and enhance ownership of GFG reforms that will enable the achievement of the SDGs.

For further questions please contact: Lena de Stigter (lena.de-stigter@giz.de), Jennifer Moreau (jennifer.moreau@giz.de).

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[1] Good Financial Governance Advisor at GIZ (German International Cooperation - Deutsche Gesellschaft für Internationale Zusammenarbeit)

[2] Good Financial Governance Advisor at GIZ (German International Cooperation - Deutsche Gesellschaft für Internationale Zusammenarbeit), currently seconded to the Global Partnerships and Policy Division at OECD-DCD 

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.

Comments

[Anthony Higgins]

Thanks Lena and Jennifer for this contribution to the important area of governance and its impact on service delivery. It is important to footnote your discussion with a caution about the major significance of staffing and payroll to any discussion of allocative efficiency and effectiveness. 'Technical issues abound in sector ministries'. Indeed. And the largest of these is payroll. When payroll and associated costs comprise 80% or more of your budget, allocative efficiency cannot be discussed without addressing the stickiness in the short to medium term of staffing, and which sectors, sub sectors and provincial/district locations they are currently located in. My experience in many MoFs, and in the health and education sectors, is that the main reason that plans are not well linked to budgets, is that medium term strategic plans ignore the realities of payroll and personnel management issues, whereas budgets run into this brick wall head on. Even if the published budget is not credible, when the actual numbers on expenditure come in, you find that the staff costs are still as high or higher than they were before, and that staff are still located where they were before.

"Politics matters". Absolutely. And yes, line ministries are more concerned with allocative efficiency than MoF. But line ministries are even more concerned about employing the nursing and teaching graduates from colleges into the provincial/district locations required from their political masters, and with housing, overtime and other allowances to supplement their inadequate salary levels, than they are with whether those nurses and teachers are in the economically most effective sub sector or province/district. Over-staffing in some sub sectors, schools or health facilities relative to others is not just an issue of allocative efficiency, it is a very (small p) political issue. But it is one you will rarely find addressed in a strategic plan, let alone a medium term budget strategy. Until we get more politics (not less) in strategic plans and budgets, the disconnect will remain.

[suhas joshi]

A good article. I am glad this self evident truth, to those of us working in the field, is now gaining theoretical attention. One other assumption made by MoFs and donor is that once an FMIS system is in place data perfection is a given. It does not quite happen this way because of the technical issues the authors have noted above. Insufficient monitoring of expenditure is not the only key challenge at that level- correct classification of expenditure is too!
At a very basic level expenditure does not always get classified the way it should calling in question the validity of the data generated. The smart argument that the system will prevent it is not always borne by facts.

[Alan Cairns]

Thank you Lena and Jennifer for sharing this with us. The guidance tools you link are well worth viewing. As Tony mentions, and I very much agree, influencing budget decisions and creating fiscal space is enormously difficult when payroll consumes the lion's share of a budget. Payroll may well be the elephant in the room, being deeply rooted and subject to incrementalism. Not only does payroll tend to become 'locked in' and difficult to reallocate resourcing within the payroll space (i.e. moving staff from one location to another), but it also has the tendency to grow and crowd out funding for operational costs that is vital for supporting service delivery activities.

Creating visibility around these issues, the importance of managing payroll and matching staff with operational funding, is one of the ways to promote better decision-making. That said, the politics in this space are complex, which may explain why significant improvements in resource allocation (particularly realignments in staffing) tend to happen when a country's economy is at crisis level.