Stepping Up the Financial Oversight of Public Corporations

Posted by Richard Allen and Miguel Alves[1]

Why should policy makers worry about the performance of public corporations (PCs)?  One reason is that, despite the large-scale privatizations that began in the 1980s, companies owned or controlled by the government continue to account for a large share of economic activity, and of public assets and liabilities (see charts below). Many PCs are pressured or mandated into fulfill political objectives and engage in public service obligations and other quasi-fiscal activities (QFAs) for which they are not compensated. PCs may also be used as a mechanism for circumventing traditional fiscal controls and as a conduit for financial corruption. (click to enhance images)

The New PPP Fiscal Risk Assessment Model (PFRAM)

Posted by Maximilien Queyranne, Isabel Rial and Genevieve Verdier [1]

The PFRAM, developed by the IMF and the World Bank, is an analytical tool to assess the potential fiscal costs and risks arising from Public-Private Partnership (PPP) projects. PPPs are increasingly promoted as a way to finance investment projects, with the objective of supporting national development goals. However, PPPs are not exempted from controversy. To supporters of PPPs, governments can benefit from efficiency gains derived mainly from the private sector’s technological innovation and superior managerial skills. Critics of PPPs, on the other hand, tend to view PPPs as a procurement option that might weaken fiscal discipline. In their view, many governments have procured investment projects as PPPs not for efficiency reasons, but to circumvent budget constraints and to postpone recording the fiscal costs of providing infrastructure services. Hence, some governments procured projects that either could not be funded within their budgetary envelope, or that exposed public finances to excessive fiscal risks.

Upgrading Infrastructure Projects through IISS

Posted by Christophe Dossarps[1]

Transparency. Efficiency. Quality. If you work with infrastructure projects, these are words you will hear all the time. Unfortunately, these concepts are familiar only because so many projects lack them. These “lessons learned” are often discussed during workshops and evaluation sessions focused on what not to do next time.

But with the newly launched International Infrastructure Support System (IISS) at the Inter-American Development Bank on Wednesday, January 27th in the presence of the global community of multilateral development banks, the IMF, the World Economic Forum and a series of key private sector organizations - a digital platform that supports project preparation - achieving transparency, efficiency and quality in infrastructure PPPs, and traditional procurement, is within our reach. 

Understanding PFM—New Online Course

 

Posted by Dr. Alberto Asquer[1]

The capacity to understand how public finances are managed is much needed nowadays, with more and more citizens in a growing number of countries demanding greater accountability in the use of public monies. No longer is public financial management (PFM) only confined to the expertise of accounting professionals.  As the media increasingly report on how mismanagement of public monies impacts on the lives of individuals, it has become more apparent that some basic notions of PFM should be part of everyone’s core knowledge about how the public sector works.

In this spirit, the Centre for Financial and Management Studies of the School of Oriental and African Studies (SOAS), University of London, has produced a MOOC (Massive Online Open Course) on “Understanding Public Financial Management: How is Your Money Spent?”. The project was realized in collaboration with FutureLearn, a UK provider of online courses with more than 70 partners around the world. You can visit the course at www.futurelearn.com/courses/public-financial-management and register for the first run, expected in January 2016.

Public Ownership of Commercial Assets—A Quarter Century Phony War

Posted by Dag Detter and Stefan Fölster¹

For more than a quarter of a century there has been a phony war raging between those in favour of public ownership of commercial assets and those against: privatisation versus nationalisation. This polarised and binary debate has missed the point. What matters is not so much who owns the assets but the quality of asset management. 

For any ownership mode, be it private, public, mutual or cooperative, there is a very wide range of alternative management models/styles and the choices made from those alternatives will have a major impact on the value the asset delivers. Huge portfolios remain in government hands, including not only corporations but also vast swathes of real estate. In some cases, privatisation will make sense. In many others, it may be neither desirable nor feasible. The good news is that there are ways to sweat assets that remain in public hands, generating a higher rate of return on them—if governments follow a few sensible rules. 

PPPs on the Balance Sheet, Please!

Posted by Tim Irwin

Public-private partnerships create a practical problem for public financial management, because their fiscal costs are deferred. Instead of paying for a project during its construction, the government starts to pay only when construction is complete, which may be four or five years after any deal is signed. That means that the main tool of public financial management—budget scrutiny—can’t be used to ensure that PPPs are affordable and a better use of public money than the alternatives. For PPPs with long construction periods, even the analysis of medium-term spending plans doesn’t help.

So what can be done to ensure that the budgetary implications of PPPs are properly considered?

The World Bank Group has just published an Operational Note on managing fiscal commitments from PPPs that helps answer this question. It looks at how these fiscal commitments can be assessed and monitored, whether they are commitments to pay for the availability of a service or to protect a PPP company from certain risks. The Note gives examples of the tasks that can be carried out by different government agencies, such as budget departments, debt-management offices, and PPP units. And it considers the kinds of rules that can be put in legislation to help ensure that the right assessment and monitoring occurs.

However, the Operational Note does not take a position on whether or not PPPs should be put on the government’s balance sheet. Budgeting and Reporting for Public-Private Partnerships by Katja Funke, Isabel Rial, and me argues that they typically should be.

A New PFM Reform Strategy for Cyprus

Posted by George Panteli[1]

The government of Cyprus recently launched a radical reform plan for modernizing the country’s public financial management (PFM) system. The reforms are crucial to the implementation of the economic and financial recovery program on which we are now engaged with the help of the European Union, the European Central Bank and the International Monetary Fund. It will enable Cyprus to bring its budget process into line with best practice in the EU region, and enforce the fiscal rules and financial discipline that are necessary to comply with our Treaty obligations. At the same time, it will create an opportunity for line ministries to enjoy a new-found flexibility in managing their staff and other resources and to focus efforts on improving the quality of education, health and other public services that in many cases lag behind out counterparts in Europe. The strategy encompasses both traditional aspects of the budget system and emerging topics such as project evaluation processes, the management of fiscal risks including public-private partnerships (PPPs) and the future development of a sovereign wealth fund.  

The reform plan is challenging and a realistic timeline is required since the plan will take several years to implement. What are the plan’s main components?  

New IPSAS Likely to Make It Difficult to Hide PPP Liabilities

Posted by Abdul Khan

Public private partnerships (PPPs) can lead to efficiencies and improved value-for-money by bringing in private sector expertise in construction and operation of assets used to provide vital public services. However, the eagerness of governments to embrace these arrangements has not always been motivated by these noble considerations. Often governments have entered into PPPs as a device to keep expenditure and debt off the budget. Hiding behind a mountain of legal and contractual obfuscations, governments have pretended that they did not have any liability for the full cost of the assets—perhaps a highway or a hospital—being built under these arrangements. This allowed them to simply include the annual contractual cash payments in their budgets and ignore all the future streams of payments required under the contract or contingent on specific triggering events. Budgets and annual accounts faithfully depicted this fiscal fiction year after year.

Conference on Fiscal Consolidation and Budget Institutions in South Asian Countries

Posted by Tej Prakash

The IMF’s Fiscal Affairs Department (FAD) and the Indian National Institute of Public Finance and Policy (NIPFP) recently hosted a joint conference on fiscal consolidation and strengthening of budget institutions in South Asian countries. The main “institutions” discussed were fiscal responsibility frameworks, fiscal councils, and medium term budget frameworks.

The conference took place in New Delhi from April 21-22, 2011. Apart from senior budget officials and policy makers from the central and state governments of India, representatives from Bangladesh, Sri Lanka, Nepal, Bhutan, Afghanistan and Maldives participated in the conference.