Public Financial Management Reform: A complete history (abridged) Reform Lessons, Capacity Building, TA, and WGA Bill Dorotinsky Fiscal Affairs Department IMF Whole-of-Government Approaches in Fragile States Conference Paris March 17-18, 2008 Distinction Public finance policy Public financial management (PFM) Treasury system Budget processes Relations Rice subsidies Bad system likely to produce bad policy Bad system cannot implement well good policy Focus of remainder is on PFM HIPC Expenditure Tracking 2005 Results Percentage of Countries Not meeting Benchmarks (24 Countries) 2001 2004 100 90 80 Percentage 70 60 50 40 30 20 10 0 Indicator Number 1 2 3 4 5 Formulation 6 7 8 9 10 Execution 11 12 13 14 Reporting 15 16 New HIPC Expenditure Tracking Lessons Realistic expectations of reform progress are needed. The "basics" of PFM systems were still not right. Over-all the countries improved 10 percent over three years, or about 3 percent per year Basic PFM system operations were very weak, but fads remain popular A holistic – systems – approach to PFM system analysis and reform development is needed. The connections between various PFM system components are understood, but infrequently emphasized or included in reform measure development Lessons (continued) Country ownership of reforms is the critical variable for PFM system improvement. How PFM system assessments, reform actions, and implementation are undertaken is at least as important as assessment instruments. Country action plan implementation best predictor of PFM system improvements. Efforts to improve PFM systems must begin with country ownership – leadership – in assessing performance, setting the reform agenda and implementing reforms. Joint action planning between authorities and technical assistance providers can yield better results. Narrowly focused action plans, reflecting clear reform priority setting, might improve reform impact and PFM system performance. Donor coordination around a more limited set of reforms might help keep reforms focused and yield better results. Customized reforms to country needs may yield better results Rather than donor pre-packaged measures Country’s pragmatic needs for managing resources, self-defined, may be the best place to start Capacity-Building Build PFM systems that meet country resource management needs Emphasize country staff doing the work, versus doing work for them Advisory/TA work is changing pragmatic, simple solutions fitting country circumstances Less on ‘what to do’, more on ‘how to do it’ Needs change; flexible, fast response needed Long-term Critical mass, cohorts, generational On-going engagement with increasing country assumption of tasks, task management, analysis, etc. Country Systems -- donor financial arrangements reinforce or undermine country PFM system Function Parallel System Budgeting Banking “Pure” Country System Limited use of Country System Substantial Use of Country System Parallel project budgets, in many cases not included in the country’s budget. Regular national budget procedures, supplemented by more detailed or reclassified “project budgets” Where national procedures allow for earmarking of multiyear funds and carryforward to future years, these might be used to more easily attain project objectives. Project expenditures and financing included in national budget and approved as part of regular budget procedures. Funds retained in commercial bank or outside country. Funds retained in central bank, separate account A Treasury Single account in central Bank, with subaccount might to notionally prevent comingling of project funds with general funds. Treasury Single Account Similar entries for other aspects of country systems: Payment; Program Management; Internal Controls; Accounting; Financial Reporting; Record-keeping; Audit (internal and external); Procurement; Oversight PFM TA modalities Different modalities for different needs Training Direct TA Generic, general out-of-country Specific, in-country On-the-job Shorter versus long-term Resident, regional, peripatetic, virtual Peer-learning On WGA WGA supports capacity-building if it Prioritizes, focuses donor support Brings more practitioner expertise where needed Supports country needs, priorities Simplifies versus complicates Helps solve practical problems, versus trying to re-create provider-country PFM system WGA may work differently for PF Policy and PFM Supplemental Resource Mobilization, Budgeting Links I II III IV Resource mobilization Low economic; low political; non-tax resources Economic outruns political; non-tax resources Economic outruns political; No non-tax resources Political outruns economic; non-tax resources Accountability Low Low High Low Administrative Control Low Low High High Examples Suggests this pattern recurs in countries with large oil-wealth. Emerging nations of Europe from 14th century. Medieval city-states of Italy and northern Europe; also English republic of mid-seventeenth century and French Revolution. Mobilizing aristocracy. Early examples in 17th and 18th century Prussia; exemplified in Napoleonic Empire. Typical pattern of cash-flow budgeting. Use of expedients. Indirect taxation, regressive. Splintered or fragmented budgets, earmarks. Lack of budgetary control. Fictional budgets. Absence of information on real financial position. High borrowing. Low accountability and low administrative control; confusion of public and private roles and high leakage. Typified by trouble raising revenues, for which they rely on direct taxes, levies in kind, voluntary contributions. Accountability imposed informally either through legislative commissions or personal control of bureaucracies. Source: “Patterns of Budgeting.” Naomi Caiden in Perspectives on Budgeting, 2nd edition. Allen Schick, Ed. ASPA 1987. Pp. 15-26.