Making budget reform work better in Armenia

Perspectives and proposals emanating from an integrated analysis of the Public

Financial Management (PFM) system

Matthew AndrewsWorld Bank

National and Sectoral Policy Review and Development

Process

1. Strategic Budgeting(policy-budget connection, resource

envelope, ceilings)

2. Budget Preparation

3. Resource ManagementFinancial resources (revenue,

customs, debt, cash), procurement, personnel and capital management

4. Internal Controls, Internal Audit and

Monitoring

5. Accounting and Reporting

6. External Audit and Accountability

PEM System

An integrated system

Questions

Are the process areas connected to ensure coherence in the PFM system, with consistent incentives and a strong and consistent form

of accountability?OR

Is the system fragmented, with inconsistent incentives and accountability relationships?

Are these process areas all sufficiently effective in introducing a disciplined, strategic and efficient PFM system ?

Does Armenia have all the required ‘processes’ for a strong PFM system—necessary to facilitate discipline, a strategic policy-based orientation, and

efficiency?

Addressing these questions: The basis of assessing the system

• Assess PFM system performance

• Assess quality of individual process areas

• Assess reform consistency and integration– Across process areas, given performance– Are all processes reflecting the same kinds of ‘goals’, ‘incentives’,

and accountability relationships?

Assessment criteria

1. PEFA indicators: Focus on ‘critical’ or basic indicators

A, B, C, D

2. ‘Better practice’ indicators of strong strategic systems

also A, B, C, D

First: Analyzing PFM system performance

The ‘three level’ goals:

1. Fiscal discipline

2. Quality of budgetary allocations

3. Operational efficiency

Findings: PFM system performanceGoal area Goal quality and

clarityPerformance, by PEFA score, where relevant

Performance, by better practice criteria

Fiscal discipline Clear goals in PRSP. Strong

Budget comprehensiveness

Clear A Moderate (NCEs, etc.)

Arrears Clear A Strong

TransparencyPublic information access

Somewhat clear A Moderate to strong

Budget reliability:Aggregate expenditureExpenditure compositionRevenue

Clear ABA

Moderate to strong

Resource allocation Clear goals at aggregate level; Unclear intra-sectoral allocation goals; No indicators’

Moderate at aggregate levels

Weak in details (intra-sectoral allocations)

Operational efficiency Not clear.No ‘efficiency’ measures in PRSP

Weak

Basic comment on Armenia’s PFM performance

Armenia’s overall performance• Is strong in ‘level 1’ fiscal discipline goals• Is moderate in aggregate ‘level 2’ allocation quality goals (sectoral level)• Is weak in the more detailed areas of ‘level 2’ allocation quality goals

(intra-sectoral) and with ‘level 3’ operational efficiency goals

There is a theory that relates PFM system development with these goals, which would suggest that:

• Armenia should be consolidating a ‘regulation and control system’ (reinforcing its fiscal discipline gains) and/or

• Armenia should be developing elements that facilitate structured discretion (moving to a place where allocation and operational efficiency is really fostered)

Armenia’s performance and the stages of reform

0. Informal, weak PEM systems Limited accountability, transparency, weak discipline, poor budget quality.

BUDGETS INFORMAL, UNRELIABLE

1. Regulation and control Reforms entrench control and disciplined, reliable budget--but little attention to

spending quality. There is an ex-ante control focus. BUDGET NOW FORMAL, RELIABLE, BUT NOT VERY STRATEGIC

2. Structured discretion Reforms blend ex-ante and ex-post controls, and move towards enhanced roles for

central agencies and budget users. BUDGET FORMAL, AND SOME THOUGHT ABOUT ALLOCATIONS

3. High discretion, performance-orientation Emphasis on ex-post controls, with budget users held accountable for

performance. BUDGET FORMAL, FOCUS ON STRATEGY, EFFICIENCY

Armenia’s current performance

Question: Do Armenia’s processes also suggest the same ‘stage’ of reform?

Analyzing PFM process areas (and connections between areas)

• Six major areas, with sub-processes in each– Strategic budgeting: identifying (1) national expenditure

priorities, (2) resource envelopes, (3) strategic plans in budget entities, (4) expenditure ceilings.

– Budget preparation: involving (1) communicating rules for preparing the budget, (2) developing budget drafts, (3) legislative budget review and ratification.

– Resource management: including (1) cash management—inflows, outflows and debt, (2) procurement, (3) personnel, (4) capital.

– Internal controls, audit and monitoring– Accounting and reporting– External audit processes

What do we see through the PEFA scores?

National and Sectoral Policy Review and Development

Process

1. Strategic Budgeting(policy-budget connection, resource

envelope, ceilings)

2. Budget Preparation

3. Resource ManagementFinancial resources (revenue,

customs, debt, cash), procurement, personnel and capital management

4. Internal Controls, Internal Audit and

Monitoring

5. Accounting and Reporting

6. External Audit and Accountability

PEM System

B

A B

C/D B A

B CC DB B B

D C

What do we see through the ‘better practice’ scores?

National and Sectoral Policy Review and Development

Process

1. Strategic Budgeting(policy-budget connection, resource

envelope, ceilings)

2. Budget Preparation

3. Resource ManagementFinancial resources (revenue,

customs, debt, cash), procurement, personnel and capital management

4. Internal Controls, Internal Audit and

Monitoring

5. Accounting and Reporting

6. External Audit and Accountability

PEM System

B

A B

C/D B A

B CC D

B B B

D C

C/D

C/D

C/BC/D

D B A/B

C/D DC D

D C B

D D

What does the assessment tell us about reform consistency, integration?

• First notice that the PEFA indicators tell a different story to the other ‘better practice’ indicators

• PEFA shows where ‘basics’ are in place– Largely these are associated with establishing a strong

‘regulation and control’ system– Still some ‘basic’ weaknesses (PEFA C, D):

• Revenue management, personnel and payroll, internal controls and internal audit, external audit and oversight

• ‘Better practice’ scores show how Armenia’s PFM system compares with more strategic systems, focused on results-based accountability, efficiency– Many weaknesses in system, when making such comparison

Armenia’s PFM system and the stages of reform

0. Informal, weak PEM systems Limited accountability, transparency, weak discipline, poor budget quality.

BUDGETS INFORMAL, UNRELIABLE

1. Regulation and control Reforms entrench control and disciplined, reliable budget--but little attention to

spending quality. There is an ex-ante control focus. BUDGET NOW FORMAL, RELIABLE, BUT NOT VERY STRATEGIC

2. Structured discretion Reforms blend ex-ante and ex-post controls, and move towards enhanced roles for

central agencies and budget users. BUDGET FORMAL, AND SOME THOUGHT ABOUT ALLOCATIONS

3. High discretion, performance-orientation Emphasis on ex-post controls, with budget users held accountable for

performance. BUDGET FORMAL, FOCUS ON STRATEGY, EFFICIENCY

Armenia’s current performance

Remember we saw that Armenia’s system performance suggested it was in the ‘regulation and control’ stage?

See that most of Armenia’s processes reflect this stage as well: PEFA A and B (MTEF, Treasury system, etc.)

Some processes are not even at this stage PEFA C and D

Very few are at a more advanced stage A/B for better practice, strategic, efficiency oriented system

However, Govt. emphasizes a move in this direction and has adopted significant reforms focused on responsive, discretionary government (like the creation of NCEs)

The current situation in a nutshell• Armenia’s PFM system has ‘achieved’ discipline

(largely)– The processes are best suited to this ‘level’ or stage of performance– Processes are not yet suited to more discretionary/policy-based

approaches (there is still no non-financial accountability, a ‘still maturing’ policy constituency, etc.)

• However, Armenia has moved ahead with some reforms that imply more advanced processes– The NCE reform assumes the existence of some kind of ‘purchase

agreement’ and the ability to monitor non-financial ‘performance’ (this could be provision of services, outputs, etc.) However, Armenia does not have this process ability…

‘The nutshell’ contd.

• Program budgeting is intended to progress Armenia to a more advanced system, but this reform is currently too shallow to move an entire system ahead– There are significant process weaknesses throughout PFM that

will hinder progression– More importantly, there are organizational and ‘cultural’

weaknesses throughout the PFM process that will hinder progression

– It is vital the develop a broader constituency for the reform, by creating an integrated approach that spans the PFM system

Two potential reform directions—both requiring some careful integration

1. Consolidate the ‘regulation and control’ approach and preserve fiscal discipline and budget reliability

• Build ‘missing’ processes (PEFA C’s and D’s)• Recentralize NCE-type organizations (and expand the

coverage of controls, and transactions accountability)• Improve controls in the Treasury (and through the budget,

procurement system, etc.)• Improve budget classifications, etc. to ensure effective control• NOT A SERIOUS APPRPOACH—GOING BACKWARDS!!

2. Decide to move ahead towards a more strategic system that entrenches accountability and incentives for how money is used (efficiency and effectiveness)

• What could be called an ‘integrated’ program budgeting reform agenda

An integrated approach to ‘next steps’ in program budget reform

Basic approachNeed to work in more process areas, where

opportunities exist

Dual purpose:

1. Making technical/process improvements;

2. Build ‘coalitions of the willing’ across the PFM system

Work in the strategic budgeting processStrengthen national expenditure priorities- Engage political representatives (Deputy Minister workshops)- Use opportunity of PRSP update

- Work with PRSP unit to develop streamlined product (build on indicator set) with 20-30 national goals, with indicators

- Build on these as ‘national goals’ and engage with Cabinet to develop their ‘ownership’

- Introduce these goals into the MTEF and budget circular- Make these goals a starting point for non-financial reporting/monitoring

Strategic plans in budget entities- Improve methodologies, especially regarding costing - Clarify responsibilities, for MFE and for SBAs- Consolidate work in pilots, but expand--gradually with full ‘program

budgeting’ reform--but immediately to all with new program definition- Altering the program definition is vital—it is currently vague, tied to GFS

1986 function/sub-function classification- New CoA provides a need to revise the program definitions, and an

opportunity to get it right—to ensure that a solid definition is established, and over the next three years that all programs are assessed to ensure they conform with the definition

Work in the budget preparation process

Improve budget circular• Introduce national policy goals, with indicators

• Introduce new program definition, and require all programs to show how they link to a national goal

• Introduce new clear costing methodology, and update norms

Improve classification approach• De-link ‘programs’ from functions and sub-functions

• Organize budgets by administrative unit(s) and program, and use functional classifiers for ex-post reflection of budget structure

• Adjust legislation to allow budget allocations to organizations and programs

• Clarify the international meaning of key classifiers (mostly economic items) and ensure they are used consistently

• Once again, the movement to adopt the new CoA provides the opportunity for all of these steps

Work in the budget preparation process

Develop core competencies• In Budget Department, to analyze budget submissions, especially for cost

efficiency (comparing costs in budgets with norms) but also in time for quality of policy goals (not for goals themselves)

• In SBAs: Need to create integrated units to develop MTEFs and budgets

• In SBAs: To develop cash and procurement plans in the latter budget period.

• In SBAs: Introduce ‘service agreements’ between SBAs and NCEs (embedding service and efficiency obligations for NCEs)

Work with the National Assembly• How to win them over to this approach?

• Provide reports for the NA; provide better policy information to NA

• Secure training for Committees in NA, on program budgeting, so that they demand program-type information

Working in resource management processes

• Revenue administration– Not part of program budgeting, but a vital reform agenda to be

pursued• Cash management

– Work with Treasury to ensure early disbursements every year– Cash planning in Treasury and SBAs– Work with Treasury to ensure that system facilitates allocations

to organizations, programs—develop codes, etc.• Procurement

– Stronger plans and capacity in SBA procuring entities– Introduce long-term contracts for increased number of goods

and services, and for capital projects– Tighten rules allowing sole source contracts (especially

regarding time constraints)– Strengthen procurement complaint mechanisms, and introduce a

register of complaints– E-procurement

• Personnel management– Vital reform whether Armenia consolidates or moves ahead– Need to develop database, and tie to payroll to facilitate controls– Improve competitive hiring processes to give managers greater

ability to hire appropriate people– Think carefully about bonus system and performance

compensation

• Capital management– Assess quality of asset registers and project databases in SBAs– Revise legislation to strengthen ‘public property’ concepts,

especially as these pertain to NCEs

Working in resource management processes

Internal controls, audit and monitoring, and Accounting and reporting

• Internal controls, audit and monitoring– Develop internal controls and audit methodologies,

accreditation processes, etc– Create internal audit cadre (in program budget pilots first)– Foster monitoring of national and program goals

• PRSP process provides opportunity, even for working with civil society in monitoring

• Accounting and reporting– Focus IPSAS reforms on program budget pilots (training, etc.)– New CoA provides excellent opportunity for overcoming

classification problems and ensuring that accounts, etc. can focus on programs

– Aggressively introduce non-financial reporting, in NCEs and in program pilots and beyond

• PRSP process provides opportunity, and PRSP unit in MFE has thought about this

External audit and accountability

• Develop Chamber of Control as Armenia’s Supreme Audit Institution– In Law– By building an accredited auditing staff

• Develop capability to conduct true financial and performance audits, even if assistance needed from private sector/civil society– Begin soon conducting performance audits of pilots

• Provide Parliament with quarterly and annual non-performance reports, building demand for this information and reform

What will this kind of design do?

• Create a broader reform constituency– Horizontal, across the PFM system– Vertical, at different levels– Political and managerial

• ‘Deepen’ the technical reforms already in place– Developing various skill sets required for

affective management of strategic budgets