Module 1.3. The starting point: assessing PFM systems The Issues of Budgetary Reform Unit 1. Approaches to PFM reform

Module 1.3. The starting point: assessing PFM systems

The Issues of Budgetary ReformUnit 1. Approaches to PFM reform

•Module 1.1. PFM objectives and budgetary approaches

•Module 1.2. Why reform PFM systems? Why establish a sequencing?

•Module 1.3. The starting point: assessing PFM systems

•Module 1.4. Conditions for successful reform

Day 1: Approaches to PFM reform

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Module 1.3. The starting point: assessing PFM systems. Objectives of the module

• Before reforming a budgetary system, it is necessary to identify its weaknesses and their causes

• This module examines the instruments to assess PFM, including PEFA, looking at both their advantages and their shortcomings

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Module 1.3 Outline

• Presentation of PFM assessment tools

• The PEFA performance indicators

• Advantages and shortcomings of the PEFA

• A few issues to be examined at the sectorial level

• Issues linked to corruption

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A few tools for PFM assessment

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RDP/PER

MAPSCPAR

ROSCBudget

AT- FMIreport

PEFA

Evaluation of public expenses policy & budget impact

X

Evaluation of political incentives X

High level evaluation of the PFM performance

X

Identification of strengths and weaknesses of the PFM

X X X X

Deep analysis of capacity factors X X X X

Reform recommendations X X X X

Risk assessment for public funds

Progress monitoring * * X

Review of Public Spending(PER)

• Strengthen the analysis and budgetary process in the country in order to focus more efforts on growth and poverty reduction

• Assess the public spending programme of a country in order to meet the financial responsibility requirement and provide the government with an different perspective of its budget

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ROSC – IMF Report

• The Code of Good Practices on Fiscal Transparency identifies a set of principles and practices to be respected by public authorities.

• The Code is based on four general principles:– 1) Clarity of roles and responsibilities– 2) Open budget process– 3) Public availability of information– 4) Assurances of integrity

• ROSC are currently less frequent then they used to be

Reports on the Observance of Standards and Codes summarize the extent to which countries observe certain internationally recognized standards and codes

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http://www.imf.org/external/np/fad/trans/code.htm

Assessment methods concerning some particular functions of PFM (1)

OCDE-CAD. Methodology for assessing procurement systems (MAPS). 12 high level indicators decomposed into secondary indicators and grouped within 4 pillars:• Legislative and Regulatory Framework

o The public must have access to Laws and Regulations• Institutional Framework and Management Capacity

o Coordination with the budgetary processo Existence of a functional normative bodyo Existence of institutional development capacities

• Procurement Operations and Market Practiceso Efficient conduct of operationso Existence of a market

• Integrity and Transparency of the Public Procurement System The Country Procurement Assessment Reports of the World Bank

(CPAR) generally use this methodology8

Debt Management Performance Assessment: DeMPA. 15 indicators that complement and add precision to the PEFA

Examples of correspondances

Assessment methods concerning some particular functions of PFM (1)

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PEFA DeMPA

IP-12: Multi-year perspective in fiscal planning, expenditure policy and budgeting

Dimension ii) Scope and frequency of debt sustainability analysis

DPI-6: Coordination with budget policy

Dimension 2: Availability of main budget variables and/or debt sustainability analysis and its frequency

IP- 16: Predictability in the availability of funds for commitment of expenditures

Dimension i) Extent to which cash flows are forecast and monitored

DPI-11: Cash flow forecasts and management of cash balances.

Dimension 1: Effectiveness of the aggregate balance forecasts of the state bank accounts.

PEFA

Instrument to measure performance and progress according to the objectives

“High level” indicators, as opposed to the CPAR tools Part of the approach has been strengthened to

support a PFM reform A reform programme conducted by the government A coordinated support programme by the lenders A common framework for assessment and follow-up

of the results

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Carry out PFM reforms

Recommend PFM reform measures

Identify main PFM weaknesses

High level assessment of performance

Place of the PEFA PFM performance report in the PFM reform cycle

Examine root causes

Indentifying the main weaknesses of PFM

Formulate a reform programme

Recommend measures for PFM reform

PFM performance report

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Integrated products• Often promoted by the World Bank, under different

names• PEMFAR. Public Expenditure Management and

Financial Accountability Review• CIFA. Country Integrated Fiduciary Assessment, etc.

• Their content may change from one another, as they may contain, in addition to a PEFA, an assessment of public procurement, an PER and a reform programme• Whereas PEFA does not contain a reform

programme, mainly to ensure a greater objectivity of the assessment

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The sociopolitical background

• The importance of external factors (cultural, political, etc.) led to developing studies of the sociopolitical background• Drivers of change (DFID)• Public Policy Analysis

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Module 1.3 Outline






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PEFA: the dimensions of performance

• PEFA indicators are regrouped within 6 different PFM systems “performance dimensions” and a group of indicators specific to donor pratices

• 1 dimension essentially corresponds to result indicators

• 1 dimension corresponds to cross-cutting issues

• 4 dimensions cover the 4 different stages of the expenditure cycle

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The PEFA: dimensions of performance

Policy based budgeting

Predictability and control in

budget execution

Accounting, recording and

Reporting

External scrutiny and

audit

Cross-cutting issuesComprehensiveness

and transparency

Budget credibility

Donors practices16

PEFA performance indicators• 28 indicators that cover all 6 PFM performance

dimensions• 3 indicators regarding the lenders’ practices• Some of the 31 indicators may be composed of sevral

components• Or each indicator:

o An analytical methodologyo A grading system from D to A (best grade)

– For the indicators composed of sevral components, two different grading systems exist: (M1) the grade of the indicator is that of the component with the lowest grade, (M2) the grade of the indicator is the average of the grade of its components.

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The PEFA indicators

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A. PFM-OUT-TURNS: Credibility of the budget

PI-1 Aggregate expenditure out-turn compared to original approved budget PI-2 Composition of expenditure out-turn compared to original approved budget PI-3 Aggregate revenue out-turn compared to original approved budget PI-4 Stock and monitoring of expenditure payment arrears B. KEY CROSS-CUTTING ISSUES: Comprehensiveness and Transparency PI-5 Classification of the budget PI-6 Comprehensiveness of information included in budget documentation PI-7 Extent of unreported government operations PI-8 Transparency of inter-governmental fiscal relations PI-9 Oversight of aggregate fiscal risk from other public sector entities. PI-10 Public access to key fiscal information C. BUDGET CYCLE C(i) Policy-Based Budgeting PI-11 Orderliness and participation in the annual budget process PI-12 Multi-year perspective in fiscal planning, expenditure policy and budgeting C(ii) Predictability and Control in Budget Execution PI-13 Transparency of taxpayer obligations and liabilities PI-14 Effectiveness of measures for taxpayer registration and tax assessment PI-15 Effectiveness in collection of tax payments PI-16 Predictability in the availability of funds for commitment of expenditures PI-17 Recording and management of cash balances, debt and guarantees PI-18 Effectiveness of payroll controls PI-19 Competition, value for money and controls in procurement PI-20 Effectiveness of internal controls for non-salary expenditure PI-21 Effectiveness of internal audit C(iii) Accounting, Recording and Reporting PI-22 Timeliness and regularity of accounts reconciliation PI-23 Availability of information on resources received by service delivery units PI-24 Quality and timeliness of in-year budget reports PI-25 Quality and timeliness of annual financial statements C(iv) External Scrutiny and Audit

PI-26 Scope, nature and follow-up of external audit PI-27 Legislative scrutiny of the annual budget law PI-28 Legislative scrutiny of external audit reports

D. DONOR PRACTICES D-1 Predictability of Direct Budget Support D-2 Financial information provided by donors for budgeting and reporting on project and program aid D-3 Proportion of aid that is managed by use of national procedures

Relationships between the dimensions of performance

• These dimensions are interdependent and work together to achieve the objectives of PFM

• However, in some domains, the process may progress ina relatively autonomous way, if there is there a will to reform

• For example, management of revenue (PEFA IP 13 to 15), payrolls (IP 18), markets m(IP 19 ).

• Some relationships between different indicators or different dimensions are more important than others

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The relationships between performance dimensionsSome essential issues

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Module 1.3 Outline






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Advantages of using the PEFA in the preparation of reforms

• The PEFA framework is a very useful tool when it comes to having a global view of a PFM system and identifying its strengths and weaknesses

• PEFA covers the majority of the core functions of a PFM system

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The shortcomings of PEFA

• Some processes of PFM are not or insufficiently covered by the PEFA o Legislative and regulatory framework; IT; capacity;

non tax revenue; sectorial management; management of physical assets

o Accounting method: decentralisation; performance• The PEFA usually concerns processes, but does not

necessarily provide information on their resultso Except the four indicators concerning budget

credibility• The PEFA does not take into account external factors

(eg. Role of the political context, corruption)

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Avoiding the cult of grading

• An “A” grade reveals that there are good practices, but does not necessarily guarantee good result• Results may depend upon many other factors than the

graded processes• A “D” grade will reveal that there is a lack of a some

functions, but priority should not necessarily go to focusing the efforts on the processes graded with a D

• The grades and the PEFA report enable one to have a better knowledge of a PFM system, but in preparing a reform programme, one must also take into account external factors and priorities assigned to different PFM objectives

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Placing the PEFA indicators in the chain of results

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Module 1.3 Outline






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Performance dimension according to PEFA

Specific points for the sector

Budget credibility

Budget execution and arrears Budget execution rate compared to the initial sector budget, scheduling and payment; arrears accumulation in the sector: (i) arrears in the treasury; (ii) non scheduled arrears

Exhaustivity and transparency

Expenses classification Have the projects or group of investment projects been identified?The staff expenses are distributed by destination in order to ventilate them by sub-function?Is the expenses ventilation by region available, at least in execution?

Central administration expenses coverage Have project aids been budgeted? Have we an estimation of non-budgeted aid?Which part of central administration expenses is not covered by the state budget?

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International administrations expenses Which are the competences attributed to local collectivities?How are these competences programmed and monitored?

Budgetary risk Are the budgetary risks linked to grants examined?

Budgeting based on public policies

Budget preparation Which are the internal procedures for budget preparation? Which is the nature of the dialogue among the DAAF, Directorate of Planning and Technical Directorates?Do MoF directives give enough time to sector ministries to prepare their budget proposals?

Performance dimension according to PEFA Specific points for the sector

Strategies, models, data base Does a realistic strategy exist?Which are the data bases of the sector?How often are they updated?Are they sufficient for programming the expenses?Does a sector strategy exist? Has it been examined by the council of ministers? And by the Parliament? Was it drafted through a participatory approach? Does a realistic strategy simulation model exist?

MTEF Does a sector MTEF exist? Is it congruent with the global CDMT?



Predictability and budget execution controlCredit establishment Is there a delay in establishing the credits?

How are the credits distributed among the decentralized services?Which is the level of predictability of this distribution?

Internal control Which are the audit and control mechanisms within the ministries?How are the expenses tracked until destination? (eg. Tracking survey)Does a reliable accountancy exist?How are the commitments (including multi-annual commitments) controlled?Francophone systemsWho is l’ordonnateur?Which central controls are redundant?Which are the special payment procedures?

Performance dimension according to PEFA Specific points for the sector

Markets Markets (see OECD-CAD)HR management Does the HR directorate have a staff dossier? If

yes, do reconciliation procedures existbetween this dossier and the dossiers managed by MoF and Ministry of public administration?How is the external staff managed? Does the HR directorate have/publish the staff expenses other than “staff expenses”?

Reporting and financial monitoringMinistry budget Do ministries account their commitments and

payments?Which are the reconciliation procedures between the ministries data and the treasury?How are the cash flows of the public institutions under guardianship and those of the ministry?

Public institutions Do public institutions publish they budget and their budget execution reports?



External control

Supreme Audit Institution Does the Court of Audit control the activities of the sector?

Parliament Does the Parliament meet in commissions?Which sector commission follows the sector?How does this commission coordinate with the Finance Commission? Which resources are made available for it?

The PEFA Assessment Tool • Analytical Framework

Fiscal discipline, strategic allocation of resources, efficient service delivery

6 main dimensions: Credibility of the budget, comprehensiveness and transparency, policy based budgeting, Control and predictability in budget execution, Accounting, recording and reporting, External scrutiny and audit

31 high level performance indicators

Legal and Regulatory Framework

Institutional Arrangements

Reform Process Progress on Government PFM reforms

Institutional arrangements for planning and implementing PFM reform33

Module 1.3 Outline






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Concerning corruption

• Reinforcing the budgetary system is only one of the aspects of the fight against corruption

• Often necessary, never sufficient

• Beware of “easy solutions”. The accumulation of controls can have perverse effects

• High priority must be granted to improving transparency and reinforcing external surveys of the executive

• A few restrictions must be kept in mind

• Does this action contributes to the fight against corruption?

• What must be done in addition to this? How to make these actions more effective to fight corruption?

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The mechanisms of corruption and the PFM cycle. A few examples (1)

• Budget preparation• A classical example: the white elephant• Actors: powerful decision-makers• How to fight it?

– Transparency? Checks and balances from administrative technicians? …

• Budget execution. 1st example: off-budget expenditure• Actors: the Ministry of Finances, powerful decision-

makers, and the voluntarily blind Tax Office• How to fight it?

– Transparency of the Tax Office accounts, external audit?

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• Budget execution: 2nd example: (bought off) delays in the processing of operations• Actors: financial control, Tax Office, sectorial ministries• How to fight it?

• Impose operations treatment deadlines• Establish an “audit trail”• …

• Budget execution. 3rd example: services not provided and missing stocks• Actors: managers, and sometimes the financial control as well• How to fight it?

• Reinforce internal control, inspections and audit

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• Markets ..

Personnel administration …

Revenue management ….

• Etc.

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What are your observations? Any suggestions?


Sanctions

• Adapted sanction systems are crucial

• Sanctions must be applied

• Warning• Administrative mistakes must not be confused for either

fraud or corruption

• The fight against corruption can be abused to serve political ambitions

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Key messages

• Prior to the launch of a PFM reform programme, an overview of the situation is necessary

• The PEFA is an essential instrument to establishing an overview of the situation, but other analyses must be added to it, specifically analyses concerning exetrnal factors and capacity issues

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Documents

Module 1.3. The starting point: assessing PFM systems The Issues of Budgetary Reform Unit 1. Approaches to PFM reform