Monitoring Public Financial Management System Performance: Lessons and Future Directions

Bill Dorotinsky The World Bank

ICGFM Conference Miami May 3, 2005

Broad Lessons from PFM assessment work to date

A large amount of PFM assessment has been undertaken, mostly by development agencies and a good deal of knowledge generated.
Limitations : In some cases, the duplication and lack of coordination in the work has led to a heavy burden on partner governments More focus on diagnostics, less on supporting implementation of reform of country systems With the exception of the HIPC benchmarks, it has been difficult to determine the extent of improvement in a countrys PFM performance over time.

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Comparison of HIPC Expenditure Tracking Assessment Outcomes of 2001 & 2004

Some improvement in HIPC PEM systems performance since 2001, however a majority still require substantial upgrading.
Relative Need for Upgrading PEM Systems
(Number in Paranthesis indicate total of benchmarks met)

0 0 0 0 0 0
BEN ( ) 0 BFA ( ) 0 GUY ( ) 0 HND ( ) 0 MLI (0 ) RWA ( ) 0 TZA ( ) 0 TCD ( ) 0 UGA ( ) 0 BOL ( ) 0 CMR ( ) 0 ETH ( ) 0 GMB ( ) 0 GHA ( ) 0 GIN ( ) 0 MDG ( ) 0 MWI ( ) 0 MRT ( ) 0 MOZ ( ) 0 NIC ( ) 0 NER ( ) 0 STP ( ) 0 SEN ( ) 0 ZMB ( ) 0 GNB ( ) 0 GMB ( ) 0 ZMB ( ) 0 COD ( ) 0 BOL ( ) 0 MDG ( ) 0 MOZ ( ) 0 STP ( ) 0 GIN ( ) 0 MWI ( ) 0 NER ( ) 0 NIC ( ) 0 CMR ( ) 0 ETH ( ) 0 GHA ( ) 0 HND ( ) 0 SEN ( ) 0 SLE (0 ) TCD ( ) 0

0
BEN ( ) 0 RWA ( ) 0 UGA ( ) 0 BFA ( ) 0 GUY ( ) 22

TZA ( ) 00 MLI ( ) 22

Little Upgrading RequiredSome Upgrading Required Substantial Upgrading Required 00 22 00 22

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3 Source: Fund-Bank AAP database

http://www1.worldbank.org/publicsector/pe/hipcpapers.htm

Why hasnt there been more progress?

Unhelpful donor practices Inadequate sequencing of reforms, due to donor pressure or difficulties for government to determine the path of reforms Fragmented approach to reforms and limited leadership in government -- PRSP and PEM reforms separate Limited monitoring of progress, mainly concentrated on inputs -> did not allow lessons learning and did not encourage focus on results on the ground Capacity constraints Technical reform versus systemic/institutional change BUT realism important on achievable pace of change
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The Way Forward: A Strengthened Approach

1. A country-led agenda including a PFM reform strategy and action plan 2. A donor coordinated program of support coordinated, coherent, multi-year program of PFM work that supports and is aligned with the governments PFM strategy 3. A shared information pool a common framework and information set for measuring and monitoring results over time

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1. A country-led PFM reform strategy and action plan

The government-led reform program

Home-grown, country
specific agenda.

Good practices suggest

Planning and undertaking diagnostic work over time. Designing a prioritized and sequenced reform program. Implementing reforms Monitoring of progress over time.

(i)

sequence and priorities of reform activities and measures, (ii) holistic view of the PFM system, institutions and processes.

Informed by policy dialogue

with donors.

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2. Donor coordination around the PFM reform agenda of the government

Coordinated policy dialogue between government and donors would facilitate sequencing and prioritization of reforms. The limited available external resources for analytical support, technical assistance, capacity-building and financing should be allocated to the reform priorities of the government. Multiple requirements of donors and competition between donors should not burden the limited capacities of government. Coordination may facilitate in the medium-term the development of aid modalities that are more supportive of government processes and institutions, e.g. multi-donor trust funds to support reform implementation, use of national procedures, SWAPs, etc.

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3. Monitoring progress of PFM reforms

Monitoring progress enables decision-makers in government and donor agencies to assess the success and difficulties of the reform process and make decisions accordingly.
Depending of the purpose and interest, different levels for monitoring progress: 1. 1. 2. Reform measures/activities (training, new law, etc.). Implemented institutional and system changes (IFMS, new budget calendar, etc.). Changes in the performance of the PFM system over the years. -> requires a framework that ensures: Consistency over time; Precise, objective measurement of progress; Systematic coverage of the budget cycle.
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The Performance Measurement Framework

A PFM Performance Report

A standard set of high level indicators

Widely accepted but limited in number Broad measures of performance relative to the key PFM system characteristics Enabling credible monitoring of performance and progress over time.

Integrative, narrative report based on the indicators and assessing performance; based on observable, empirical evidence. Updated periodically, depending on country circumstances and operational needs Contributing to coordinated assessment Feeds into government-donor policy dialogue

An explicit performance measurement framework focuses on capacitybuilding and results on the ground.
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Current indicator set available at WWW.PEFA.ORG

MEASURING WHAT PERFORMANCE?

The questions the PFM performance indicators seek to answer
Budget Realism: Budget Realism: Is the budget Is the budget realistic, and realistic, and implemented as implemented as intended in aa intended in predictable manner? predictable manner?

Accountability and Accountability and Transparency : : Transparency Are effective external Are effective external financial accountability financial accountability and transparency and transparency arrangements in place? arrangements in place?

Comprehensive, Comprehensive, Policy-based, budget: Policy-based, budget: Does the budget capture Does the budget capture all relevant fiscal all relevant fiscal transactions, and is the transactions, and is the process, giving regard to process, giving regard to government policy? government policy?

Six core objectives of PFM system

Control : : Control Is effective control and Is effective control and stewardship exercised in stewardship exercised in the use of public funds? the use of public funds?

Comprehensive fiscal risk Comprehensive fiscal risk oversight : : oversight Is oversight of fiscal risk Is oversight of fiscal risk arising from public enterprises arising from public enterprises and sub-national governments and sub-national governments adequate? adequate? The World Bank

Information: Information: Is adequate fiscal, revenue and expenditure Is adequate fiscal, revenue and expenditure information produced and disseminated to meet information produced and disseminated to meet decision-making and management purposes? decision-making and management purposes?

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STRUCTURE AND CONTENT OF THE INDICATORS

Structure of the indicator set
C. Budget Cycle A. PFM Out-turns

Policybased budgeting

External Scrutiny and Audit

B. Key cross-cutting features Comprehensiveness Transparency

Budget Execution

Credibility Credibility

Accounting and Reporting

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Performance indicators
PI-0 PI-0 PI-0 PI-0 A. PFM -OUT -TURNS: Credibility of the budget Aggregate expenditure out -turn compared to original approved budget Composition of expenditure out -turn compared to original approved budget Aggregate revenue out -turn compared to original approved budget Stock and monitoring of expenditure payment arrears
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PI-0 PI-0 PI-0 PI-0 PI-0 PI-0 0

B. KEY CROSS-CUTTING ISSUES: Comprehensiveness and Transparency Classification of the budget Comprehensiveness of information included in budget documentation Extent of unreported government operations Transparency of inter-governmental fiscal relations Oversight of aggregate fiscal risk from other public sector entities. Public access to key fiscal information

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C. BUDGET CYCLE PI-0 0 PI-2 2 C(i) Policy-Based Budgeting Orderliness and participation in the annual budget process Multi-year perspective in fiscal planning, expenditure policy and budgeting C(ii) Predictability and Control in Budget Execution Transparency of taxpayer obligations and liabilities Effectiveness of measures for taxpayer registration and tax assessment Effectiveness in collection of tax payments Predictability in the availability of funds for commitment of expenditures Recording and management of cash balances, debt and guarantees Effectiveness of payroll controls Competition, value for money and controls in procurement Effectiveness of internal controls for non-salary expenditure and assets management Effectiveness of internal audit 14

PI-2 2 PI-2 2 PI-2 2 PI-2 2 PI-2 2 PI-2 2 PI-2 2 PI-2 2 PI-0 0

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PI-0 0 PI-2 2 PI-2 2 PI-2 2 PI-2 2 PI-2 2 PI-2 2

C(iii) Accounting, Recording and Reporting Timeliness and regularity of accounts reconciliation Availability of information on resources received by service delivery units Quality and timeliness of in-year budget reports Quality and timeliness of annual financial statements C(iv) External Scrutiny and Audit Scope, nature and follow-up of external audit Legislative scrutiny of the annual budget law Legislative scrutiny of external audit reports

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And three donor practice indicators

D. DONOR PRACTICES D-0 Predictability of Direct Budget Support D-0 Financial information provided by donors for budgeting and reporting on projec t and program aid D-0 Proportion of aid that is managed by use of national procedures

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PI-1 Aggregate expenditure out-turn compared to original approved budget

Dimensions to be assessed: The difference between actual primary expenditure and primary budgeted expenditure (i.e. excluding debt service charges, but also excluding externally financed project expenditure).
Score A B C D Minimum Requirements (Scoring Method M ) 0 (i) In no more than one out of the last three years has the actual expenditure deviated from budgeted expenditure by an amount equivalent to more thanof budgeted 0 % expenditure. (i) In no more than one out of the last three years has the actual expenditure deviated from budgeted expenditure by an amount equivalent to more 0 % of budgeted than 0 expenditure. (i) In no more than of the last three years has the actual expenditure one deviated from budgeted expenditure by more than an amount equivalent 0 of budgeted 0to % expenditure. (i) In two or all of the last three years did ethactual expenditure deviate from budgeted expenditure by an amount equivalent more than 00 of budgeted to % expenditure.
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PI-22. Timeliness and regularity of accounts reconciliation

Dimensions to be assessed: Regularity of bank reconciliations Regularity of reconciliation and clearance of suspense accounts and advances.
Score A B C D Requirements: Scoring Methodology M 0 The average of the numerical scores of the dimensions 000 is -0 0 The average score of the dimensions is -0 (assign B+ if the average is above ) 000 00 The average score of the dimensions is -2 (assign C+ if the average is above 2) 002 2 The average score of the dimensions is -0 (assign D+ if the average is above 0) 000 0

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Dimension Minimum requirements for dimension score (i) Regularity Score = 000 : Bank reconciliation for all central government bank accounts take of bank place at least monthly at aggregate and detailed levels, usually within0 weeks of reconciliations end of period. Score = 00 : Bank reconciliation for all Treasury managed bank accounts take place at least monthly, usually within 0weeks from end of month. Score = 00 : Bank reconciliation for all Treasury managed bank accounts take place quarterly, usually within 0weeks of end of quarter. Score = 0 Bank reconciliation for all Treasury managed bank accounts take : place less frequently than quarterly OR with backlogs of several months. (ii) Regularity of reconciliation and clearance of suspense accounts and advances Score = 000 : Reconciliation and clearance of suspense accounts and advances take place at least quarterly, within a month from end of period and with few balances brought forward. Score = 00 : Reconciliation and clearance of suspense accounts and advances take place at least annually within two months of end of period. Some accounts have uncleared balances brought forward. Score = 00 : Reconciliation and clearance of suspense accounts and advances take place annually in general, within two months of end of year, but a significant number of accounts have uncleared balances brought forward. Score = 0 Reconciliation and clearance of suspense accounts and advances take : place either annually with more than two months delay, OR less frequently.
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Future Directions
Indicators developed by Bank in collaboration with IMF, EC, DFID, France, Switzerland, Norway Consultations were held in OECD DAC JV on PFM, and with countries Under final review, with expected formal issuance in mid-May Within Bank, expected to be recommended as good practice in working with clients

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