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Improving Public Financial Management:

The Role of Analytic Instruments

Presentation to ICGFM Conference

Miami, 2 April, 2003 David Shand and Parminder Brar

The World Bankdshand@worldbank.orgpbrar@worldbank.org

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THE IMPORTANCE OF SOUND PFM Need for accountability to citizens (and

donors) Need for pro-poor budgets – and which are

implemented Good PFM reduces corruption, poor PFM

facilitates it Concern with good PFM should be with - all ministers, not just Minister of Finance - all ministry heads, not just Finance

Ministry - all program managers, not just finance

staff

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WORLD BANK’S WORK ON PFM Central place of PFM in Bank’s dialogue with most

borrowing countries Substantial growth of Bank’s PFM work Part of public sector reform – can we reform PFM

separately? Changes in Bank’s business – growth of adjustment

lending, debt relief and sector programs Less emphasis on “ring fenced” PFM systems (“islands

of excellence in a sea of failure”) more on country PFM systems

“Integrated Fiduciary Assessment” proposed as future pre-requisite for all budget support lending

Growth of Bank’s involvement with sub-national governments

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OBJECTIVES OF PFM ANALYTICAL TOOLS

Importance of development as well as fiduciary objectives - complementary not opposites

Best fiduciary assurance comes from a government committed to a sound PFM system

Risk is to country (and other donor) funds as well as Bank funds

These tools are not audits, or seeking to trace individual transactions

or a “pass/fail” certification of adequacy of the PFM system for budget support lending

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OBJECTIVES - (cont’d) Rather a knowledge tool about the environment

into which Bank funds are going Going into lending operations with “eyes open” Influencing decisions on amount, timing and form

(budget support, sectoral support, investment projects) of lending

Budget support lending may be appropriate in a weak PFM environment where there is clear government commitment to PFM improvement – and evidence of improvements

Improved PFM may therefore be an outcome of or a precondition for adjustment lending

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PFM AS AN INTEGRATED SYSTEM

Budget development – comprehensiveness, realism, classification, processes

Budget execution and monitoring – internal controls, FMIS, cash and debt management

External fiscal reporting and transparency Internal and external auditing Legislative scrutiny of budget execution Problems in budget execution may reflect

problems in budget construction – can’t implement well a badly constructed budget

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PFM Diagnostic Tools Variety of PFM diagnostic instruments World Bank – - Country Financial Accountability Assessment

(CFAA) - Public Expenditure Review (PER) - Country Procurement Assessment Report (CPAR) IMF Fiscal Transparency Assessment (Fiscal ROSC) Joint Bank/Fund HIPC Expenditure Tracking

Assessments – 15 PFM benchmarks EC assessments of country financial management UNDP Contact

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Collaboration with Development partners

Over half of current CFAAs being undertaken in collaboration with other development partners – IADB, DFID, SPA, EC, Netherlands, SIDA, NORAD etc.

Reflecting the international harmonization agenda Interest of other donors in using CFAA for their own

decisions on budget support But different donors will have different thresholds for

this Collaboration may reduce transaction costs to countries,

but poses management and quality challenges. Too many cooks ?

Collaboration should also improve diagnostic quality and increase likelihood of country addressing PFM problems

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Donor Collaboration – Sharing of diagnostic work plans and

needs Open and participatory reviews – results

widely shared, “no surprises” Rationalize scope, timing and conduct

of diagnostic reviews Many possible forms of collaboration –

depends on country context. Possible “lead agency” approach

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Involving the Country Strong country participation desirable to build

country commitment to PFM reforms. Continuous consultation - “no surprises”. A general diagnostics issue.

Risk is to country as well as Bank funds – persuading the country ? Hard to improve “by force”.

Various levels of country participation; in practice Bank generally “holds the pen”

Involvement of key officials; may undertake some of diagnosis

Collaboration among development partners facilitates country participation (although claims of “ganging up”)

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PFM FOLLOW UP Need to increase Bank understanding of and skills in

capacity development And working collaboratively with other donors and the country PFM improvements as a condition for further lending or as

components of PS Reform loans Need for regular performance measurement of PFM – is

progress being made But measurement of progress within a country is more

important; hard to compare different countries Agreement with other donors and country on harmonized

performance indicators

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A National Perspective: India Are expenditure outcomes being

achieved?

Aggregate fiscal discipline Prioritization of expenditures Operational efficiency Transparency – processes and information

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National Perspective: Budget Formulation:Unrealistic revenue

forecasts have resulted in unachievable fiscal deficit targets.

Office of the Controller General of Accounts, Ministry of Finance-Improving Financial ManagementGOI’sReceipt and Expenditure Trends and Cash Management. FY 02-03. March 2003.

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GOI'sReceipts, Expenditure and Deficit

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

Rs. C

r.

Total Receipts 134,275 143,131 166,017 193,368 206,796 221,499 258,547 285,158

Total Expenditure 201,007 232,068 279,366 298,084 325,611 362,453 404,013 438,795

Fiscal Deficit 66,732 88,937 113,349 104,717 118,815 140,954 145,466 153,637

1996/97 1997-98 98/99 99/00 00/01 01/02 02/03 (RE) 03/04 (BE)

+14,703+13,428

+27,350

+36,842+27,527

+18,718

+47,298

+31,060

+41,560

+37,048

+22,886+8,856

+34,782

+26,611

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National Perspective: Budget Execution:Focus remains on

meeting spending targets instead of outputs or outcomes.

0

10000

20000

30000

40000

50000

60000

70000

Apl May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

Rs

. Cr.

Plan (Developmental) Non-Plan (Non Developmental)

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National Perspective Fiscal Reform is at the top of the agenda for many governments.

State Fiscal Reform Facility (2000-01 – 2004-05): Incentive Fund established to encourage states to improve fiscal discipline.

Releases from the fund require a five percentage point reduction in the revenue deficit as a proportion to the State’s total revenue receipts in each year till 2004-05.

States are required to draw up a Medium Term Fiscal Reform Program (MTFRP) which aims to bring down the fiscal deficit, eliminate the revenue deficit by 2005 and reduce the debt – GDP ratio, including contingent liabilities. MTFRP’s drawn up by 16 states.

There is a community of interest in improving PFM systems.

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Diagnosis: Dialogue on PFM issues is increasing:

April 2000 – March 2002: 4 WB structural adjustment loans released for fiscal reform in

Uttar Pradesh (pop. 166 m.) Karnataka (pop.53 m.) and Andhra Pradesh (pop. 76 m.).

February 2001: IMF Fiscal Rosc April 2002: CGA / MoF Conference on Financial

Reforms May 2002: IMF Data Rosc initiated By July 03: Four SFAA’s due for delivery June 2003: Regional Conference of CGA’s

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Results: Karnataka:

Improved Aggregate Fiscal Management: MTFP being updated annually. Fiscal Responsibility Act enacted – binds state to achieve fiscal deficit of 3% by 2005-06.

Increased performance orientation: Departmental MTFP’s completed in 5 departments - being rolled out to other departments.

Budget simplification: Object heads reduced by 50%. Systems Modernization: 220 Treasuries and Sub Treasuries

computerized. New accounting system introduced in biggest urban local body. Improved transparency: First state to publish monthly accounts

on the web.Right to Information Act enacted along with Transparency in Public Procurement Act.

Improved response to Audit.

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Results: Andhra Pradesh:

Improved Aggregate fiscal management: MTFP being updated annually.

Hard budget ceiling on departments.Line departments given much more flexibility to to prioritize expenditures within ceiling limits. Performance budgeting systems evolving.

Cash management system vastly improved.Significant decrease in use of overdrafts.

Incentives provided to improve collection of user charges. Systems modernization : Integrated Financial Information System

being introduced. Codes and regulations being updated. Internal Audit introduced in Government, with assistance provided

by Institute of Chartered Accountants of India. Monitoring and enforcement of internal controls improved. Self Diagnosis: SFAA being prepared by the Government.

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The Way Forward:

Country leadership Strong Partnership Results focus