Fiduciary Risk AssessmentPublic Financial Management

Performance Measurement Framework

PEFA Public Financial Management Performance Measurement Framework and its PrecursorsICGFM May 08 2006David Joseph Ormandy MA CGA CIM FCSIAdvisor to the Financial SecretaryGovernment of Montserrat

Why Perform FRA/PEFA/PEM ?

Link governance and development Build capacity to govern to reduce poverty Provide environment to

– Encourage development– Resolve conflict– Root out corruption

Focus of FRA/PMF

The goal of the exercise are gradual improvements in financial governance

– Non-hectoring– Focus on constraining potential abuses of power – Making long term commitment to institutional reform

What is new about these processes ?

These incentives reduce the focus on individual aid projects (“enclave” projects) to reduce poverty which were in many cases unsuccessful as aid is fungible. And to increase the emphasis on poverty reduction by promoting sound public administration and efficient delivery of public services

Role of PEFA in Good Governance

- encourage macroeconomic stability- Promote investment- Account for public sector resources- Promote honest and accountable

government

Economic Stability/Investment

Support markets and liberalization of markets Government involvement is between

centralizing and disaggregating Promote state institutions to administer

financial policy Regulate financial activities including private

property rights

Account for public sector resources/budgetary outcomes

Encourage effective government spending by fiscal discipline including debt management

Establish strategic prioritization of spending Assure efficiency and effectiveness to

minimize corruption by transparency in procurement systems (value for money)

Promote honest and accountable government

Failure here will compromise other objectives Minimize “grand” corruption” Independent audit of government financial

systems and independent parliamentary oversight of spending (via “Public Accounts Committee)

“Transparency in Accountability”

Components of PEM System

The Budget Process

Links between expenditure and public policy (such as links between recurrent spending and national development priorities)

The political legal and institutional context

The Budget Process

Policy Review Strategic Planning Budget Preparation Budget Execution Accounting and monitoring Reporting and audit

Links between expenditure and public policy

• In developing countries, in the absence of a MTEF or Strategic Plan, recurrent spending may not be prioritized.

The political legal and institutional context

The institutional structure is the framework of rules, customs and incentives which influence how expenditures are made and how people behave. A good public sector will have well defined rules for authority for delegation.

All systems will operate on the basis of informal and formal rules which determine to what extent “official” policy is acted on or ignored.

When does DFID perform a FRA?

Mandatory when providing Poverty Reduction Budget Support (PRBS either general or earmarked support) and where government systems are the primary channels for financial aid

FRA should be undertaken every three years if there are no material changes in circumstances or deterioration in public financial management otherwise, annually.

Why does DFID perform a FRA?

Audit discharge requirements to UK government

1 Accounting/Financial discharge-evidence that funds have been paid

2 Fiduciary Discharge evidence for effective use of the funds The FRA is undertaken because of the limited reliance which may be available from the financial statements and SAI reports

What documentation may be examined in the FRA

ISO/Audit reports Public Accounts Committee reports National Public Accounts Service Delivery Surveys Budget Execution Reports Public Expenditure Tracking Surveys Poverty reduction Strategy Progress Reports Additional examination for anti-corruption,

institutional context and procurement

PEM Diagnostic tools

Formerly– PER WB Public Expenditure Review– CFAA WB Country Financial Accountability

Assessment– CPAR WB Country Procurement Assessment– ROSC IMF Report on Fiscal Transparency– HIPC AAP WB/IMF public expenditure tracking in

HIPC– EC audits

From 2005 “PEFA” PFM Performance Management Framework

The PEFA PFM Performance Measurement Framework and Report provides a common pool of information for measurement and monitoring of PFM progress and common platform for dialogue

June 2005 further revision pending www.pefa.org

PEFA Goals

Reduces the transaction costs to countries. Enhances donor harmonization. Allows monitoring of progress of country PFM

performance over time. Better addresses developmental and fiduciary

concerns. Leads to improved impact of reforms. Encourages country ownership.

Why is PEFA a “strengthened approach” to PEM/PFM

Country led “non-hectoring”/non-admonitory International donor harmonization Result focused on improvements Based on dialogue Achieves objectives of

Account for public sector resources/budgetary outcomes

Encourage effective government spending by fiscal discipline including debt management

Establish strategic prioritization of spending Assure efficiency and effectiveness to

minimize corruption by transparency in procurement systems (value for money)

6 Critical Dimensions for an open and orderly PFM system which are measured by PEFA

Credibility of the budget Comprehensiveness and Transparency Policy based budgeting Predictability and control in budget process Accounting recording and reporting External scrutiny an audit Concern with Country specific issues ( e.g.

“persistent volcanism”)

These 6 dimensions are measured by 28 indicators of 3 types

PFM system outturns expenditures and revenues actual compared with planned

Cross cutting features of the PFM system comprehensiveness of the PFM system across the budget cycle

Budget cycle performance of key systems processes and institutions within budget practices

+ donor practices which impinge on PFM performance

PFM Performance Report5 Sections approx 35 pages

1 Summary assessment 3-4 pages Contains assessment of PFM along 6 dimensions, assessment of weakness in PFM and prospects for reform planning

2 Introduction to preparation of report 1 page

3 Country related Information 4-5 pages

4 Body 60 indicators in total + country specific issues 18-20 pages

5 Section on ongoing government reform activities

No recommendations for reform or action plans are included in the Performance Report

PFM High Level Performance indicator Set

A. PFM Out-Turns Credibility of Budget

PI-1 Aggregate expenditure outturn compared to original approved budget

PI-2 Composition of expenditure outturn compared to original budget

PI-3 Aggregate revenue out-turn compared to original approved budget

PI-4 Stock and monitoring of expenditure payment arrears

PFM High Level Performance indicator Set

B. Key Cross Cutting Issues (Comprehensiveness and Transparency)

PI-5 Classification of Budget

PI-6 Comprehensiveness of budget documentation

PI-7 Extent of unreported government operations

PI-8 Transparency of inter-government fiscal relations

PI-9 Oversight of fiscal risk from other public sector entities

PI-10 Public access to key fiscal information

PFM High Level Performance indicator Set

C. Budget CycleC(i) Policy Based Budgeting

PI-11Orderliness and participation in the annual budget process

PI-12Multi-year perspective in fiscal planning expenditure and other public sectors

PFM High Level Performance indicator Set

C. Budget CycleC(ii) Predictability and Control in Budget Execution

PI-13 Transparency of Taxpayer obligations and liabilitiesPI-14 Effectiveness of taxpayer registration and assessmentPI-15 Effectiveness in collection of tax paymentsPI-16 Predictability in availability of funds for commitment of

expenditures.PI-17 Recording and management of cash balances debt and

guarantees.PI-18 Effectiveness of payroll controlsPI-19 Competition value for money and controls in procurementPI-20 Effectiveness of internal controls for non-salary expensePI-21 Effectiveness in Internal Audit

PFM High Level Performance indicator Set

C. Budget CycleC(iii) Accounting Recording and Reporting

PI-22 Timeliness and regularity in account 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 statement

PFM High Level Performance indicator Set

C. Budget CycleC(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 the external audit reports

PFM High Level Performance indicator Set

D. Donor Practices

D-1 Predictability of Direct Budget Support

D-2 Financial information provided by donors for budgeting and reporting

D-3 Proportion of aid that is managed by use of national procedures.

Scoring-PFM High indicators

Each of the 28+3 indicators has one to four individual “dimensions” (sub-indicators) which are graded on the basis of specific benchmark grades A to D.

Where there is more than one dimension the individual grades are averaged to determine an overall core for that indicator

Scoring is described in a narrative and tabulated

PFM Performance Report

Indicators

+Country Specific Issues

+ Description of Reform Activities

= Basis for Report Summary

Performance Measurement Framework

Wrap up Because the sponsors of the Performance

Measurement Framework, who are the PEFA secretariat, include many development agencies if your country is dependant of external aid you may well be faced with a PFM evaluation in the future.

PS: Don’t get “hectored” !

PEFA Partners

The PEFA Partners World Bank (WB) European Commission (EC) U.K. Department for International Development (DFID) Swiss State Secretariat for Economic Affairs (SECO) Norwegian Ministry of Foreign Affairs French Ministry of Foreign Affairs International Monetary Fund (IMF) Strategic Partnership with Africa (SPA)