Fiduciary Risk Assessment Public Financial Management Performance Measurement Framework

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Fiduciary Risk AssessmentPublic Financial
Management Performance Measurement Framework

• PEFA Public Financial Management Performance
  Measurement Framework and its Precursors
• ICGFM May 08 2006
• David Joseph Ormandy MA CGA CIM FCSI
• Advisor to the Financial Secretary
• Government of Montserrat

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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

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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

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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

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Role of PEFA in Good Governance

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

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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

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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)

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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

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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

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The Budget Process

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

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Links between expenditure and public policy

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

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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.

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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.

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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

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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

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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

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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

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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.

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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

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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)

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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)

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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

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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

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PFM High Level Performance indicator Set

• 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

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PFM High Level Performance indicator Set

• 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

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PFM High Level Performance indicator Set

• 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 and other public sectors

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PFM High Level Performance indicator Set

• C. Budget Cycle
• C(ii) Predictability and Control in Budget
  Execution
• PI-13 Transparency of Taxpayer obligations and
  liabilities
• PI-14 Effectiveness of taxpayer registration and
  assessment
• PI-15 Effectiveness in collection of tax payments
• PI-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 controls
• PI-19 Competition value for money and controls in
  procurement
• PI-20 Effectiveness of internal controls for
  non-salary expense
• PI-21 Effectiveness in Internal Audit

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PFM High Level Performance indicator Set

• C. Budget Cycle
• C(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

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PFM High Level Performance indicator Set

• C. Budget Cycle
• 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 the external audit
  reports

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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.

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Scoring-PFM High indicators

• Each of the 283 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

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PFM Performance Report

• Indicators
• Country Specific Issues
• Description of Reform Activities
• Basis for Report Summary

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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 Dont get hectored !

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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)
•