Public Financial Management Reform:

1
Public Financial Management Reform

• Trends and Lessons

Bill Dorotinsky Fiscal Affairs Department IMF
ICGFM June 18, 2008 Washington, D.C.
2
Outline

• Orientation
• Objectives of PFM
• PFM Cycle
• Popular Reforms
• Recent Reform Trends
• Observations

3
Objectives of PFM and Budgeting

• Three-level PFM Framework
• Macrofiscal discipline
• Strategic allocation of resources
• Technical efficiency
• Source Public Expenditure Handbook World Bank
  (1998)

• Three functions of Government and budgeting
• Strategic Planning
• Management Control
• Operational Control
• Source Planning and Control Systems A Framework
  for Analysis. Robert Anthony (Boston, 1965)

4
Expenditure Management Cycle
Source Adapted from Integrated Financial
Management. Michael Parry, International
Management Consultants Limited. Training Workshop
on Government Budgeting in Developing Countries.
THE UNITED NATIONS. December 1997.
5
Popular Reforms
Recommended reforms generally try to change
incentives to better meet objectives by changing
rules, roles and information
Macrofiscal Discipline Strategic Allocation Operational Efficiency
Medium-Term Expenditure Frameworks ? ? ?
Performance, Program budgeting ? ?
IFMIS, automation ? ?
Fiscal Responsibility Laws ?
Treasury Single Account ? ?
Budget classification, chart of account ? ? ?
Reporting/ Transparency ? ? ?
Procurement ?
Internal control/audit ?
External audit ? ?
Accrual Accounting ? ? ?
6
And other popular themes.

• Anti-corruption
• Anti-corruption commissions
• Decentralization
• Deconcentration
• Demand-side
• Legislative oversight, involvement
• Civil society oversight, participation
• Sovereign wealth funds
• Public-Private Partnerships
• Monitoring and Evaluation
• Sectoral measures (e.g. road funds)
• Long-term planning
• Debt sustainability analysis

7
Anglophone OECD Model?

• Changing role of MoF
• From control to monitoring/oversight and advisory
  role
• Risk management analysis of emerging issues,
  problems, and health of decision-making and
  finance system
• From excessive budget detail to policy analysis
  and development
• Shifting authority and accountability towards
  line ministries
• Emphasizing MoF training and guidance
• Performance over compliance
• New Public Management
• Separating policy from implementation
• Contractual relationships, agency model
• Empowering line ministries for efficiency
• Caution advanced industrial economies, to solve
  efficiency problems, not macrofiscal stability or
  sectoral allocation issues good control
  structures, high transparency

8
And other practices..

• Fragmenting MoF
• Separate debt agency
• Separate procurement function
• Separate treasury
• Separate budget
• Separate revenue authority
• Separate planning and policy processes
  (persistent state rather than trend)
• All tend to weaken the MoF
• Effect on financial management unclear
• Frequently done to improve pay or improve
  independence

9
Budget Formulation
Recent Reform Emphasis
LIC (35) LMIC (33) UMIC (13)
MT Fiscal Framework 29 45 31
MT Expenditure Framework 37 39 46
Performance/Program Budgeting 23 15 38
Capital-Investment Bdgts 9 21 23
Different drivers of reforms confuse the picture.
Which are donor-driven? Which country driven?
Which address real need? Which are simply
fashionable? If higher income enables more
self-direction, interesting that performance
budgeting of greater interest in upper-middle
income countries.
2006 gross national income (GNI) per capita.
The groups are low income (LIC) US905 or less
lower middle income (LMIC) US9063,595 upper
middle income (UMIC) US3,59611,115.
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Budget Execution
Recent Reform Emphasis
LIC (35) LMIC (33) UMIC (13)
Treasury/Cash management 51 36 31
Commitment controls 26 18 15
Debt management 11 18 8
Accounting/classification 40 42 23
Payroll/Personnel 17 9 15
Internal audit/control 11 12 na
Procurement 14 12 na
11
Other Reforms
Recent Reform Emphasis
LIC (35) LMIC (33) UMIC (13)
IFMIS 49 36 23
MoF Reorganization 3 18 8
Budget Law/Legal 26 36 23
Transparency 20 30 15
PPPs 3 21 15
Decentralization 26 15 23
12
Observations

• LICs struggle to get basics in place
• Do advanced reforms may detract from this
  objective?
• LMICs and UMICs frequently struggle to overcome
  legacy systems
• Recently, slight movement away from larger
  reforms, towards pragmatic reforms linked to
  country problems
• IFMIS to FMIS
• Unbundling MTEFs, better sequencing
• Challenges remain on
• Holistic views of PFM systems, focus on weakest
  links
• Sequencing reforms
• Limiting adverse impact of supply-push,
  transplanting of advanced reforms to weak
  environments
• Realistic time horizons
• Redefining ownership as helping the country solve
  practical financial management challenges simply,
  directly
• Right-sizing reforms, measures