The Fallacy of Best Practice*The Fallacy of Best Practice** And other thoughts on PFM reforms

Michael RuffnerDirector, US Treasury Technical Assistance

OverviewOverview• Treasury TA ProgramTreasury TA Program• Importance of Economic GovernanceImportance of Economic Governance• Lessons LearnedLessons Learned

• Systemic, Tailored ReformSystemic, Tailored Reform• Ownership?Ownership?

•Towards a New Vision for PFM reformTowards a New Vision for PFM reform

What is the Focus of Treasury’s What is the Focus of Treasury’s Technical Assistance?Technical Assistance?

Treasury provides technical assistance Treasury provides technical assistance encompassing four core but linked areas to encompassing four core but linked areas to promote better economic governance:promote better economic governance:

1.1. Public Financial ManagementPublic Financial Management2.2. Combating Financial Crime/Terrorist Combating Financial Crime/Terrorist

FinancingFinancing3.3. Financial Sector StrengtheningFinancial Sector Strengthening4.4. Combating Public CorruptionCombating Public Corruption

5 Core Financial Disciplines5 Core Financial Disciplines

1.1. Banking and Financial ServicesBanking and Financial Services

2.2. Budget Policy and ManagementBudget Policy and Management

3.3. Financial EnforcementFinancial Enforcement

4.4. Government Debt Issuance and ManagementGovernment Debt Issuance and Management

5.5. Tax Policy and AdministrationTax Policy and Administration

Broad Based AgreementBroad Based Agreement

Promoting good public financial Promoting good public financial management is universally agreed as management is universally agreed as goodgood– PEFA Standards, IMF ROSC’s, FSAP’sPEFA Standards, IMF ROSC’s, FSAP’s– Communiques: Paris Declaration (DAC), G-8, Communiques: Paris Declaration (DAC), G-8,

APECAPEC– IFI Loan ConditionalitiesIFI Loan Conditionalities

Why the Agreement?Why the Agreement?

PFM precondition (and outcome?) for PFM precondition (and outcome?) for Budget SupportBudget Support

Long term sustainability of investmentsLong term sustainability of investments

Economic governance precondition for Economic governance precondition for growthgrowth

Virtuous CircleVirtuous Circle– Broad based economic growth will help Broad based economic growth will help

promote prosperity, stability and peace.promote prosperity, stability and peace.

How to Reform?How to Reform?

First Things FirstFirst Things First

How Do We Modernize Systems in a Way That How Do We Modernize Systems in a Way That Makes Sense?Makes Sense?Staging ReformsStaging Reforms– Do you need an MTEF when you ration cash?Do you need an MTEF when you ration cash?

Weak Governance RegimesWeak Governance Regimes– SystemicSystemic

Gap Between Rules and BehaviorsGap Between Rules and BehaviorsEfficient International LearningEfficient International Learning– Contextual Variables – Systems, Not InstrumentsContextual Variables – Systems, Not Instruments– Separate Good Principles from FadsSeparate Good Principles from Fads

Enabling ConditionsEnabling Conditions

Stable and Professional Civil ServiceStable and Professional Civil Service– Social ControlSocial Control

Stable EconomyStable Economy– Predictable revenuesPredictable revenues

Confidence that Implementation Follows Confidence that Implementation Follows PlanPlanCountervailing Forces Countervailing Forces Reliable Control ProceduresReliable Control Procedures– Caution: DevolutionCaution: Devolution

Governance ChangesGovernance Changes

Anti-CorruptionAnti-Corruption– A governance problem: Decision making is A governance problem: Decision making is

not safe from concentrated and obscure not safe from concentrated and obscure powerpower

– Instruments and Structures Not SufficientInstruments and Structures Not Sufficient– Need Systemic ViewNeed Systemic View

Anti-corruption is a part of all reformsAnti-corruption is a part of all reforms

– Real Change Requires Behavioral/Cultural Real Change Requires Behavioral/Cultural ChangeChange

Most Important QuestionMost Important Question

What is the Problem?What is the Problem?

Why is Problem Why is Problem Definition Important?Definition Important?

There is no model of reform –depends on There is no model of reform –depends on nation’s problems and circumstances.nation’s problems and circumstances.

Changing rules and structures does not Changing rules and structures does not necessarily change behavior necessarily change behavior

Behavioral and value changes take time, a Behavioral and value changes take time, a range of levers, and focused attention by range of levers, and focused attention by managementmanagement

Successful Reform StrategiesSuccessful Reform Strategies

Are calibrated to specific risks and Are calibrated to specific risks and dynamics of the national systemdynamics of the national system

Focus on desired cultural changeFocus on desired cultural change

Mobilize all levers on behavior – formal Mobilize all levers on behavior – formal and informaland informal

Have persistent and committed leadership Have persistent and committed leadership at all levelsat all levels

Formulaic ReformsFormulaic Reforms

Reforms not calibrated to country contextReforms not calibrated to country context– The Fallacy of “Best” PracticeThe Fallacy of “Best” Practice

Focus is on process, not cultureFocus is on process, not culture– Behavioral change requires Behavioral change requires longer longer

commitmentcommitment than donor attention span than donor attention span

InstrumentalistInstrumentalist– E.g Every country needs an MTEFE.g Every country needs an MTEF

Why ?Why ?

The Usual Suspects: Politics, lack of will by The Usual Suspects: Politics, lack of will by counterparts, perception of gain versus effort, counterparts, perception of gain versus effort, systemic effort is hardsystemic effort is hard

Technical Assistance generally left to Technical Assistance generally left to development agencies and contractors.development agencies and contractors.– Not practitionersNot practitioners

Wrong method of TA deliveryWrong method of TA delivery– Courses, fly by visitsCourses, fly by visits

Not Systemic/Sector Wide effortNot Systemic/Sector Wide effort

OwnershipOwnership

Real ownership is the exceptionReal ownership is the exception– Real reform comes out of real ownershipReal reform comes out of real ownership

It is ok to say NoIt is ok to say No

There is an opportunity cost to assistanceThere is an opportunity cost to assistance

Ownership, then accountabilityOwnership, then accountability

ContractorsContractors

Systemic reform is complex and Systemic reform is complex and complexity requires flexibilitycomplexity requires flexibility

Contracts – little flexibilityContracts – little flexibility

Designed and Managed by non- Designed and Managed by non- practitionerspractitioners

OwnershipOwnership

An OECD Model?An OECD Model?

Distilled, Stylized ModelDistilled, Stylized Model

Reality is far differentReality is far different– Even among most sophisticatedEven among most sophisticated

High Degree of VariationHigh Degree of Variation

Advertise what will happen, rather than Advertise what will happen, rather than what has happenedwhat has happened

Processes not as importantProcesses not as important– Enabling conditions mean moreEnabling conditions mean more

Use and Abuse of PEFAUse and Abuse of PEFA

Self-Assessment versus Decision-making Self-Assessment versus Decision-making documentdocument

Consequences?Consequences?

Development Community need for the Development Community need for the Silver BulletSilver Bullet

Careful! Over-reliance on ToolsCareful! Over-reliance on Tools

A Systems View of OTAA Systems View of OTA

Financial Enforcement

Tax Admin and Policy

Financial Institutions

Budget

DebtManagement

Economic Governance

Anti-Corruption

Machinery of Government

UnderpinningOf Economy

If Men were Angels…

The Conceptual FrameworkThe Conceptual Framework

Capacity building – practitioner advisors

Reform-focused – best appropriate solution

Co-Location

Ministry-to-Ministry

Results-oriented

Willingness to pull the plug

A New Role for Finance MinistriesA New Role for Finance Ministries

Stewards of Public ResourcesStewards of Public Resources

Economic ExpertiseEconomic Expertise

Finance Ministries sit on Boards of Finance Ministries sit on Boards of AgenciesAgencies

Finance Ministries have the Finance Ministries have the PRACTITIONERSPRACTITIONERS