Public Financial Management and Accountability

Governance Induction Governance Induction

Hitchin 9Hitchin 9thth March 2004 March 2004

What do we want to get out of it?

A clearer understanding of the public financial A clearer understanding of the public financial management and accountability framework management and accountability framework

Some understanding of diagnostic instruments and Some understanding of diagnostic instruments and the harmonisation agendathe harmonisation agenda

Taking the work forward Taking the work forward Know when to ask for expert help and support Know when to ask for expert help and support Calling for more!!Calling for more!!

What do we want to get out of it?

What is our vision…What are we aiming for?What is our vision…What are we aiming for? Where are we now…Diagnostics and drivers for Where are we now…Diagnostics and drivers for

changechange Moving on…Addressing the basics and strategic Moving on…Addressing the basics and strategic

incrementalismincrementalism Know when to ask for expert help and support Know when to ask for expert help and support Calling for more!!Calling for more!!

What is PFMA?

Process by which decisions are made,Process by which decisions are made,implemented and accounted for implemented and accounted for amount of resources to be spentamount of resources to be spent balance between revenue and expenditurebalance between revenue and expenditure allocation of funds between entities /activitiesallocation of funds between entities /activities how resources will be managed and accounted forhow resources will be managed and accounted for

(emphasis on substantive outcomes)(emphasis on substantive outcomes)(covers the whole of the budget cycle)(covers the whole of the budget cycle)(covers broad institutional and managerial arrangements)(covers broad institutional and managerial arrangements)

Vision..What are we aiming for?

Effective, transparent and accountable public Effective, transparent and accountable public financial management systems that will translate financial management systems that will translate clearly defined development priorities into the clearly defined development priorities into the effective delivery of public goods and serviceseffective delivery of public goods and services

Country ownership consistent with evolving Country ownership consistent with evolving international standards, regular progress international standards, regular progress measurement supported by coherent donor supportmeasurement supported by coherent donor support

Overall fiscal discipline, allocative Overall fiscal discipline, allocative efficiency and value for moneyefficiency and value for money

Why is PFMA important?

Sound management of all public finances are intrinsically Sound management of all public finances are intrinsically important to development important to development

Transparency about how public resources are raised and then Transparency about how public resources are raised and then used is basic to democratic accountabilityused is basic to democratic accountability

Improvements can lead to big changes which benefit the poor Improvements can lead to big changes which benefit the poor (viz Uganda education)(viz Uganda education)

Off budget expenditure financed by donors undermines Off budget expenditure financed by donors undermines accountabilityaccountability

Active scrutiny by legislature and public is essentialActive scrutiny by legislature and public is essential Risk to service delivery of poor PFM systems (see WDR 2004)Risk to service delivery of poor PFM systems (see WDR 2004) Improvements in PFM reduce opportunities for corruption (see Improvements in PFM reduce opportunities for corruption (see

WDR 2004)WDR 2004)

Where are we now? Evidence shows that these Evidence shows that these systems are in very systems are in very

poor shapepoor shape in many of our partner countries in many of our partner countries

Assessment of accounting in countries receiving Assessment of accounting in countries receiving direct budget support from DFIDdirect budget support from DFID No country met the proposed minimum standardNo country met the proposed minimum standard

IMF/WB review of HIPC countries 2002(2001)IMF/WB review of HIPC countries 2002(2001) Little upgrading = 0 (2)Little upgrading = 0 (2) Significant upgrade = 8 (7)Significant upgrade = 8 (7) Substantial upgrade = 14 (16)Substantial upgrade = 14 (16)

Lets look at the system

Policy review

Strategicplanning

BudgetpreparationBudget

execution

Accounting andmonitoring

Reporting andaudit

Lets look at the system again

Policy review

Strategicplanning

BudgetpreparationBudget

execution

Accounting andmonitoring

Reporting andaudit

Ministry of Finance

Accountant GeneralAuditor General

Ministry of Development/Economic Planning

Strategic planning

1

2

Policy review

3

46

5Planning Process

Ministry of Finance

Budget preparation

Budget Execution Accountant General’s

Department

Accounting & Monitoring

Auditor General

Reporting and auditing

Potential disconnects

The Budget Cycle and Risk

Where can risk occur?Where can risk occur?

The budget cycle

Policy review

Strategic planning

Budget preparationBudget

execution

Accounting and monitoring

Reporting and audit

Introduction of RiskRisk occurs at each stage and in the connections between the stages

Policy review

Strategic planning

Budget preparationBudget

execution

Accounting and monitoring

Reporting and audit

Policy review

Strategic planning

Budget preparationBudget

execution

Accounting and monitoring

Reporting and audit

Is the Budget Cycle flawed?

Does Policy review feed into Strategic Planning?Does Policy review feed into Strategic Planning? Does Strategic Planning inform Budget Does Strategic Planning inform Budget

preparation?preparation? Is the Budget executed?Is the Budget executed? Is expenditure accounted and monitored? (who Is expenditure accounted and monitored? (who

does it and who for?)does it and who for?) Is resource use audited?Is resource use audited? Does audit information feed into policy review?Does audit information feed into policy review?

Risk identification

The broader governance frameworkThe broader governance framework Does the budget translate strategies into Does the budget translate strategies into

resource allocation?resource allocation? Budget compositionBudget composition Budget executionBudget execution Different perspectives by the playersDifferent perspectives by the players

The broader Governance framework

Level of political engagement in medium term expenditure Level of political engagement in medium term expenditure plans/poverty strategiesplans/poverty strategies

Institutional links between planning and financeInstitutional links between planning and finance Executive involvement in setting resource allocation Executive involvement in setting resource allocation

prioritiespriorities Adherence to the “rules of the game”Adherence to the “rules of the game” A budget law specifying fiscal management A budget law specifying fiscal management

responsibilitiesresponsibilities Independent scrutiny of government expendituresIndependent scrutiny of government expenditures Overall Government capacity to design and implement a Overall Government capacity to design and implement a

reform programmereform programme

The Budget as an instrument of translation Consistency of resource allocation decisions with Consistency of resource allocation decisions with

overall plans and strategiesoverall plans and strategies What use is made of a medium term framework?What use is made of a medium term framework? Relationship of the discretionary budget to overall Relationship of the discretionary budget to overall

government expenditure?government expenditure? Is expenditure linked with objectives and prioritiesIs expenditure linked with objectives and priorities Are there adequate estimates of the costs of Are there adequate estimates of the costs of

delivering on policies? delivering on policies?

The composition of the budget

Are all Government activities included in Are all Government activities included in the budget?the budget?

Are all sources of revenue captured?Are all sources of revenue captured? What is the role of extra budgetary funds?What is the role of extra budgetary funds? Are there separate earmarked funds?Are there separate earmarked funds? Consistency between the recurrent and Consistency between the recurrent and

capital budgetscapital budgets

Budget execution

Are funds disbursed in a timely and consistent Are funds disbursed in a timely and consistent way?way?

What is the relationship between the budget and What is the relationship between the budget and the expenditure outturn?the expenditure outturn?

Can they be compared?Can they be compared? Is there a history of cash constraints and Is there a history of cash constraints and

expenditure cut backs?expenditure cut backs? Do ceilings change during the budget preparation Do ceilings change during the budget preparation

process?process?

Summary of the Risks

Little accountability for the use of public Little accountability for the use of public resources (Diversion and corruption)resources (Diversion and corruption)

Strategies are not translated into resource Strategies are not translated into resource allocationsallocations

Funded ministries do not deliver Public Funded ministries do not deliver Public servicesservices

Poor value for moneyPoor value for money

Having said all of that

How can we build up a shared understanding of How can we build up a shared understanding of the problem?the problem?

What experiences do we have of constructive What experiences do we have of constructive dialogue?dialogue?

A twin track…delivering “quick wins” based on a A twin track…delivering “quick wins” based on a jointly owned and developed longer term strategic jointly owned and developed longer term strategic plan. plan.

Engagement of both politicians and bureaucrats. Engagement of both politicians and bureaucrats. Different perceptions of riskDifferent perceptions of risk

Implications for Diagnosis(1)

Moving away from accounting for transactions to a Moving away from accounting for transactions to a focus on systems improvementfocus on systems improvement

The country is the focus for supportThe country is the focus for support Diagnostic tools must capture the breadth of the agenda Diagnostic tools must capture the breadth of the agenda

(technical, institutional and wider governance (technical, institutional and wider governance considerations)considerations)

Too many products and not enough attention to the Too many products and not enough attention to the process process

Diagnosis must lead to a reform programme which can Diagnosis must lead to a reform programme which can be monitoredbe monitored

Implications for Diagnosis(2)

Review the diagnostic part of the DFID Review the diagnostic part of the DFID PEM guidelinesPEM guidelines

Working collaboratively with others CFAA, Working collaboratively with others CFAA, PER, CPAR, ROSC, etcPER, CPAR, ROSC, etc

Adding value in terms of breadthAdding value in terms of breadth Awareness of the integration agendaAwareness of the integration agenda Considerable work going on by PEFA (see Considerable work going on by PEFA (see

Handout)Handout)

Diagnosis

Using the benchmarks within DFID’s Using the benchmarks within DFID’s Fiduciary Risk FrameworkFiduciary Risk Framework

A clear set of rules governs the budget process A budget law A budget law

specifying fiscal specifying fiscal management management responsibilities is in responsibilities is in operationoperation

Accounting policies Accounting policies and account code and account code classifications are classifications are published and appliedpublished and applied

Applicability of the Applicability of the budget lawbudget law

Clarifies roles and Clarifies roles and responsibilitiesresponsibilities

Link between the budget Link between the budget and planning frameworksand planning frameworks

Realistic budget timetableRealistic budget timetable Clear budget guidelinesClear budget guidelines Consistency with IMF Consistency with IMF

definitionsdefinitions ““Formal” v “Informal”Formal” v “Informal”

The budget is comprehensive

All general All general government activities government activities are included in the are included in the budgetbudget

Extra budgetary Extra budgetary expenditure is not expenditure is not materialmaterial

Role of debt, arrears, quasi-Role of debt, arrears, quasi-fiscal liabilities, non-fiscal liabilities, non-discretionary expenditurediscretionary expenditure

Is there a link between the Is there a link between the recurrent and the capital or recurrent and the capital or development budget?development budget?

How is donor assistance How is donor assistance treated?treated?

Treatment of Treatment of revenues(reporting on a net or revenues(reporting on a net or gross basis?)gross basis?)

Role of direct grants/ Role of direct grants/ earmarked funds?earmarked funds?

Intergovernmental transfersIntergovernmental transfers Content of reports to the Content of reports to the

legislaturelegislature

The budget supports pro-poor strategies Budget allocations are Budget allocations are

broadly consistent broadly consistent with any medium term with any medium term expenditure plans for expenditure plans for the sector or for the the sector or for the overall budgetoverall budget

Linkages between the Linkages between the planning and budget planning and budget processes and other processes and other institutional linkagesinstitutional linkages

Issues of budget Issues of budget classification: look for classification: look for system that facilitates a system that facilitates a programme approachprogramme approach

Discretionary v Non Discretionary v Non discretionary budgetsdiscretionary budgets

Budget approval processesBudget approval processes Mechanisms to link inputs Mechanisms to link inputs

with outputs and outcomeswith outputs and outcomes

The budget is a reliable guide to expenditure Budget outturn shows Budget outturn shows

a high level of a high level of consistency with the consistency with the budgetbudget

Do we understand the Do we understand the approval process?approval process?

Revenue estimationRevenue estimation What are the steps What are the steps

between budget approval between budget approval and expenditure?and expenditure?

Is there a revised budget Is there a revised budget process?process?

Cash flow consistent with Cash flow consistent with the budgetthe budget

Role of virement?Role of virement?

Expenditure within year is controlled In-year reporting of In-year reporting of

actual expenditureactual expenditure Systems operating to Systems operating to

control virement, control virement, commitments and commitments and arrearsarrears

Where are the controls?Where are the controls? Role of Internal auditRole of Internal audit How can commitments be How can commitments be

entered into?entered into? Who sees the reports?Who sees the reports? What is their timeliness?What is their timeliness? Handling of cash balancesHandling of cash balances

Government carries out procurement in line with principles of value for money and transparency Appropriate use of Appropriate use of

competitive tendering competitive tendering rules.rules.

Decision making is Decision making is recorded and auditablerecorded and auditable

Effective action to Effective action to identify and eliminate identify and eliminate corruptioncorruption

Informal v FormalInformal v Formal Appropriateness of limits. Appropriateness of limits.

Delegation of powersDelegation of powers Regularity of tender board Regularity of tender board

operationoperation Transparency of operationTransparency of operation Value for money Value for money

programmeprogramme

Reporting of expenditure is timely and accurate Reconciliation of Reconciliation of

fiscal and bank fiscal and bank records is carried out records is carried out on a regular basison a regular basis

Audited annual Audited annual accounts are submitted accounts are submitted to parliament within to parliament within the statutory periodthe statutory period

Role of Government Role of Government bankerbanker

Regularity. What Regularity. What actually happens?actually happens?

Who does the Who does the reconciliation?reconciliation?

Who uses the Who uses the information?information?

What does it tell you?What does it tell you?

There is effective independent scrutiny of government expenditure

Government accounts Government accounts are independently are independently auditedaudited

Government agencies Government agencies are held to account for are held to account for mismanagementmismanagement

Criticism made by the Criticism made by the auditors are followed auditors are followed upup

Capacity of the Capacity of the Auditor’s officeAuditor’s office

Time lagTime lag Expertise/ Expertise/

understanding of understanding of watchdogwatchdog

Evidence of follow upEvidence of follow up Accessibility of Accessibility of

informationinformation

Some broader issues

Need for clear understanding by all playersNeed for clear understanding by all players Legislature/ExecutiveLegislature/Executive Government/DonorsGovernment/Donors MoF / other central ministriesMoF / other central ministries MoFMoF / sectoral ministries/ sectoral ministries

Incentives to maintain reformIncentives to maintain reform

Applying the diagnosis

Choose a country you are familiar Choose a country you are familiar Apply the six characteristics of PFM (see Apply the six characteristics of PFM (see

below)below) Look at the principles of Good PracticeLook at the principles of Good Practice What about the broader political, What about the broader political,

governance and institutional factors?governance and institutional factors?

PEM Diagnostic MatrixStages ofbudgetprocess:

Politicalengagement

Policyclarity

Predictability Transparency Comprehensive Accountability

Budgetformulation

Budgetexecution

Summary

Diagnostic Work

What are our experiences of What are our experiences of Developing ownershipDeveloping ownership Working collaboratively with donorsWorking collaboratively with donors Adding value to the processAdding value to the process Linking with our own fiduciary frameworkLinking with our own fiduciary framework Linking diagnosis with reformLinking diagnosis with reform

Supporting country owned reform

Is there a shared vision?Is there a shared vision? What do the diagnostics tell us?What do the diagnostics tell us? Where is the greatest risk/ potential for most gain?Where is the greatest risk/ potential for most gain? Political supportPolitical support Donor cohesionDonor cohesion Technical v Institutional/GovernanceTechnical v Institutional/Governance Issues of sequencingIssues of sequencing

PFM Reform MatrixQuality of governance

Adm

inis

trative a

nd m

anagerial com

pete

nce

Good goverance and high competence

e.g. strengthen civil society and Parliament

MTEFs and PRSPs

e.g better debt management, revenue forecasting, accounting systems

PEFA work on reviewing safeguards Wide variety of safeguards have been used by Wide variety of safeguards have been used by

donors. Broad conclusionsdonors. Broad conclusions

Fragmented and partial nature of Fragmented and partial nature of measuresmeasures

““Measure based”Measure based”

Little consistency between and within Little consistency between and within donorsdonors

Implementation can weaken Government Implementation can weaken Government ownershipownership

PEFA review (contd)

Upfront measures should complement longer term Upfront measures should complement longer term reformreform

Develop a “platform” for reformDevelop a “platform” for reform Initial platform should focus on the basic dialogue Initial platform should focus on the basic dialogue

with Governmentwith Government

Key characteristics of the “platform” would be Key characteristics of the “platform” would be measures that 1) establish basic data integrity and measures that 1) establish basic data integrity and 2) require political support and mandate2) require political support and mandate

Objectives of the basic platform

To create a basis for dialogueTo create a basis for dialogue(trust and partnership)(trust and partnership)

Financial Reporting IntegrityFinancial Reporting Integrity Transparency/ComprehensivenessTransparency/Comprehensiveness Incentives for further FM improvementIncentives for further FM improvement Disincentives for corruptionDisincentives for corruption Basis of accountability (for domestic and Basis of accountability (for domestic and

external stakeholders)external stakeholders)

Criteria for short term measures

What is the contribution of the measure What is the contribution of the measure to achieving improved control andto achieving improved control andaccountability?accountability?

Realistic?Realistic? Sustainable?Sustainable?Based on what exists?Based on what exists? Self contained?Self contained?Improved Transparency?Improved Transparency?Minimises resource leakageMinimises resource leakageCoherent as a package?Coherent as a package?Platform for further development?Platform for further development?

Composition of the basic platform: Budget Planning Short-termShort-term

Macro budget Macro budget framework/model for framework/model for overall planning and overall planning and controlling overall controlling overall fiscal frameworkfiscal framework

DownstreamDownstream

Sector based planning Sector based planning as a basis for resource as a basis for resource allocationallocation

Composition of the basic platform: Budget Formulation Short-termShort-term

Comprehensiveness of Comprehensiveness of coverage (all significant coverage (all significant public resources and public resources and deployment captured)deployment captured)

Build on existing Build on existing reporting datareporting data

DownstreamDownstream

Look at the efficiency Look at the efficiency and effectiveness of and effectiveness of resource deploymentresource deployment

Develop performance Develop performance related datarelated data

Composition of the basic platform: Budget Execution Short termShort term

Integrity of key Integrity of key transaction processing transaction processing systemssystems

Develop credibility and Develop credibility and reliability of resource reliability of resource flows to sector ministries flows to sector ministries (contingency, control of (contingency, control of commitments, etc)commitments, etc)

DownsteamDownsteam

Use for management Use for management information and information and control… system control… system improvementimprovement

Detailed commitment Detailed commitment accountingaccounting

Composition of the basic platform: Accounting Short-termShort-term

Basic reconciliationBasic reconciliation

Improved classificationImproved classification

Reduce backlog ofReduce backlog of

monthly/quarterly andmonthly/quarterly and

annual reportsannual reports

DownstreamDownstream

Improved IFMSImproved IFMS

New coding structureNew coding structure

Composition of the basic platform: Scrutiny and Accountability Short-termShort-term

Funds flow trackingFunds flow tracking

Liaison with SAILiaison with SAI

Training for Training for

Legislative oversightLegislative oversight

committeecommittee

DownstreamDownstream

Effectiveness/EfficiencyEffectiveness/Efficiency

reviewsreviews

SAI Capacity BuildingSAI Capacity Building

Capacity building forCapacity building for

Oversight committeeOversight committee

DFID’s approach to Fiduciary Risk

Aim to improve Government systems so we can rely on them to Aim to improve Government systems so we can rely on them to make effective use of all resources, including DFID funds.make effective use of all resources, including DFID funds.

Willing to take risks by putting money through government Willing to take risks by putting money through government systems,provided:systems,provided: There has been a thorough evaluation of the public financial There has been a thorough evaluation of the public financial

management and accountability systems. management and accountability systems. Risks are known and outweighed by benefits. Safeguards can Risks are known and outweighed by benefits. Safeguards can

be introduced to support ongoing system reformbe introduced to support ongoing system reform Government has a credible programme to improve PFMAGovernment has a credible programme to improve PFMA Assessments are explicitly recordedAssessments are explicitly recordedKey risk areas;Key risk areas; Accounting (where has the money gone?)Accounting (where has the money gone?) Procurement (corruption and VFM)Procurement (corruption and VFM)

Other issues

Experiences ofExperiences of Engagement at the political levelEngagement at the political level Translation of priorities into resource allocation Translation of priorities into resource allocation MTEFMTEF Fiscal decentralisationFiscal decentralisation Participatory budgetingParticipatory budgeting IFMSIFMS Role of the Auditor General’s DepartmentRole of the Auditor General’s Department RevenueRevenue

PFMA team in Policy Division

Simon Gill, Kathy Ford, Helen Leadbetter, Simon Gill, Kathy Ford, Helen Leadbetter, Caroline Bash….David Biggs (from August)Caroline Bash….David Biggs (from August)

Plus Julie Lynn (NAO secondee)Plus Julie Lynn (NAO secondee) Revenue secondeeRevenue secondee Nicola Smithers (seconded to the PEFA Nicola Smithers (seconded to the PEFA

Programme in Washington)Programme in Washington) Luke Mukubvu (Based in Harare, with some time)Luke Mukubvu (Based in Harare, with some time) Check out the PFMA page on InsightCheck out the PFMA page on Insight

What is the PFMA team doing?

Operational guidelines on Fiduciary RiskOperational guidelines on Fiduciary Risk Harmonisation agenda via PEFA and the Harmonisation agenda via PEFA and the

OECD-DACOECD-DAC Guidelines for working at the sectoral levelGuidelines for working at the sectoral level Broader issues of accountabilityBroader issues of accountability Training supportTraining support Audit guidelines….Audit guidelines….

Almost by Royal appointment!!

A Lesotho Case StudyA Lesotho Case Study

Critical appraisal of a reform programme

Papers to review

1.1. Executive Summary from IMF reviewExecutive Summary from IMF review

2.2. Draft Government Action PlanDraft Government Action Plan

3.3. Draft Project Memorandum prepared by a Draft Project Memorandum prepared by a ConsultantConsultant

To discuss

How should the DFID programme team How should the DFID programme team take forward PFM reform?take forward PFM reform?

Some thoughts

Need to improve legislative oversight. Need to improve legislative oversight. Create some demand for reformCreate some demand for reform

Need to improve the credibility of theNeed to improve the credibility of theMinistry of FinanceMinistry of FinanceIdentify some quick winsIdentify some quick wins

Address the need for a comprehensive reform agendaAddress the need for a comprehensive reform agendaLink with other donors and the broader Public Sector Link with other donors and the broader Public Sector Reform agendaReform agenda

Look at sequencing and priorityLook at sequencing and priorityConcentrate reform in the area of budget executionConcentrate reform in the area of budget execution

Develop a dialogue with Government (1) Importance of PFM to translate Government Importance of PFM to translate Government

strategies into practicestrategies into practice Develop linkages between financial inputs and Develop linkages between financial inputs and

sectoral outcomessectoral outcomes Need to develop broader accountability for the Need to develop broader accountability for the

delivery of servicesdelivery of services Use of donor resources to strengthen Use of donor resources to strengthen

Government’s own accountabilityGovernment’s own accountability Develop a common view with the wider donor Develop a common view with the wider donor

communitycommunity

Develop a dialogue with Government (2) Maintain a focus on the basicsMaintain a focus on the basics

Basic financial reporting integrityBasic financial reporting integrity

Increasing transparency and oversightIncreasing transparency and oversight

Incentives for reformIncentives for reform

Disincentives for corruptionDisincentives for corruption