Public Financial Management International trends Priorities in Armenia Jens Kromann Kristensen Senior Public Sector Specialist The World Bank

Public Financial Management International trendsPriorities in Armenia

Jens Kromann KristensenSenior Public Sector Specialist

The World Bank

Agenda1. Perspectives on public financial management2. International trends and lessons

– Reform trends– Lessons – Impact of the financial crisis

3. Public Financial Management in Armenia– Status– Challenges

4. Vision: The Armenian Governments Public Financial Management Strategy

5. Q/A - discussion

Perspectives…PFM is power, policy and politics

• Budgeting is power, policy and politics – the authoritative allocation of resources in a society – who gets what, how, why and when

• The study of the budget should be a center piece of political science

• Surprisingly, budgeting not very well researched academically. Most recent analyses are operational/practical/applied research

• Reform of budget systems is the structuring of politics and power….

• …but obviously only part of the story…

Perspectives…PFM and good governance

The budget and the public financial management provides a good entry point for enhancing these principles in a polity.

TransparencyAccountabilityEffectiveness

Efficiency Forward vision

Perspectives…PFM and Development

Perspectives…Objectives

Managing Public Expenditure, introduction, Allen & Tomasi, OECD 2001

Perspectives…The public financial management cycle

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Project monitoring

Projectappraisal

Resourceallocation

Liquiditymanagement

Expenditurecontrol

Monitoring& controlling

Post eventreview

Accountability

Expenditurereview

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.

Annual BudgetsMedium term plans

Planning systems

Funds release

AccountingReportingAudit system

Expenditure review

• Changing global context: emerging pressures on the State– Growing global competition – demands for macro stability & competitive investment

climate– Growing citizen demands for effective service delivery, transparency, & accountability– Growing fiscal demands for efficiency & effectiveness

• Vision– A more capable, responsive & high-performing State that:– Provides stability & credible investment climate for growth– Delivers public services to make growth inclusive & equitable– Ensures value-for-money of public spending– Demonstrates transparency, accountability & good governance

• Demands on public sector: much more performance focusA public sector that – serves the public and delivers on promises– is less inward-looking and rule-bound, and more performance-focused– dynamically achieves key objectives and outcomes

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International…Trends

Sources: Presentation by Guenter Heidenhof, Sector Manager, Public Sector & Governance November 2010, The World Bank and Manning and Shepherd, Public Management Reform: should Latin America learn from the OECD?

1990s – Performance

Concern to make promises and deliver on them Measurement of results and the use of measurements for planning or accountability purposes

1970s - Responsiveness to elected officials and political priorities Frustration with political neutrality Concern that the public service is an obstacle to political objectives

1950s - Equal access and equal treatment

Impartiality Concern that employment in the public sector should be representative of society

19th century - Due process and institutional continuity Patronage & purchase of public positions Northcote-Trevelyan Reforms of 1854 in UK Driven by the law

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Source: Manning and Shepherd, Public Management Reform: should Latin America learn from the OECD?

IN HIGH INCOME OECD COUNTRIES• Increasing emphasis on allocative and

operational efficiency– Introduction or strengthening of many

fiscal rules since 1990s for aggregate discipline

– Responsiveness & performance increasingly targeted allocative & operational efficiency

• Performance-based budgeting: recent trends– Shifting focus from input control to

accountability for results • Example: UK Public Service

Agreements (PSAs) with the Treasury: three-year agreements with objectives & targets, published & monitored by Treasury

• Accounting & auditing reforms– Strengthening accounting practice (e.g.

move to accrual accounting) and performance & value-for-money audits

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IN OTHER COUNTRIES• Strengthening of Budget Rules to foster aggregate Fiscal

Discipline– Numerical restrictions, “Fiscal Responsibility” laws– Procedural rules – Centralizing authoriy, limiting

particularistic interests of ministers and legislators

• Reforms to improve performance– Many countries tried to introduce performance

elements in their budgeting framework, but only few countries have mastered sophisticated approaches such as results-based budgeting (e.g. Chile)

– Some progress in linking development plans to the annual budget (a substantial number of countries around the world)

– But still a lot of countries with limited linkages between development strategy and budget (e.g. Bolivia, Peru, countries in Africa)

• Strong focus on Integrated Financial Management Systems (IFMSs) – Many successful reforms efforts around the world in

1990s – But many systems did not go the “extra mile” to

strengthen public procurement or institutions of accountability (e.g. Supreme Audit Institutions)


Source: Presentation by Guenter Heidenhof, Sector Manager, Public Sector & Governance The World Bank

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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 ? ? ?


Source: Presentation by Dorotinsky, Sector Manager, ECA PREM, Practice Co-Leader, PSP GET,July 2010

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• Anti-corruption - anti-corruption commissions• Decentralization to lower levels of government• Deconcentration – to ministries and creation of agencies• 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



International…Lessons

• Government-led reform strategy - ideally, government approved

• Balanced development of components• Overly advanced components regress• Less advanced hinder progress• System components need to work together

• Focusing on weakest link, foundation elements, good starting point problem-driven reforms provides the soundest foundation


• Reform should also address current needs of or gaps felt by decision-makers and managers– Government (PM or President + Cabinet)– Minister of Finance– Ministry of Finance– Spending ministries

• Management• Budget managers• Street level

– Parliament– Civil society



• Pragmatic, practical reform measures• Specific, monitorable measures

• Benchmarking to assess success• Measure current performance as baseline• PEFA as broad measure of system performance

• Improvements should get the right information to the right people at the right time

• not only data, but information and analysis• generally, improved transparency



International…Impact of the Crisis

The global financial crisis has not changed priorities but highlighted even more– Expenditure efficiency– Performance information for prioritization– Wage bill management– Better revenue collection– Medium-term budgeting and fiscal space– Capital investment efficiency


PFM in ArmeniaGeneral overview

• PFM in Armenia is well analyzed and documented across the cycle. Strengths and weaknesses are well understood.

• Major achievements have been made (Planning processes, MTEF and macro management, TSA, cash planning and management, payment processing etc.)

• Substantial activities have been undertaken in preparation of the next phase of reform including in the areas of i) Program based budgeting, ii) GFMIS, iii) debt management, iv) Internal control, v) Accounting, vi) procurement, Etc.

• In addition efforts have been initiated to bring the parts together in a comprehensive PFM reform Strategy.

• Work has gone into formulating a long term PIFC strategy• Challenges remain...

PFM in Armenia2008 PEFA Self Assessment

PFM in Armenia2010 OECD- EC PIFC Gap Analysis

• Overall Management Structure: – Centralization of responsibility – limited delegation– Focus on compliance and cash management not efficiency and

effectiveness

• Information systems:– GFS 2001 provides a solid basis for budgeting– The classification does not deliver on the needs of budget managers

• Links to objectives: – Limited link between resources and objectives at all levels

http://www.oecd.org/home/0,3305,en_2649_201185_1_1_1_1_1,00.html

PFM in Armenia2010 OECD- EC PIFC Gap Analysis

• Internal structures for governance and control– No finance director position– No risk management– Inappropriate supervision of NCOs and public companies

• Internal assurance measures: – Internal audit it weak in regard to independence, regulatory

framework and quality

• Central Harmonization Unit: – Just established

• Internal and external reporting:– Line managers are given limited information about budgets and their

use– External reporting includes only financial information

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PFM in ArmeniaGovernment Reform Vision2010-2020

“The purpose of the reforms is to increase the efficiency of public expenditure management thereby ensuring improved quality of policies and delivered services, specifically

• ensuring fiscal discipline which will contribute to macroeconomic stability and predictability of budget system;

• guaranteeing the linkage of funds with main policies and priorities through following up on strategic approaches;

• ensuring value for money and guaranteeing efficient, effective and economic use of funds;

• ensuring accountability in public spending.

Source: Government Decree on Approving the Strategy for Reforming the PFM System

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PFM in ArmeniaGovernment Reform Visions2010-2020

“The core vision of the reforms is: “Centralized regulation - decentralized management”. To accomplish this, public finance management system reforms should facilitate the establishment of a management culture which, • on the one hand ensures centralized (harmonized) regulation of PFM-related

procedures and on the other hand; • grants powers to managers at all levels (decentralization), and they have obligation and

accountability for optimal use of resources (managerial accountability and responsibility).

The aim of PFM reforms shall be ensuring a PFM system acting in accordance with the following principles in all levels of governance:

• managerial accountability and responsibility;• availability of control;• ongoing improvement of services delivered. “

Source: Government Decree on Approving the Strategy for Reforming the PFM System

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PFM in Armenia Stages towards the vision

Stage 1

• Complete the work on introduction of the basic systems and controls while gradually transitioning from centralized administration to decentralized management and result-based program management

Stage 2 • Increase managerial accountability

Stage 3 • Increase emphasis on efficiency and effective use of resources

PFM in Armenia Challenges to achieving the vision

– Potential for stronger integration of functional processes

– Integration and enhanced capability of ICT systems– Building Capacity, Professionalization and

Motivation of FM staff across the cycle and across Government institutions

– Reform management, prioritizing, phasing - integration and coordination of reforms at all levels of the reform process (design, implementation, management)

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PFM in Armenia Priority stage 1 reform activities

Suggested activities in order of priority:

1. Integration of information and business processes across the budget cycle

2. Strengthening internal control and accounting3. Gradually advance Program Based Budgeting4. Build ICT management capacity incl. ICT strategy

These actions would be pursued in coordination to achieve stage 1 and would be internally sequenced in a work plan.

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PFM in Armenia Priority reform activities (1/4)

1. Integration of information and business processes across the budget cycle• Why: To enable planned reforms of functional processes

(PBB, IPSAS, PIFC), reduce transaction costs, enhance data quality and increase accuracy - i.e to use one capture of data for many purposes.

• How: Through implementation of ICT enabled business process reengineering ( i) BPR, ii) GFMIS)

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2. Strengthening internal control and accounting• Why: Mitigate fiduciary risks (incl. SNCOs). Enhance transparency

and accountability. Enable decentralization without loss of control. • How 1: Establish managerial accountability and clarify overall

management structure in line with PIFC. Build internal audit capacity. Develop standards, including public and corporate accounting standards to provide assurance to stakeholders. Adequate information systems including automation of the internal audit function. Establish strong CHU covering both financial management and control and internal audit. Strengthen internal and external reporting. Enhance controls over SNCOs.

• How 2: Reorganize spending units through delegation and accountability

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3. Gradually advance Program Based Budgeting and further strengthen budget preparation processes and capacity

• Why: To further deepen policy orientation of the budget process and to prepare for results based budgeting implementation and management

• How: Build on existing process and address downstream implications of Program Based Budgeting (Adjustment of the Chart of Accounts, reporting, treasury operations). Consider a consultation with current and potential PBB users and checklist assessment of template before appropriating against the PBB. Build capacity for investment appraisal. Strengthen risk and sustainability analysis.

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4. Build ICT management capacity incl. ICT strategy• Why: To enable for GFMIS. To improve management of existing

systems. To establish data security.• How: Improve IT management capacity (technology architecture,

policy framework, human resource management). Reconsider infrastructure aspects of GFMIS strategy (wide-area network, data center) in light of e-Government plans of GoA. Identify essential data input and reporting requirements of PFM reform program and develop interim IT solutions for them based on current or new software, according to cost and technology factors. Design and engineer interim IT solutions for possible expansion and industrial strengthening. Execute training plan for internal IT staff (SOA, project management, IT procurement)

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Assessment and key messages• Further integration of business processes are necessary to achieve a next level

of PFM. • Status quo on ICT is not an option if ongoing reforms are implemented. • Work on PPB with a view to strengthening policy orientation of the budget

should continue while maintaining the existing execution controls.• ICT management capacity should be improved in any reform scenario.• Capacity development and change management should take center stage in

any reform scenario.• Current plans for reforms implies a rather large investment. Further

preparatory activities should be informed by priorities and funding availability. • PIFC is an important but complicated and long term process. Focus on

delegation and organization is hugely important for the efforts to go beyond increased compliance control.

• PIFC and reforms to “up-stream” reforms should go hand in hand

http://www.worldbank.org.am/

http://www.worldbank.org.am/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/ARMENIAEXTN/0,,menuPK:301605~pagePK:64026187~piPK:141126~sortDesc:DOCDT~theSitePK:301579,00.html

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Public Financial Management International trends Priorities in Armenia Jens Kromann Kristensen Senior Public Sector Specialist The World Bank