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

2. Agenda 1.Perspectives on public financial management 2.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

3. 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…

4. Perspectives… PFM and good governance The budget and the public financial management provides a good entry point for enhancing these principles in a polity. Transparency Accountability Effectiveness Efficiency Forward vision

5. Perspectives… PFM and Development

6. Perspectives… Objectives Managing Public Expenditure, introduction, Allen & Tomasi, OECD 2001

7. Perspectives… The public financial management cycle 7 Project monitoring Project appraisal Resource allocation Liquidity management Expenditure control Monitoring & controlling Post event review Accountability Expenditure review 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 Budgets Medium term plans Planning systems Funds release AccountingReportingAudit system Expenditure review

8. 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 focus A 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 8 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?

9. 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 19 th century - Due process and institutional continuity  Patronage & purchase of public positions  Northcote-Trevelyan Reforms of 1854 in UK  Driven by the law 9 International… Trends Source: Manning and Shepherd, Public Management Reform: should Latin America learn from the OECD?

10. 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 10 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) International… Trends Source: Presentation by Guenter Heidenhof, Sector Manager, Public Sector & Governance The World Bank

11. 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??? 11 International… Trends Source: Presentation by Dorotinsky, Sector Manager, ECA PREM, Practice Co-Leader, PSP GET,July 2010

12. 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 12 International… Trends Source: Presentation by Dorotinsky, Sector Manager, ECA PREM, Practice Co-Leader, PSP GET,July 2010

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

14. 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 International… Lessons Source: Presentation by Dorotinsky, Sector Manager, ECA PREM, Practice Co-Leader, PSP GET,July 2010

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

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

17. PFM in Armenia General 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...

18. PFM in Armenia 2008 PEFA Self Assessment

19. PFM in Armenia 2010 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

20. PFM in Armenia 2010 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

21. PFM in Armenia Government Reform Vision 2010-2020 “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. 21 Source: Government Decree on Approving the Strategy for Reforming the PFM System

22. PFM in Armenia Government Reform Visions 2010-2020 “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. “ 22 Source: Government Decree on Approving the Strategy for Reforming the PFM System

23. PFM in Armenia Stages towards the vision 23 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

24. 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)

25. 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 accounting 3.Gradually advance Program Based Budgeting 4.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. 25

26. 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) 26

27. PFM in Armenia Priority reform activities (2/4) 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 27

28. PFM in Armenia Priority reform activities (3/4) 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. 28

29. PFM in Armenia Priority reform activities (4/4) 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) 29

30. 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 30

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