1. Module 1.3. The starting point: assessing PFM systems The Issues of Budgetary Reform Unit 1. Approaches to PFM reform

2. Module 1.1. PFM objectives and budgetary approaches Module 1.2. Why reform PFM systems? Why establish a sequencing? Module 1.3. The starting point: assessing PFM systems Module 1.4. Conditions for successful reform Day 1: Approaches to PFM reform 2

3. Module 1.3. The starting point: assessing PFM systems. Objectives of the module Before reforming a budgetary system, it is necessary to identify its weaknesses and their causes This module examines the instruments to assess PFM, including PEFA, looking at both their advantages and their shortcomings 3

4. Module 1.3 Outline Presentation of PFM assessment tools The PEFA performance indicators Advantages and shortcomings of the PEFA A few issues to be examined at the sectorial level Issues linked to corruption 4

5. A few tools for PFM assessment 5 RDP/ PER MAPS CPAR ROSC Budget AT- FMI report PEFA Evaluation of public expenses policy & budget impact X Evaluation of political incentives X High level evaluation of the PFM performance X Identification of strengths and weaknesses of the PFM XXXX Deep analysis of capacity factors XXXX Reform recommendations XXXX Risk assessment for public funds Progress monitoring **X

6. Review of Public Spending (PER) Strengthen the analysis and budgetary process in the country in order to focus more efforts on growth and poverty reduction Assess the public spending programme of a country in order to meet the financial responsibility requirement and provide the government with an different perspective of its budget 6

7. ROSC – IMF Report The Code of Good Practices on Fiscal Transparency identifies a set of principles and practices to be respected by public authorities.Code of Good Practices on Fiscal Transparency The Code is based on four general principles: –1) Clarity of roles and responsibilities –2) Open budget process –3) Public availability of information –4) Assurances of integrity ROSC are currently less frequent then they used to be Reports on the Observance of Standards and Codes summarize the extent to which countries observe certain internationally recognized standards and codes 7

8. Assessment methods concerning some particular functions of PFM (1)  OCDE-CAD. Methodology for assessing procurement systems (MAPS). 12 high level indicators decomposed into secondary indicators and grouped within 4 pillars: Legislative and Regulatory Framework o The public must have access to Laws and Regulations Institutional Framework and Management Capacity o Coordination with the budgetary process o Existence of a functional normative body o Existence of institutional development capacities Procurement Operations and Market Practices o Efficient conduct of operations o Existence of a market Integrity and Transparency of the Public Procurement System  The Country Procurement Assessment Reports of the World Bank (CPAR) generally use this methodology 8

9.  Debt Management Performance Assessment: DeMPA. 15 indicators that complement and add precision to the PEFA Examples of correspondances Assessment methods concerning some particular functions of PFM (1) 9 PEFADeMPA IP-12: Multi-year perspective in fiscal planning, expenditure policy and budgeting Dimension ii) Scope and frequency of debt sustainability analysis DPI-6: Coordination with budget policy Dimension 2: Availability of main budget variables and/or debt sustainability analysis and its frequency IP- 16: Predictability in the availability of funds for commitment of expenditures Dimension i) Extent to which cash flows are forecast and monitored DPI-11: Cash flow forecasts and management of cash balances. Dimension 1: Effectiveness of the aggregate balance forecasts of the state bank accounts.

10. PEFA  Instrument to measure performance and progress according to the objectives  “High level” indicators, as opposed to the CPAR tools  Part of the approach has been strengthened to support a PFM reform  A reform programme conducted by the government  A coordinated support programme by the lenders  A common framework for assessment and follow- up of the results 10

11. Carry out PFM reforms Recommen d PFM reform measures Identify main PFM weaknesse s High level assessment of performance Place of the PEFA PFM performance report in the PFM reform cycle Examine root causes Indentifying the main weaknesses of PFM Formulate a reform programme Recommend measures for PFM reform PFM performance report 11

12. Integrated products Often promoted by the World Bank, under different names PEMFAR. Public Expenditure Management and Financial Accountability Review CIFA. Country Integrated Fiduciary Assessment, etc. Their content may change from one another, as they may contain, in addition to a PEFA, an assessment of public procurement, an PER and a reform programme Whereas PEFA does not contain a reform programme, mainly to ensure a greater objectivity of the assessment 12

13. The sociopolitical background The importance of external factors (cultural, political, etc.) led to developing studies of the sociopolitical background Drivers of change (DFID) Public Policy Analysis 13

14. Module 1.3 Outline Presentation of PFM assessment tools The PEFA performance indicators Advantages and shortcomings of the PEFA A few issues to be examined at the sectorial level Issues linked to corruption 14

15. PEFA: the dimensions of performance PEFA indicators are regrouped within 6 different PFM systems “performance dimensions” and a group of indicators specific to donor pratices 1 dimension essentially corresponds to result indicators 1 dimension corresponds to cross-cutting issues 4 dimensions cover the 4 different stages of the expenditure cycle 15

16. The PEFA: dimensions of performance 16

17. PEFA performance indicators 28 indicators that cover all 6 PFM performance dimensions 3 indicators regarding the lenders’ practices Some of the 31 indicators may be composed of sevral components Or each indicator: o An analytical methodology o A grading system from D to A (best grade) –For the indicators composed of sevral components, two different grading systems exist: (M1) the grade of the indicator is that of the component with the lowest grade, (M2) the grade of the indicator is the average of the grade of its components. 17

18. The PEFA indicators 18 A. PFM-OUT-TURNS: Credibility of the budget PI-1Aggregate expenditure out-turn compared to original approved budget PI-2Composition of expenditure out-turn compared to original approved budget PI-3Aggregate revenue out-turn compared to original approved budget PI-4Stock and monitoring of expenditure payment arrears B. KEY CROSS-CUTTING ISSUES: Comprehensiveness and Transparency PI-5Classification of the budget PI-6Comprehensiveness of information included in budget documentation PI-7Extent of unreported government operations PI-8Transparency of inter-governmental fiscal relations PI-9Oversight of aggregate fiscal risk from other public sector entities. PI-10Public access to key fiscal information C. BUDGET CYCLE C(i) Policy-Based Budgeting PI-11Orderliness and participation in the annual budget process PI-12Multi-year perspective in fiscal planning, expenditure policy and budgeting C(ii) Predictability and Control in Budget Execution PI-13Transparency of taxpayer obligations and liabilities PI-14Effectiveness of measures for taxpayer registration and tax assessment PI-15Effectiveness in collection of tax payments PI-16Predictability in the availability of funds for commitment of expenditures PI-17Recording and management of cash balances, debt and guarantees PI-18Effectiveness of payroll controls PI-19Competition, value for money and controls in procurement PI-20Effectiveness of internal controls for non-salary expenditure PI-21Effectiveness of internal audit C(iii) Accounting, Recording and Reporting PI-22Timeliness and regularity of accounts reconciliation PI-23Availability of information on resources received by service delivery units PI-24Quality and timeliness of in-year budget reports PI-25Quality and timeliness of annual financial statements C(iv) External Scrutiny and Audit PI-26 Scope, nature and follow-up of external audit PI-27 Legislative scrutiny of the annual budget law PI-28 Legislative scrutiny of external audit reports D. DONOR PRACTICES D-1Predictability of Direct Budget Support D-2Financial information provided by donors for budgeting and reporting on project and program aid D-3Proportion of aid that is managed by use of national procedures

19. Relationships between the dimensions of performance These dimensions are interdependent and work together to achieve the objectives of PFM However, in some domains, the process may progress ina relatively autonomous way, if there is there a will to reform For example, management of revenue (PEFA IP 13 to 15), payrolls (IP 18), markets m(IP 19 ). Some relationships between different indicators or different dimensions are more important than others 19

20. The relationships between performance dimensions Some essential issues 20

21. Module 1.3 Outline Presentation of PFM assessment tools The PEFA performance indicators Advantages and shortcomings of the PEFA A few issues to be examined at the sectorial level Issues linked to corruption 21

22. Advantages of using the PEFA in the preparation of reforms The PEFA framework is a very useful tool when it comes to having a global view of a PFM system and identifying its strengths and weaknesses PEFA covers the majority of the core functions of a PFM system 22

23. The shortcomings of PEFA Some processes of PFM are not or insufficiently covered by the PEFA o Legislative and regulatory framework; IT; capacity; non tax revenue; sectorial management; management of physical assets o Accounting method: decentralisation; performance The PEFA usually concerns processes, but does not necessarily provide information on their results o Except the four indicators concerning budget credibility The PEFA does not take into account external factors (eg. Role of the political context, corruption) 23

24. Avoiding the cult of grading An “A” grade reveals that there are good practices, but does not necessarily guarantee good result Results may depend upon many other factors than the graded processes A “D” grade will reveal that there is a lack of a some functions, but priority should not necessarily go to focusing the efforts on the processes graded with a D The grades and the PEFA report enable one to have a better knowledge of a PFM system, but in preparing a reform programme, one must also take into account external factors and priorities assigned to different PFM objectives 24

25. Placing the PEFA indicators in the chain of results 25

26. Module 1.3 Outline Presentation of PFM assessment tools The PEFA performance indicators Advantages and shortcomings of the PEFA A few issues to be examined at the sectorial level Issues linked to corruption 26

27. Performance dimension according to PEFA Specific points for the sector Budget credibility Budget execution and arrears Budget execution rate compared to the initial sector budget, scheduling and payment; arrears accumulation in the sector: (i) arrears in the treasury; (ii) non scheduled arrears Exhaustivity and transparency Expenses classification Have the projects or group of investment projects been identified? The staff expenses are distributed by destination in order to ventilate them by sub-function? Is the expenses ventilation by region available, at least in execution? Central administration expenses coverageHave project aids been budgeted? Have we an estimation of non-budgeted aid? Which part of central administration expenses is not covered by the state budget?

28. 28 Performance dimension according to PEFA Specific points for the sector International administrations expenses Which are the competences attributed to local collectivities? How are these competences programmed and monitored? Budgetary riskAre the budgetary risks linked to grants examined? Budgeting based on public policies Budget preparationWhich are the internal procedures for budget preparation? Which is the nature of the dialogue among the DAAF, Directorate of Planning and Technical Directorates? Do MoF directives give enough time to sector ministries to prepare their budget proposals?

29. Performance dimension according to PEFASpecific points for the sector Strategies, models, data base Does a realistic strategy exist? Which are the data bases of the sector? How often are they updated? Are they sufficient for programming the expenses? Does a sector strategy exist? Has it been examined by the council of ministers? And by the Parliament? Was it drafted through a participatory approach? Does a realistic strategy simulation model exist? MTEFDoes a sector MTEF exist? Is it congruent with the global CDMT?

30. Performance dimension according to PEFA Specific points for the sector Predictability and budget execution control Credit establishment Is there a delay in establishing the credits? How are the credits distributed among the decentralized services? Which is the level of predictability of this distribution? Internal controlWhich are the audit and control mechanisms within the ministries? How are the expenses tracked until destination? (eg. Tracking survey) Does a reliable accountancy exist? How are the commitments (including multi-annual commitments) controlled? Francophone systems Who is l’ordonnateur? Which central controls are redundant? Which are the special payment procedures?

31. Performance dimension according to PEFA Specific points for the sector MarketsMarkets (see OECD-CAD) HR management Does the HR directorate have a staff dossier? If yes, do reconciliation procedures existbetween this dossier and the dossiers managed by MoF and Ministry of public administration? How is the external staff managed? Does the HR directorate have/publish the staff expenses other than “staff expenses”? Reporting and financial monitoring Ministry budget Do ministries account their commitments and payments? Which are the reconciliation procedures between the ministries data and the treasury? How are the cash flows of the public institutions under guardianship and those of the ministry? Public institutionsDo public institutions publish they budget and their budget execution reports?

32. Performance dimension according to PEFA Specific points for the sector External control Supreme Audit Institution Does the Court of Audit control the activities of the sector? ParliamentDoes the Parliament meet in commissions? Which sector commission follows the sector? How does this commission coordinate with the Finance Commission? Which resources are made available for it?

33. The PEFA Assessment Tool Analytical Framework  Fiscal discipline, strategic allocation of resources, efficient service delivery  6 main dimensions: Credibility of the budget, comprehensiveness and transparency, policy based budgeting, Control and predictability in budget execution, Accounting, recording and reporting, External scrutiny and audit  31 high level performance indicators  Legal and Regulatory Framework  Institutional Arrangements  Reform Process  Progress on Government PFM reforms  Institutional arrangements for planning and implementing PFM reform 33

34. Module 1.3 Outline Presentation of PFM assessment tools The PEFA performance indicators Advantages and shortcomings of the PEFA A few issues to be examined at the sectorial level Issues linked to corruption 34

35. Concerning corruption Reinforcing the budgetary system is only one of the aspects of the fight against corruption Often necessary, never sufficient Beware of “easy solutions”. The accumulation of controls can have perverse effects High priority must be granted to improving transparency and reinforcing external surveys of the executive A few restrictions must be kept in mind Does this action contributes to the fight against corruption? What must be done in addition to this? How to make these actions more effective to fight corruption? 35

36. The mechanisms of corruption and the PFM cycle. A few examples (1) Budget preparation A classical example: the white elephant Actors: powerful decision-makers How to fight it? –Transparency? Checks and balances from administrative technicians? … Budget execution. 1 st example: off-budget expenditure Actors: the Ministry of Finances, powerful decision- makers, and the voluntarily blind Tax Office How to fight it? –Transparency of the Tax Office accounts, external audit? 36

37. Budget execution: 2 nd example: (bought off) delays in the processing of operations Actors: financial control, Tax Office, sectorial ministries How to fight it? Impose operations treatment deadlines Establish an “audit trail” … Budget execution. 3 rd example: services not provided and missing stocks Actors: managers, and sometimes the financial control as well How to fight it? Reinforce internal control, inspections and audit 37 The mechanisms of corruption and the PFM cycle. A few examples (2)

38. Markets ..  Personnel administration  …  Revenue management  …. Etc. 38 What are your observations? Any suggestions? The mechanisms of corruption and the PFM cycle. A few examples (3)

39. Sanctions Adapted sanction systems are crucial Sanctions must be applied Warning Administrative mistakes must not be confused for either fraud or corruption The fight against corruption can be abused to serve political ambitions 39

40. Key messages Prior to the launch of a PFM reform programme, an overview of the situation is necessary The PEFA is an essential instrument to establishing an overview of the situation, but other analyses must be added to it, specifically analyses concerning exetrnal factors and capacity issues 40