1. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 1 The Centrality of Public Finance Policy & Management in Development Presented to: Public Finance Analysis & Management Course May 1, 2006 Washington, DC Presented by: Sanjay Pradhan Director Public Sector Governance Board The World Bank

2. Sanjay Pradhan PREM Public Sector Governance Page 2 Governance and Development: Lessons of Global Experience An effective state is crucial for growth and poverty reduction: – Building a sound investment climate for growth (macroeconomic stability, rule of law, regulatory system, physical & financial infrastructure) – Empowering people to make growth inclusive through effective delivery of basic services (education, health, social protection) State effectiveness requires a two-pronged strategy: Match role of the state to its institutional and fiscal capability – including level and composition of public finances Strengthen state capability – both capacity and accountability in state functions, including public finance management

3. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 3 The Centrality of Public Finance System for Good Governance and Development A well functioning PF system is crucial for:  Enabling the state to finance & deliver key public services and infrastructure to achieve MDGs  Achieving three levels of fiscal outcomes:  aggregate fiscal discipline  allocation of resources according to strategic priorities  efficient and effective use of public resources  Ensuring transparency and accountability of a government to its citizens  Providing assurance to donors that their funds are being used for the purposes intended

4. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 4 The new international aid architecture emphasizes the principle of mutual accountability Scaling up of donor assistance requires sound PF systems and reduced corruption in partner countries Recent global developments have put PF systems in the spotlight Increasing recognition that "ringfencing" projects will not work Important benefits from using country's own systems -- but need to strengthen capacity and accountability of PF

5. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 5 Two Aspects of Public Finance Systems  Focus on Public Finance System includes:  Efficiency, equity & sustainability of public expenditures and how they are financed (“numbers”)  Efficiency & effectiveness in how public finances are raised, allocated and utilized (“institutions”)  Two Aspects of PF Systems:  Public Finance Policy: Aggregate fiscal stance, level and composition of public expenditures & revenues  Public Finance Management: Institutional mechanisms that ensure fiscal discipline, allocative and operational efficiency

6. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 6 Key Issues in Public Expenditure Analysis  Public Expenditure Analysis:  Rationale for Government Intervention: Market Failure, Redistribution  Mechanisms for Intervention: Regulation, Subsidy, Public Provision  Cost-benefit & Cost-effectiveness of Expenditure Allocations  Some Issues:  Data & Methodological Limitations of cost-benefit analysis: Analyzing broad allocations of spending  Benefit valuation & Intersectoral Allocations  Growth impact of expenditure programs  Generating Fiscal Space for infrastructure & social programs

7. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 7 Public Finance Analysis, ‘Fiscal Space’ & Governance: Diamond Fiscal policy – level & composition of public finance – is important not only for stability but also crucially for growth Governments have 4 basic alternatives for additional fiscal space – revenue, grant aid, borrowing & efficiency savings – as shown in the fiscal diamond Improved governance is crucial for all dimensions “Fiscal Space” Increase of Grant Aid in % GDP New Borrowing in % GDP Improved Revenue Effort in % GDP Improved Expenditure Efficiency in % GDP 0 1 2 3 4 5

8. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 8 Challenges in Public Finance Management  PFM systems in many countries are still very weak  Governance and corruption indicators reveal major challenges  Fragmentation of donor approaches and overlapping diagnostics

9. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 9 Fiduciary Risk Sound PF systems can ensure that donor resources are used for the purposes intended Reputational Risk Sound PF systems can ensure that large amounts of aid in countries do not tarnish donors’ reputation Development Effectiveness Risk Sound PF System can ensure that budget systems, including donor supported projects, achieve development goals Robust PF System can mitigate key risks from corruption

10. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 10 Majority of PEM Systems Still Require Substantial Upgrading

11. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 11 Main elements of a ‘strengthened approach’ to PFM PFM Strengthened Approach:  A country-led agenda – including a PFM reform strategy and action plan  A donor coordinated program of support – coordinated, coherent, multi-year program of PFM work that supports and is aligned with the government’s PFM strategy  A results focus with objective performance measurement

12. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 12 A standard set of high level indicators Widely accepted but limited in number Broad measures of performance relative to key PFM system characteristics Enabling credible monitoring of performance and progress over time PFM Performance Report Integrative, narrative report based on indicators using observable, empirical evidence. Updated periodically, depending on country circumstances and operational needs Contributes to coordinated donor assessment Feeds into government-donor policy dialogue The Performance Measurement Framework Credible results measurement framework with standardized reporting should help shift focus to capacity building Performance Measurement Framework

13. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 13 Trends in PFM can be monitored Net Change in HIPC Tracking Indicators, 2001-2004 2 6 1 6 7 0 1 2 3 4 5 6 7 8 Decline in3 categories Decline in1-2 categories No changeImprovement in1-2 categories Improvement in3or more categories

14. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 14 All projects CPIA (Q16) < 3.0 CPIA (Q16) from 3.0 to 3.5 CPIA (Q16) Greater or equal to 3.5 No. of projec ts Projects with Satisfact ory or better (%) No. of projec ts Projects with Satisfacto ry or better (%) No. of projec ts Projects with Satisfacto ry or better (%) No. of project s Projects with Satisfacto ry or better (%) PFM 3985%1587%1883%6 ACS R 2458%1136%978%3100% PFM operations perform satisfactorily regardless of governance starting point, but ACSR operations are successful in stronger settings OED Evaluated PSGB-mapped projects with PFM (without ACSR) and ACSR (without PFM) primary themes, FY00-FY05

15. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 15 Improving PFM – A Platform Approach Platform 1 A credible budget delivering a reliable and predictable resource to budget managers Platform 2 Improved internal control and public access to key fiscal information to hold managers accountable Platform 3 Improved linkage of priorities and service targets to budget planning and implementation Platform 4 Integration of accountability and review processes for both finance and performance management Integration of budget (recurrent & capital budgets)  Strengthen macro and revenue  Forecasting  Streamline spending processes Broad Activities  Re-design  Budgeting  Classification system  Initial design of FMIS for core business processes  Strengthen external audit and define internal audit function  Re-design budget cycle (e.g. MTEF)  Pilot program based budgeting & budget analysis  Further fiscal  Decentralization  Full design of FMIS  Develop IT  Management  Strategy  Initial design of asset register Enables a basis for accountability Enables focus on what is done with money Enables more accountability for performance management Cambodia – Sequence of Platforms Broad Activities Broad Activities Broad Activities Source: See “Study of measures used to address weaknesses in Public Financial Management systems in the context of policy-based support,” by Peter Brooke, at www.pefa.org www.pefa.org

16. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 16 Citizens/Firms Reforming PFM Systems: Strengthen Links with Broader Accountability Systems Citizens/Firms Political Institutions Political Parties & Leadership Social & Econ Interest Groups Executive-Central Govt PFM Systems Service Delivery & Regulatory Agencies Subnational Govt & Communities Check & Balance Institutions Parliament Judiciary Oversight institutions Oversight Groups in Society Civil Society Watchdogs Media Business Associations

17. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 17 Strengthening Demand for Public Financial Accountability Participatory Budgeting, Puerto Alegra (Brazil) Civil Society Oversight; transparent, competitive procurement (Slovakia) Strengthening Supreme Audit Institutions (Hungary) Public Expenditure Tracking & Information Campaigns (Ghana, Madagascar, Mozambique, Peru, Senegal, Tanzania, Zambia) Procurement oversight by CSOs (Philippines) Strengthening Public Accounts Committees of Parliament (India) Transparent, competitive e- procurement (LAC) Strengthening Public Accounts Committees of Parliament (Kenya, Ghana, Zambia -- AFR) Accountability, Transparency & Integrity Project (Tanzania) Key Issue: Instrument to Support Demand-side Interventions

18. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 18 Philippines: Procurement Reform Mobilizing Support & Oversight by Civil Society Transparency and Accountability Network (20+ member groups) Walang Ku-Corrupt Movement (Youth) (Youth) PAGBA & AGAP (w/in Gov’t) CBCP (Church) Philippine Contractors Association (private sector – main stakeholder) Local chambers of Commerce (Private sector) Drew other civil society groups into the advocacy efforts and coordinated the activities

19. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 19 Reaching Out Radio: The swath & the dagger The Media Campaign: The Communications Strategy Print Media: Amplifying the problem TV: Raising the ante Advertising: Creating a ‘brand name’

20. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 20 “BIR Officials Amass Unexplained Wealth” By Tess Bacalla, Philippine Center for Investigative Journalism CAR MODEL BENEFICIAL OWNER REGISTERED OWNER Nissan Patrol Edwin Abella BIR Reg'l Director, Quezon City Sulpicio S. Bulanon Jr. 1817 Jordan Plains Subd., Quezon City (listed address of Abella in his SALs) Suzuki Grand Vitara Ditto Merrick Abella (son of Abella) 24 Xavierville, Loyola Heights, Quezon City Nissan Cefiro Ditto Elizabeth S. Buendia 152 Road 8,- asa, Quezon City BMW Lucien E. Sayuno BIR Reg'l Director, Makati City Limtra Dev. Corp. Zone 4, Dasmari ñ as, Cavite BMW Ditto Marie Rachel D. Mene c/o Metrocor and Holdings, G&F, Makati City Honda Accord Danilo A. Duncano BIR Reg'l Director, Quezon City Daniel Anthony P. Duncano 2618 JP Rizal, New Capital Estate, Quezon City Mitsubishi L200 Corazon P. Pangcog Asst. Reg'l Director, Alberto P. Pangcog (husband) B2 L23 Lagro Subd., Quezon City Owner: Regional Director in the Bureau of Internal Revenue; forced to resign; currently facing corruption charges; other officials suspended, also facing charges Media,Transparency, and Combating Corruption

21. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 21 From fragmented, overlapping PFM diagnostics … … to integrated, harmonized, PFM assessments Strategic directions for PF work for future From ad hoc PE analysis … … to more systematic PF policy analysis From diagnosis & producing reports… … to capacity building & improving PF performance From technocratic, supply- side interventions … to strengthening demand-side pressures & accountability systems From silos of separate EP, FM, Procurement, PSG teams … to integrated country PF teams

22. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 22 Broadening of the PF Agenda  From PREM preoccupation in early years of PERs to broad cross-network interest  PFAM course is offered in collaboration with HD, INF and AGR networks, as well as participation of IMF  PEFA Indicators developed in partnership between FM, Procurement and PREM within Bank, and with PEFA donor partners  Integrated Public Finance Thematic Group  Finally: Thanks to Course Organizers:  Anand Rajaram, Bill Dorotinsky, Tuan Minh Le as thematic leaders  Excellent supporting work by Juliet Teodosio, Zhicheng Li Swift, Nataliya Biletska

23. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 23 Discussion

24. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 24 EXTRA SLIDES

25. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 25 Primary focus of WB operations in governance Local Participation & Community Empowerment Decentralization with accountability Community Driven Development (CDD) Oversight by parent-teacher associations & user groups Beneficiary participation in projects Local Participation & Community Empowerment Decentralization with accountability Community Driven Development (CDD) Oversight by parent-teacher associations & user groups Beneficiary participation in projects Political Accountability Political competition, broad-based political parties Transparency & regulation of party financing Disclosure of parliamentary votes Political Accountability Political competition, broad-based political parties Transparency & regulation of party financing Disclosure of parliamentary votes Institutional Checks & Balances Independent, effective judiciary Legislative oversight (PACs, PECs) Independent oversight institutions (SAI) Global initiatives: UN, OECD Convention, anti- money laundering Institutional Checks & Balances Independent, effective judiciary Legislative oversight (PACs, PECs) Independent oversight institutions (SAI) Global initiatives: UN, OECD Convention, anti- money laundering Civil Society & Media Freedom of press Freedom of information Civil society watchdogs Public hearings of draft laws Report cards, client surveys Participatory country diagnostic surveys Civil Society & Media Freedom of press Freedom of information Civil society watchdogs Public hearings of draft laws Report cards, client surveys Participatory country diagnostic surveys Private Sector Interface Effective, streamlined regulation Transparent public- private dialogue Break-up of monopolies Transparency in Extractive Industries Corporate governance Collective business associations Private Sector Interface Effective, streamlined regulation Transparent public- private dialogue Break-up of monopolies Transparency in Extractive Industries Corporate governance Collective business associations Anticorruption has many dimensions Bank operations focus only on some Effective Public Sector Management Ethical leadership: asset declaration, conflict of interest rules Meritocratic civil service with adequate pay Transparency & accountability in budget mgnt Transparent, competitive procurement Anticorruption in sectors Effective Public Sector Management Ethical leadership: asset declaration, conflict of interest rules Meritocratic civil service with adequate pay Transparency & accountability in budget mgnt Transparent, competitive procurement Anticorruption in sectors GOODGOVERNANCEGOODGOVERNANCE

26. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 26 Purchasing of public positions Source: Kaufmann, Pradhan, Ryterman (1998) Percent of public officials believed to have purchased their positions Cutting-edge diagnostics help ‘unbundle’ corruption & identify entry points Public expenditure tracking (Uganda) Source: Reinikka and Svensson (2004) Public info campaign (1999) Control of corruption, 2004: World map Colors are from Dark Red - the worst bottom 10th percentile rank to Dark Green - the best above 90 th percentile. Source: Governance Matters IV: Governance Indicators for 1996–2004, D. Kaufmann A. Kraay, and M. Mastruzzi (2005) 5 10 15 20 25 30 Proportion of firms affected by capture of … HungaryEstoniaRussiaUkraine Parliamentary Votes Presidential Admin. Decrees Civil Court Decrees

27. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 27 Fiduciary Risk That donor resources will not be used for the purposes intended Reputational Risk That large amounts of aid in countries with high corruption & weak PFM systems will tarnish donors’ reputation Development Effectiveness Risk That corruption in weak PFM systems will undermine the achievement of development goals in general and in donor supported projects Robust PFM can mitigate key risks from corruption

28. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 28 Improvements in Satisfaction: public Services in Bangalore Source: Public Affairs Committee, India 5 6 4 9 25 1 14 41 47 42 67 34 16 32 73 94 73 92 73 78 85 96 77 n/a 0 10 20 30 40 50 60 70 80 90 100 City council Electricity Water supply Telephones Public hospitals Police Land authority Public buses Transport authority Agencies % satisfied 199419992003

29. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 29 Corruption is not just a developing country problem Source: “Are Foreign Investors and Multinationals Engaging in Corrupt Practices in Transition Economies?” by Kaufmann, Hellman, Jones, in Transition, May-June 2000. Note: Survey Question was “How often nowadays do firms like yours need to make extra, unofficial payments to public officials to gain government contracts?” Firms responding “sometimes” or “more frequently” were classified as paying kickbacks. These figures are subject to significant margins of error and thus should be regarded as approximate. Percentage of firms that pay public procurement kickbacks by country of origin of foreign direct investment

30. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 30 Transparency in Extractive Industries Publish What You Pay (PWYP) – (focus on home governments) Initiation: The PWYP campaign was founded by Global Witness, CAFOD, Oxfam, Save the Children UK, Transparency International UK and the Open Society Institute. Participants: There are now several Publish What You Pay national NGO coalitions around the world, including in Azerbaijan, Chad, Congo Brazzaville, Democratic Republic of Congo, France, Kazakhstan, The Netherlands, Nigeria, the United States and the United Kingdom. Extractive Industries Transparency Initiative (EITI) (focus on host governments) Initiation: The UK Prime Minister, Tony Blair announced the EITI initiative at the World Summit on Sustainable Development in Johannesburg, September 2002. In January 2005, the International EITI Secretariat in the UK Department for International Development (DFID) produced the first version of the EITI Source book. Participants: Governments, donors, companies, industry associations, international organizations, NGOs and investors Countries: Azerbaijan, Congo, Republic of, Ghana, Kyrgyz Republic, Nigeria, Sao Tome and Principe, Timor Leste, Trinidad & Tobago

31. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 31

32. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 32 Ethics Infrastructure Political Leadership Codes of Conduct Guidance Professional Socialization Legislative Framework Control Accountability & Control Coordinating Body Management Public Service Conditions

33. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 33 Progress in Meeting HIPC Benchmarks (Percentage of benchmarks met by indicator) Source: Fund-Bank AAP database 2005

34. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 34 Comprehensive Fiscal oversight: Are the aggregate fiscal position and risks are monitored and managed? Comprehensive Fiscal oversight: Are the aggregate fiscal position and risks are monitored and managed? Information: Is adequate fiscal, revenue and expenditure information produced and disseminated to meet decision-making and management purposes? Information: Is adequate fiscal, revenue and expenditure information produced and disseminated to meet decision-making and management purposes? Comprehensive, Policy-based, budget: Does the budget capture all relevant fiscal transactions, and is the process, giving regard to government policy? Comprehensive, Policy-based, budget: Does the budget capture all relevant fiscal transactions, and is the process, giving regard to government policy? Budget Realism: Is the budget realistic, and implemented as intended in a predictable manner? Budget Realism: Is the budget realistic, and implemented as intended in a predictable manner? Control : Is effective control and stewardship exercised in the use of public funds? Control : Is effective control and stewardship exercised in the use of public funds? The PFM performance areas monitored in the framework Accountability and Transparency : Are effective external financial accountability and transparency arrangements in place? Accountability and Transparency : Are effective external financial accountability and transparency arrangements in place? Performance Measurement Framework Six PFM System Aspects All represent different aspects of risk to client and Bank funds, projects and objectives