www.pefa.org What do PEFA assessments tell us about intergovernmental fiscal relations? PEMPAL plenary meeting of BCoP March 14—16, 2018; Vienna, Austria Jens Kromann Kristensen, Acting Head of the PEFA Secretariat

What is PEFA?

PEFA has a huge potential for increased impact on PFM reforms PEFA is … An agreed diagnostic tool mapping country’s PFM performance at national and subnational levels A tool for building coalitions for PFM reform before, during, and after assessments A reference for good practice in PFM and comparing PFM performance over time in and between countries A tool for fiduciary assurance (EU but also indirectly World Bank and others) A database of over 570 reports and over 40,000 individual performance scores A framework for country-led development partners coordination in countries A monitoring tool for: Country authorities Development partners Global frameworks (WDI, SDGs, Busan development effectiveness commitments) An emerging community of officials, assessors, and development practitioners in countries PEFA has a huge potential for increased impact on PFM reforms

Benefits of PEFA Measures progress over time Builds momentum for PFM reform Fosters stakeholder coordination Extensive international acceptance

The geography of PEFA: Global outreach USED BY 150 COUNTRIES APPLIED 576 TIMES https://pefa.org/countries-regions#/

Countries with PEFA assessments By region (total 150) Europe & Central Asia 23 Middle East & North Africa 12 Sub-Saharan Africa 46 North America 1 Asia & Pacific 36 The lion’s share of assessments have been done in Africa, which is not surprising considering the number of countries in that continent.   Other regions account for a smaller percentage of assessments, but most countries in those regions have performed at least one PEFA assessment. Latin America & Caribbean 32

BOSNIA AND HERZEGOVINA PEFAs in the PEMPAL region ALBANIA 3 NATIONAL (2006, 2009, 2017) 5 SUBNATIONAL (2017) GEORGIA 2 NATIONAL (2008, 2014) 2 SUBNATIONAL – draft (2010, 2014) MONTENEGRO 2 NATIONAL (2009, 2013) ARMENIA 2 NATIONAL (2008, 2014) 1 SUBNATIONAL (2013) KAZAKHSTAN 1 NATIONAL (2009) RUSSIAN FEDERATION 1 NATIONAL – draft (2007) KOSOVO 4 NATIONAL (2007, 2009, 2013, 2016) 12 SUBNATIONAL (2011—2013) SERBIA 3 NATIONAL (2007, 2010, 2016) 6 SUBNATIONAL (2016) AZERBAIJAN 2 NATIONAL (2008, 2014) KYRGYZ REPUBLIC 3 NATIONAL (2006, 2009, 2015) TAJIKISTAN 3 NATIONAL (2007, 2012, 2018 – upcoming) BELARUS 2 NATIONAL (2009, 2014) MACEDONIA 2 NATIONAL (2007, 2015) UKRAINE 3 NATIONAL (2007, 2012, 2016) BOSNIA AND HERZEGOVINA BiH, District of Brčko, FBiH, Republika Srpska (2014) UZBEKISTAN 1 NATIONAL (2012) MOLDOVA 4 NATIONAL (2006, 2008, 2011, 2015) CROATIA 4 SUBNATIONAL (2014)

PEFA in numbers: 2005—2017 National vs subnational assessments

PEFA 2016 PFM performance assessment 3 OUTCOMES 7 PILLARS 31 INDICATORS 94 DIMENSIONS The PEFA framework was upgraded in 2016. It is the most comprehensive upgrade since it was first published in 2005 and slightly revised in 2011.

PEFA 2016: Pillars of PFM performance PILLAR ONE Budget reliability PILLAR TWO Transparency of public finances PILLAR THREE Management of assets and liabilities PILLAR FOUR Policy-based fiscal Strategy and budgeting PILLAR FIVE Predictability and control in budget execution PILLAR SIX Accounting and reporting PILLAR SEVEN External scrutiny and audit

PEFA performance indicators PI-16. Medium-term perspective in expenditure budgeting —BUDGET RELIABILITY— PI-1. Aggregate expenditure outturn PI-17. Budget preparation process PI-2. Expenditure composition outturn PI-18. Legislative scrutiny of budgets PI-3. Revenue outturn —PREDICTABILITY AND CONTROL IN BUDGET EXECUTION— —TRANSPARENCY OF PUBLIC FINANCES— PI-4. Budget classification PI-19. Revenue administration PI-5. Budget documentation PI-20. Accounting for revenue PI-6. Central government operations outside financial reports PI-21. Predictability of in-year resource allocation PI-22. Expenditure arrears PI-7. Transfers to subnational governments PI-23. Payroll controls PI-8. Performance information for service delivery PI-24. Procurement PI-9. Public access to fiscal information PI-25. Internal controls on nonsalary expenditure —MANAGEMENT OF ASSETS AND LIABILITIES— PI-26. Internal audit —ACCOUNTING AND REPORTING— PI-10. Fiscal risk reporting PI-27. Financial data integrity PI-11. Public investment management PI-28. In-year budget reports PI-12. Public asset management PI-29. Annual financial reports PI-13. Debt management —EXTERNAL SCRUTINY AND AUDIT— —POLICY-BASED FISCAL STRATEGY AND BUDGETING— PI-30. External audit PI-31. Legislative scrutiny of audit reports PI-14. Macroeconomic and fiscal forecasting PI-15. Fiscal strategy

Each dimension is scored separately. Scoring & calibration Each dimension is scored separately. High level of performance that meets good international practices A Sound performance above the basic level B Basic level of performance broadly consistent with good international practices C Either less than the basic level of performance or insufficient information to score D

PEFA & Intergovernmental Fiscal Relations

How does PEFA define subnational governments? Both state and local governments are covered by the term “subnational government” in PEFA Subnational government is defined in line with the IMF GFS 2014: “…have authority over smaller geographical areas than do central governments; may appoint their own officers, independent of external administrative control; and are able to raise, allocate, and spend some funds on their own initiative and within their own area of responsibility”.

How are intergovernmental fiscal relations assessed in central government PEFA assessments? Two PEFA indicators refer to subnational governments with a direct relationship to central government Transfers to subnational governments: Transparency and timeliness of transfers from central government to SNGs with direct financial relationships to it. Fiscal risk reporting – Monitoring of SNGs: The extent to which information on financial performance, including the CG’s exposure to fiscal risks, is available through audited annual financial statements of SNGs.

Transfers to subnational governments System for allocating transfers Timeliness of information on transfers Extent of consolidated data collected according to sectoral categories The extent to which transparent, rules-based systems are applied to budgeting and the actual allocation of conditional and unconditional transfers. This dimension is not included in PEFA 2016. It measures the value of subnational government expenditure that is collected and consolidated into annual reports that is consistent with central government fiscal reporting and produced in a recommended timeframe. The timeliness of reliable information provided to subnational governments on their allocations from central government for the coming year.

Good international practice on transfers to subnational governments implied by PEFA Clear criteria for the distribution of grants among subnational governments exist to ensure allocative transparency and medium- term predictability of funds available for planning and budgeting of expenditure programs by SNGs. Score A: Over 90 % (by value) of transfers are determined by transparent, rules-based system It is crucial for SNGs to receive information on annual allocations from CG well in advance of the completion (and preferably before the start) of their own budget-preparation processes. Information on transfers should be regulated by the CG’s annual budget calendar. Score A: SNGs should have at least six weeks to complete their budget planning on time.

Fiscal risk reporting Monitoring of public corporations Monitoring of subnational governments Contingent liabilities and fiscal risks The extent to which information on financial performance, including the central government’s potential exposure to fiscal risks, is available through the audited annual financial statements of subnational governments. It also assesses whether the central government publishes a consolidated report on the financial performance of the subnational government sector annually.

Good international practice on transfers to subnational governments implied by PEFA The net fiscal position of SNGs that have direct fiscal relations with the central government should be monitored, at least on an annual basis, with essential information on fiscal risks reported to the central government official responsible for subnational government oversight. Score A: Audited annual financial statements for more than 90 % (by value) of SNGs are published within nine months of the end of the fiscal year. A consolidated report on the financial position of all subnational governments is published at least annually.

Additionally, when PEFA assessments are carried out at the subnational level, this indicator is applied HLG-1: Reliability of transfers from a higher level of government – The extent to which transfers to the SNG from a higher-level government are consistent with original approved high-level budgets, and are provided according to acceptable time frames.

Reliability of transfers from a higher level of government Outturn of transfers from higher-level government Earmarked grants outturn In-year timeliness of transfers from higher-level government If and how actual total transfers from higher-level to subnational governments deviated from the original total to be allocated. Score A: Transfers have been at least 95 percent of the original budget estimate in two of the last three years. The in-year timeliness of transfers from higher-level governments, with reference to timetables for in-year distribution of disbursements. The difference between the actual and estimated transfers of earmarked grants. Score A: Disbursement timetable is part of the agreement, approved by all stakeholders at the beginning of the fiscal year. Score A: The difference was 5 percent or less in each of the last three years.

What can we learn from PEFA assessments?

Overall assessment of transfers to subnational governments: Regional comparison D

Overall assessment of transfers to subnational governments in PEMPAL countries Legend D C B A

Transfers to subnational governments in detail: Regional comparison

Transfers to subnational governments in detail in PEMPAL countries

Monitoring of subnational governments: Regional comparison D

Monitoring of subnational governments in PEMPAL countries Legend D C B A

Overall reliability of transfers from a higher level of government: Regional comparison D

Reliability of transfers from a higher level of government in detail: Regional comparison

Overall conclusions PEFA measures transparency and timeliness of transfers to subnational governments and the extent to which subnational governments with direct fiscal relations with central government expose the CG to fiscal risks In case of subnational assessments, PEFA also measures how reliable are transfers from a higher level of government ECA region performs better than other regions on all the indicators/dimensions; however, there are discrepancies among countries which form an opportunity for knowledge exchange and peer learning in the region

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