1. Bill Dorotinsky, PREM public sector group
Public Expenditure and Financial Management Overview of Issues and Approaches
Bill Dorotinsky,
PREM public sector group
PEAM Course
January 13, 2004

2. Outline Framework for Review Approaches to PEM review Common Problems
What is reviewed?
Common Problems
Common Solutions
Getting the basics right

3. Three Objectives of Public Expenditure Management Systems
Framework
Three Objectives of Public Expenditure Management Systems
Macrofiscal discipline and stability
Support economic growth and stability (and reduce poverty)
Avoid public finance crises
Strategic allocation of resources
Match government policy with programs, objectives
And assure social safety nets, and promote growth
Technical efficiency
Getting the most from each zloty spent
And just delivering core services

4. Basic principles of PEM
Framework
Basic principles of PEM
Comprehensiveness
include all revenue and expenditure, all agencies
Accuracy
record actual transactions and flows
 Annuality
cover a defined period of time (e.g. one year budget, multi-year forecasts)
Authoritativeness
only spend as authorized by law
Transparency
information on spending is public, timely, understandable

5. What institutions matter?
Laws and regulations
Fiscal, budget, procurement, civil service
Process
Policy
Planning
Financial/resource management
Organizations

6. Approaches to PEM Review
Cycle, Process
System
broad scope
organizations
Functions/tasks
Outcomes/Impact

7. Expenditure Management Cycle
Planning
system
Medium term
plans, e.g. three
year rolling plans
Annual budgets
Development,
recurrent and
revenue
Fund release
procedure, e.g...
warranting
Accounting for
revenue and
expenditure
Public expenditure
review
Institutions
Reports and
financial statements
Audit system
Project monitoring
Project
appraisal
Resource
allocation
Liquidity
management
Expenditure
control
Monitoring
& controlling
Post event
Accountability
Financial management system boundaries
Formulation covers ‘expenditure review’ insofar as this is a step in preparation of future plans, and goes through to “annual budgets..”
-- need for good budget
-- Brazil roads, congress, MoF
-- linking budget to cash management
-- dc grants management
Execution covers from ‘liquidity management’ through to PER’s, insofar as PER’s are part of the ex poste accountability system.
Half of cycle
(2) Hardware and software do not solve problems in human systems. Must know source of problem, and seriously assess whether computerization will solve the core problem. (DC Example)
Underlying all of this is good recording of transactions and reporting!
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.

8. Budget and Policy Execution System in Hungary (1999)

9. Public Finance Functions
Core Functions
Budget
Execution
Macroeconomic
Forecasting
Budget
Formulation
Fiscal Policy
Revenue
Administration
Debt
Management
Treasury
Procurement
Policy
Internal
Audit
Non-core Functions
Lottery &
Gambling
Financial Asset
Management
Financial
Market
Regulation
Financial
Investigations
Procurement
Administration

10. Core Tasks and Organizations
- Macroforecasting
Fiscal Policy
Revenue administration
Debt Management
- internal control
- program management
- spending (commitments)
- recording & reporting
- payment orders
- verification of receipt of
goods/services
- program/cash plans
Financial Management is Everyone’s Responsibility

11. Credibility of the Honduran Budget – In-year Deviations by Agency (percent of the executed over the approved budget)
Matching Plan to Implementation
Good Macrofiscal
But, look at sectoral allocations. Who gets harmed?
3-level framework
Cash, accrual, commitment

12. Common PEM problems
Weak links between policy, resource limits, and budgets
failure to achieve strategic objectives
abstract planning, unrelated to ways and means
Annual focus leads to suboptimal choices
Digging a hole; inability to climb out
Complacency today, unaware of crisis tomorrow
Separation between capital and recurrent budgets
Lower than expected returns to capital
Non-comprehensive budget
Using other means to support favored programs
Revenues not captured in budget
Taking piecemeal decisions without reference to over-all effect
Funds don’t reach intended beneficiaries
Budget executed differently than approved
Goods and services not delivered as planned
Trying to solve conflict of goals, objectives through direct control rather than dialogue, consensus --- exacerbates the principle agent problem, rather than addressing it head-on and resolving.
Labor productivity: span of control;

13. Common Reforms MTEF Treasury Performance Budgeting ‘Fragmentation’
IFMIS
Performance Budgeting
‘Fragmentation’
Procurement, Debt
New Public Management
Deconcentration, decentralization
Administrative & Civil Service

14. What is an MTEF?
Conceptual framework for thinking about public finance systems
ties together multiple technical reforms
gives paradigm for understanding import of technical reforms
teaching tool
Process, not only components of public expenditure systems
process of government decision-making
developing a “public interest” in decision-makers
Multi-year emphasis
creating a learning system
Emphasizing policy
steering versus rowing for senior officials, organizations
linking policy, inputs, outputs, objectives
Effort to change paradigm of actors in system

15. Core elements of an MTEF
Multi-year fiscal envelope
Setting broad policy priorities (sectors)
Setting multi-year sector ceilings
Sector budgets prepared under constraints
Strategy, policy and objectives under constraints
Delivering resources as budgeted

16. Benchmark Description Final Audited Accounts
HIPC expenditure tracking assessment’s 15 indicators, benchmarks of PEM system capabilities
Benchmark Description
Meets GFS definition of general government
Extra (or off) budget expenditure is not substantial
Level and composition of outturn is "quite close" to budget
Both capital and current donor funded expenditures included
Functional and/or program information provided
Identified through use of classification system
(e.g., a virtual poverty fund)
Projections are integrated into budget formulation
Low-level of arrears accumulated
Internal audit function (whether effective or not)
Tracking used on regular basis
Reconciliation of fiscal and monetary data carried out
on routine basis
Monthly expenditure reports provided within four weeks of
end of month
Timely functional reporting derived from classification system
Accounts closed within two months of year end
Audited accounts presented to legislature within one year
Comprehensiveness
1. Composition of the budget entity
2. Limitations to use of off-budget transactions
3. Reliability of budget as guide to outturn
4. Data on donor financing
Classification
5. Classification of budget transactions
6. Identification of poverty-reducing expenditure
Projection
7. Quality of multi-year expenditure projections
Internal Control
8. Level of payment arrears
9. Quality of internal audit
10. Use of tracking surveys
Reconciliation
11. Quality of fiscal/banking data reconciliation
Reporting
12. Timeliness of internal budget reports
13. Classification used for budget tracking
Final Audited Accounts
14. Timeliness of accounts closure
15. Timeliness of final audited accounts
Formulation
Execution
Budget Management

17. Relative need for upgrading PEM Systems15
Agreed Assessment
(8) Number of Benchmarks met
Bolivia (5)
Cameroon (4)
Ethiopia (6)
Gambia, The (5)
Ghana (1)
Guinea (5)
Madagascar (7)
Malawi (7)
Mauritania (7)
Mozambique (5)
Nicaragua (5)
Niger (3)
Sao Tome &
Principe (4)
Senegal (4)
Zambia (3) 9
Benin (8)
Burkina Faso (9)
Chad (8)
Guyana (8)
Honduras (8)
Mali (8)
Rwanda (8)
Tanzania (8)
Uganda (9)
Little Upgrading
Required
Some Upgrading
Required
Substantial Upgrading
Required
Source: “Actions to Strengthen the Tracking of Poverty Related Public Spending in Heavily Indebted Poor Countries (HIPCs), World Bank and IMF, March 22, See

18. The results indicated the need to improve basic aspects of PEM systems
(Percent of countries not meeting each benchmark)
100%
Note: Based on 24 countries’ Final Assessments
90%
80%
70%
60%
50%
Meets GFS definition of general government
40%
Timely functional reporting from class system
Audited accounts to legislature within 1 year
Projections integrated into budg. formulation
Quality of internal audit (effective or not)
Accounts closed within two months of y/e
30%
Fiscal & monetary data reconciled
20%
Extra (off) budget expend.
Data on donor financing
Pov. Red. Exp. Identified
Classification of budget
Low level of arrears
Regular tracking
Outturn close?
Month reports
10% 0%
Benchmark number: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Formulation
Execution
Reporting
Source: “Actions to Strengthen the Tracking of Poverty Related Public Spending in Heavily Indebted Poor Countries (HIPCs), World Bank and IMF, March 22, See

19. Comparison of selected PEM indicators for ECA PRSP countries and HIPCs
A recent draft study by the Bank’s Europe and Central Asia (ECA) region, entitled “BUDGET MANAGEMENT AND PRSP in ECA PRSP COUNTRIES” (June 2003), employed an instrument similar to the HIPC expenditure tracking assessment. The instrument was applied in 11* ECA countries. Many indicators in the ECA study are sufficiently different to prevent comparison with the HIPC expenditure tracking results, but four can be compared:
Comprehensiveness of the budget. Budget reporting follows GFS. No ECA countries met the benchmark, compared to 10 percent of HIPCs. Budget comprehensiveness challenges are a particular legacy of the former socialist countries, with the public sector still being defined in many countries.
Multi-year forecasts integrated into the budget process. Ten percent of ECA countries met the benchmark, compared to 18 percent of HIPCs. Relatively more emphasis has been placed in ECA countries on budget execution during the 1990’s, and budget formulation, including medium-term forecasts and MTEFs, are a more recent phenomenon.
Internal audit effectiveness. None of the ECA countries met the benchmark, compared to about 12 percent of HIPCs. Even though internal audit has generally been neglected in Africa, the function nominally existed. For ECA countries, the socialist heritage did not include internal audit functions.
Audited accounts presented to the legislature. Fifty-five percent of ECA countries met the benchmark, compared to 17 percent of HIPCs. ECA countries, as noted above, have placed relatively greater emphasis on budget execution, including auditing and reporting, in the 1990’s, and this is reflected in the results. HIPCs in Africa have focused more on budget formulation (MTEFs) rather than budget reporting.
HIPC countries generally scored better than ECA PRSP countries, and these reflect the differing initial conditions, capacity for reform, and differing PEM reform emphasis in the regions.
* Albania, Armenia, Azerbaijan, Bosnia, Georgia, Kyrgyz Republic, Serbia, Macedonia, Moldova, Montenegro, and Tajikistan. Serbia and Montenegro form one country, but are reported separately in the ECA study due to significant differences between the two Republics PEM systems and capacity.

20. HIPC Assessment Conclusions
Execution and reporting relatively weaker
Institutional reforms
require continuous engagement and monitoring: not one-off
Country commitment also fundamental
Unless some of these addressed, other PEM reforms will have limited impact
With limited policy space for reform, important to focus on a few key areas, rather than laundry list

21. General References
SIGMA Policy Brief No. 1: Anatomy of the Expenditure Budget (1997) OECD
Managing Government Expenditure. Schiavo-Compo and Tommasi. Asian Development Bank. 1999
Government Budgeting and Expenditure Controls, Theory and Practice. Premchand. IMF. 1993
Public Expenditure Management. IMF
Treasury Reference Model (Bank PE website)
A Contemporary Approach to Public Expenditure Management. Schick, Allen. World Bank Institute
Public Expenditure Handbook. World Bank, 1998.
“Tracking of Poverty-Reducing Public Spending in Heavily Indebted Poor Countries,” Revision 1, March 28, 2001, SM/01/16, and World Bank, March 30, 2001, IDA/SECM /1
“Actions to Strengthen the Tracking of Poverty-Reducing Public Spending in Heavily Indebted Poor Countries,” Revision 2, March 21, 2002, SM/02/30, and World Bank, March 22, 2002, IDA/SECM /2
“Update on Implementation of Action Plans to Strengthen Capacity of HIPCs to Track Poverty-Reducing Spending,” March 11, 2003, SM/03/90; World Bank, March 13, 2003, IDA/R
All HIPC Papers available at: