Public Expenditure Management: Applications Bill Dorotinsky, PREM public sector group PEAM Course March 21, 2005

Dominican Republic Budget Deviation, 1996-2000 Application Informal Rules Dominican Republic Budget Deviation, 1996-2000 Identifying sources of weakness for further investigation Identifying incentives at work Source: Dominican Republic PER 2003, background data

Exploring problems Above-the-waterline observation WHY? WHY? WHY? 100 clinics, but only 70 operating WHY? Budget not comprehensive Budget fragmented Cash triage 10 built with donor funds, donor funds off-budget 10 built with domestic funds, capital budget separate 10 funded in budget, but no cash allocated to operate WHY? Weak budget law Too rigid budget execution Low public pay WHY? Donor ring-fencing for “accountability” Line ministry gets flexible resource pool Local staff seek higher PIU pay And what can be done about it?

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

Relative need for upgrading PEM Systems 15 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, 2002. See http://www.worldbank.org/hipc/hipc-review/tracking.pdf

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, 2002. See http://www.worldbank.org/hipc/hipc-review/tracking.pdf

Why hasn’t there been more progress? Unhelpful donor practices Inadequate sequencing of reforms, due to donor pressure or difficulties for government to determine the path of reforms Fragmented approach to reforms and limited leadership in government -- PRSP and PEM reforms separate Limited monitoring of progress, mainly concentrated on inputs -> did not allow lessons learning and did not encourage focus on results on the ground Capacity constraints Technical reform versus systemic/institutional change BUT realism important on achievable pace of change

The Way Forward: A 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 shared information pool – a common framework and information set for measuring and monitoring results over time

Government-led PFM Reform Strategy What’s different ? What we don’t want Government reform strategy influenced by ad-hoc donors requests encourages a fragmented approach to PFM reforms A Strengthened Approach A government-led reform strategy, supported by a coordinated program of work by donors, facilitates an integrated and sequenced reform process. Donor 2 Donor 3 Government-led PFM Reform Strategy External audit Procurement Donor 4 Budget preparation Coordinated program of support by donors Treasury reforms Donor 1

Operationalizing in Bank Proposed Recent Situation Country-owned PFM reform strategy Flexible ESW to support reform implementation, capacity-building Knowledge mandate (understanding of institutional environment into which Bank funds flow) tied to operational needs Country team determines form PFM Performance framework to monitor progress Country PFM team bridging networks and donors, planning and doing work Each country team needs to plan according to country need first, broad knowledge mandate second Country-level donor-client coordination More anchor support on lesson learning, reform approaches, PFM issues Corporate Mandate 3-core diagnostic products Three networks operating independently Currently have product focus