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

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

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

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

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

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

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.

Budget and Policy Execution System in Hungary (1999)

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

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

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

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;

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

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

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

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

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.

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

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. 1993. Treasury Reference Model (Bank PE website) A Contemporary Approach to Public Expenditure Management. Schick, Allen. World Bank Institute. 1999. 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/SECM2001-0052/1 “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/SECM2002-30/2 “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/R2003-0043. All HIPC Papers available at: http://www-wbweb.worldbank.org/prem/prmps/expenditure/hipc.htm