Capacity Development in Public Finance Reforms: The Approach of GTZ Presentation at the XVIII Seminario Regional de Política Fiscal Santiago de Chile, January 23-26, 2006 Philipp Krause

Overview Good Financial Governance A Systemic Perspective on Public Finance Capacity Development in Public Finance Reforms 11/18/2018

The Overarching Objective: Good Financial Governance Good Governance means a conducive political framework for social, economic and environmental development, as well as the state‘s responsible use of political power and public resources. Responsible and transparent management of public resources depends on proper policies for revenue collection, resource allocation and their control by audit courts and parliaments. Functioning systems of public finance are a prerequisite of a country‘s successful development and poverty reduction. Good Financial Governance matters both as a means towards better public sector performance, but also as and end, being a central element of good governance overall. 11/18/2018

Core Principles of Good Financial Governance (1) Legitimacy and voice: The totality of decisions, rules and regulations of the state must be legitimized by democratic rules. Particularly relevant for revenue collection, where legitimacy depends on equitable tax policy while successful revenue collection depends on legitimacy of the state, and the budget, where oversight and control of elected representatives is crucial, as is a fiscal policy that provides public goods and services for all citizens. 11/18/2018

Core Principles of Good Financial Governance (2) Accountability: Holding individuals and organizations accountable for their performance. First of all requires transparency of public finances. Needs various mechanisms and organs of control, including audit institutions, legislatures, civil society and media. Centers on the budget as the comprehensive expression of a government‘s priorities. The more activities are run off-budget, the weaker is transparency, the higher is the potential for corruption and the lesser is the scope for control. 11/18/2018

Core Principles of Good Financial Governance (3) Rule of Law: Requires all actions by the state to be embedded in a fair and impartial legal framework. Rule of law secures trust and predictability in public finances as all activities of public finance policy and management have to be based on democratic laws. Development orientation of the government: To turn reform advances into benefits for the population. Underscores the importance of a fair tax system. Depends on a sound macroeconomic framework. Puts public management for development results at center stage. 11/18/2018

Core Principles of Good Financial Governance (4) Performance: Public sector institutions deliver public goods that meet the needs of the population while making the best use of resources. Increased performance of institutions depends on advances in three areas: decision making, implementation and control. Raising performance cannot be achieved by implementing adequate technical procedures and information systems alone. Has to be seen within a systemic process of capacity development. 11/18/2018

A Systemic Perspective: Sees Public Finance as a complex system, which is: a central part of any country‘s public sector, divided into several interrelated subsystems, linked in various ways to its environment. Focuses on processes and linkages between actors, not on individual instruments or actors. 11/18/2018

The System of Public Finance and its Subsystems 11/18/2018

Core Subsystems of Public Finance Reform: Revenue Policy and Administration: Comprises of tax policy, tax administration and customs administration. Seeks to boost countries own revenues as a prerequisite of sustainable reforms. Budgetary Policy and Expenditure Management: Reforming budgetary policy aims at reorienting budget priorities towards most important government priorities. Reforming expenditure management seeks to strengthen the capacity of the administration to implement government policies. Oversight and External Control: Parliamentary oversight and capable decision-making are key for responsible, efficient and effective public spending. Strong external auditing serves to detect irregularities and identifies related weaknesses in management controls. 11/18/2018

Examples for Reforms Linking Subsystems of Public Finance: The distribution of responsibilities between the treasury department and the budget department should be clarified. Debt management departments should be unified. Co-ordination between tax administration and departments responsible for preparing tax forecasts should be reinforced. Inter-ministerial cooperation needs strengthening at the political and operational level, e.g. Ministry of Finance – Ministry of Economy – National Statistics Office. Parallel reforms at the central and sector level are required, e.g. improving investment budgeting depends on the effectiveness of procedures to screen and select projects within the line ministries. Attention should be given to the linkage between the central and sub-national layers. Source: OECD (2001) Managing Public Expenditures 11/18/2018

Examples for Linkages to the Environment: Independent Judiciary: Assures individual rights, legality of government actions. Party system and political groups: precede formal debate in the legislature. Civil Society: Participates, controls, channels individual interests. Media: Informs, translates complex data for wider citizenry. Informal networks of rules and norms of behavior: affect autonomy and embeddedness of the state. General Population: Taxpayer, Beneficiary, Citizen. 11/18/2018

Capacity Development in Public Finance Reforms Capacity development has been a core task of GTZ since its foundation. Is the process of strengthening the abilities of individuals, organizations and institutions to achieve their own goals on a sustainable basis. GTZ‘s work of capacity development in public finance reforms employs a systemic perspective and strives towards good financial governance. 11/18/2018

Increased Importance of Capacity Development in Public Finance Reforms: Traditionally important as the strengthening of a central function of the modern state, but sometimes neglected in favor of more immediate development objectives. New emphasis in the international dialogue for more aid effectiveness: With the Paris Declaration, countries committed to an ambitious agenda of using efficient and effective country systems of public finance. Millennium development goals and poverty reduction strategies create a constructive pressure for governments to perform. 11/18/2018

Systemic Capacity Development for Good Financial Governance: Necessary Good Practices Facilitation of country ownership and leadership of reform processes Integration of political reforms, institutional changes, and managerial and technical aspects Adaptation strategies to country context 11/18/2018

Facilitation of Country Ownership and Leadership of Reform Processes Take a long-term view and develop a common language for dialogue. Use joint country-donor diagnostics to facilitate ownership. Build upon external incentives for reform. Step back to create space for government to lead: Capacity development can only be facilitated, not lead by donors. Build upon the leadership of the ministry of finance. Strengthen Supreme Audit Institutions and parliamentary oversight as agents of change. Build awareness and ownership in line ministries. 11/18/2018

Integration of Political Reforms, Institutional Changes, and Managerial and Technical Aspects Integrate organizational strengthening into institutional context. Use training strategically to support institutional and organizational changes. Structure project management roles realistically. Balance local and international expertise in the implementation. Make use of practitioners to build bridges between administrations in different countries. 11/18/2018

Adaptation of strategies to country context Be responsive to government’s most pressing needs. Support government in setting clear objectives and advancing incrementally. Focus on specific public finance outcomes, rather than a department or function. Reform fundamental procedures and structures first. Extract key concepts in lieu of replicating whole systems. 11/18/2018

For further Discussion: Four Challenges for Future Work How to balance a long-term capacity development agenda with short-term pressures to show results. How to understand and manage the politics of public finance reforms. How to introduce results-based management techniques without overtaxing country capacities. How to facilitate momentum for a „results-culture“ in the public finance system. 11/18/2018

Forthcoming Publications: „Capacity Development in Public Finance Reforms“ „Good Financial Governance“ „Towards Good Financial Governance in Vietnam“, first in a series of country information papers 11/18/2018

Thank you for your attention! 11/18/2018