Moving PFM reforms forward: A Strengthened Approach David Biggs DFID Bill Dorotinsky The World Bank On behalf of the PEFA Steering Committee PEM reforms in PRSP countries from Europe and Central Asia Warsaw, February 6-9, 2005

An Overview of PFM reform in ECA PRSP Countries Higher levels of fiscal discipline, but challenges remain because of low revenues, high debt levels, risks related to State Owned Enterprises, need for retrenchment, pay reform. Strategic prioritisation has improved over the years, but further progress needed in the quality of allocative decisions. Poor delivery of essential public goods and services in part caused by weak public finances. Further progress is required. Importance of PFM reforms to create an enabling environment for achieving the various policy goals of the ECA countries (e.g. reducing poverty, economic growth, joining the EU).

What is the current state of affairs of PFM reforms in ECA countries The Conference has highlighted a very wide range of reform initiatives occurring across the region There is a daunting array of issues to be resolved, including: Financing sub-national government Improving the links between policy and budgeting (NB costing) Securing political support for difficult reforms Coping with uncertainty eg revenue forecasts (NB donors) Developing a medium-term framework for financial management Improving institutional co-ordination Better procurement practice

What is the current state of affairs of PFM reforms in ECA countries Improving cash-flow management Making the budget comprehensive Strengthening audit, parliamentary scrutiny and accountability Debt management Capacity development Wider Public Administration Reform Managing the revenue consequences of capital spending Building public participation in budgeting and managing expectations Applying “international standards”

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

1. A country-led PFM reform strategy and action plan The government-led reform program Home-grown, country specific agenda. Good practices suggest (i) sequence and priorities of reform activities and measures, (ii) holistic view of the PFM system, institutions and processes. Informed by policy dialogue with donors. Planning and undertaking diagnostic work over time. Designing a prioritized and sequenced reform program. Implementing reforms Monitoring of progress over time.

Sequencing of reforms Moving to reform implementation requires prioritization and sequencing of PFM reforms by government. Good practices show that some key factors for prioritization and sequencing of reforms include: Policy objectives of government: what are the key priorities of the government (EU accession, reduction of deficit, implementation of PRSPs, etc.). The risks of the PFM system: what are the main weaknesses of the PFM system that are likely to impact aggregate fiscal discipline, strategic allocation of reforms and service delivery. Technical sequence of reforms: what are the building blocks to move towards a performing PFM system ? Capacities of government: what are the capacities of the government to implement the reforms ?

Holistic view of the PFM system Holistic view of the PFM system facilitates prioritization and sequencing of reforms Good practices show that a holistic view of the PFM system includes considering: Budget cycle – Formulation, execution, procurement, accounting and reporting, external audit. Both sides of PFM – Revenues and expenditures The central government – Ministry of Finance and line Ministries. Autonomous agencies and state-owned enterprises The levels of government – National government versus sub-national government.

2. Donor coordination around the PFM reform agenda of the government Fewer donors involved in PFM reforms in CIS-7 countries relative to some other regions of the world, but donor coordination remains important: Coordinated policy dialogue between government and donors would facilitate sequencing and prioritization of reforms. The limited available external resources for analytical support, technical assistance, capacity-building and financing should be allocated to the reform priorities of the government. Multiple requirements of donors and competition between donors should not burden the limited capacities of government. Coordination may facilitate in the medium-term the development of aid modalities that are more supportive of government processes and institutions, e.g. multi-donor trust funds to support reform implementation, use of national procedures, SWAPs, etc.

3. Monitoring of progress of PFM reforms Monitoring of progress enables decision-makers in government and donor agencies to assess the success and difficulties of the reform process and make decisions accordingly. Depending of the purpose and interest, different levels for monitoring progress: Reform measures/activities (training, new law, etc.). Implemented institutional and system changes (IFMS, new budget calendar, etc.). Changes in the performance of the PFM system over the years. -> requires a framework that ensures: Consistency over time; Precise, objective measurement of progress; Systematic coverage of the budget cycle.

The Performance Measurement Framework A PFM Performance Report Integrative, narrative report based on the indicators and assessing performance; based on observable, empirical evidence. Updated periodically, depending on country circumstances and operational needs Contributing to coordinated assessment Feeds into government-donor policy dialogue A standard set of high level indicators Widely accepted but limited in number Broad measures of performance relative to the key PFM system characteristics Enabling credible monitoring of performance and progress over time. Expanding on that last point, a performance measurement framework has been developed to support the establishment of a common informational framework and pool in a given country. This incorporates a performance report and the draft high level set of indicators that was circulated at the last meeting. The aim is to gain wide agreement around this framework in order to reduce the informational demands on government, and also facilitate a common platform for discussion between Govt and donors regarding PFM performance and the reform agenda. This indicator set is designed to be limited in number, to be manageable, and to provide an overall measure of performance and most importantly to facilitate monitoring over time. The PFM performance report has been developed to provide an essential narrative on the indicators, to explain the ratings and provide context. This could involve a self assessment by government, or joint Govt/donor assessment, but would require validation to meet donor accountability needs. An explicit performance measurement framework focuses on capacity-building and results on the ground. Current indicator set available at WWW.PEFA.ORG

What’s different ? Donor 2 Donor 3 Government-led PFM Reform Strategy What we don’t want Government reform strategy influenced by ad-hoc donors requests encourages a fragmented approach to PFM reforms The 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