Public Financial Management Reforms Trends and lessons Bill Dorotinsky The World Bank Istanbul June 6, 2005

The World Bank 2 Three Objectives of Public Expenditure Management Systems  Macrofiscal discipline and stability –Avoid public finance crises –Support economic growth and stability  Strategic allocation of resources –Match government policy with programs, objectives  Technical efficiency –Getting the most from each lira spent

The World Bank 3 Popular Reforms Macrofiscal Discipline Strategic Allocation Operational Efficiency MTEF  Performance, Program budgeting  IFMIS, automation  Fiscal Responsibility Laws  Treasury Single Account  Budget classification, chart of account  Reporting/ Transparency  Procurement  Internal control/audit  External audit  Reforms generally try to change incentives to better meet objectives by changing rules, roles and information

The World Bank 4 Recent trends  Fragmenting MoF –Separate debt agency –Separate procurement function –Separate treasury –Separate budget –Separate revenue authority –Separate planning and policy processes (persistent state rather than trend)  All tend to weaken the MoF –Effect on financial management unclear –Frequently done to improve pay or improve independence

The World Bank 5 Longer-term Trends  Changing role of MoF, central budget office –Control to monitoring/oversight –Policy analysis and development over excessive budget detail –Shifting authority towards line ministries  Emphasizing training and guidance  Performance over compliance –Analysis of emerging issues, problems, and health of decision-making and finance system  Integration of planning into budget process –Integration of capital and recurrent budgets

The World Bank 6 “Benchmarking” Recent McKinsey Study looked at 7 dimensions of 7 country Finance Ministries  Australia, Brazil, Malaysia, Singapore, Thailand, UK, US  All had taken steps to ‘empower’ line ministries and professional managers  All had made substantial efforts to strengthen external audit  All had taken measures to move away from input budgeting towards performance or output budgets  Most had taken measures to improve transparency of processes and information Source: Transforming MOF: Organizational Recommendations and Implementation. Confidential report to Indonesian Ministry of Finance. June 18, 2003.

The World Bank 7 “Benchmarking” (continued)  Six had made substantial effort to separate policy development and oversight from implementation  All had taken strong measures to consolidate similar functions, especially cash and debt management  Most had taken some measures towards greater checks and balances to MoF functions Source: Transforming MOF: Organizational Recommendations and Implementation. Confidential report to Indonesian Ministry of Finance. June 18, 2003.

The World Bank 8 Broad Lessons  How reform undertaken, organized matters –Stakeholder, user involvement –Clear change sought, clear problem to fix  Measureable results  Focused objectives  Proper sequencing –MTEFs fail if accounting, execution weak –Too many reforms at one time tend to fail –Narrow reforms, well sequenced, may have more impact than comprehensive, government-wide reforms