1. Bill Dorotinsky, PREM public sector governance group
Public Expenditure and Financial Management Overview of Issues and Approaches
Bill Dorotinsky,
PREM public sector
governance group
PEAM Course
May 2, 2006

2. Outline Framework for Review Approaches to PEM review Common Problems
Budget Cycle
Formulation
Execution
PFM System
PFM Functions
Outcomes/Impact
Common Problems
Common Solutions
Measuring PFM Systems

3. 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

4. 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

5. What institutions to review?
Formal and Informal Rules
Laws and regulations
Constitutions , fiscal, budget, procurement, civil service, special funds, sector laws, public enterprises, mandatory spending
Process
Policy
Planning
Financial/resource management
Organizations and their roles
Information

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

7. 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.

8. Budget Formulation Issues are typically about Process
Quality of Engagement

9. Process Issues “Due process” Coherence Civil society participation
Fair hearing for proposals, requests within government
Coherence
Budget process is planning process
Planning within resource constraints
Indicative ceilings for budget offered early in the process
‘hard budget constraint’
Changing incentives
Comprehensiveness
Capital, all revenues and expenses
Civil society participation
‘decentralized’ impact analysis
Legislative stage
In executive via white papers

10. Process (continued) Proper decision sequence for coherent process
Macrofiscal, revenues, expenditures
Sectoral
Administrative/program/project
Accountability: Link resources with management responsibility
Schedule
Budget calendar issued
Sufficient time for sound proposals
Ministries
Budget office analysis
Legislative review
Two stage process

11. Quality Issues (improving process outcome)
Multi-year perspective
Setting multi-year policy objectives
Conservative economic, revenue forecast
Likely versus ‘hoped for’
Benchmarked against non-governmental forecasts
Realistic expenditure forecast
Provision for recurring ‘unanticipated’ events
Contingency reserves – with clear rules for use
Indicative ceilings linked to second-year of prior budget forecast (policy)
Requests reconciled to prior year actuals, current year estimates
Two aggregate forecasts (advanced)
Proposed policy
Current services/policy
Capital and recurrent

12. Quality (continued) Budget ownership
Early, frequent engagement of policy officials on structured decisions
Fiscal policy paper to kick-off process
Distinguish policy from recurrent revenue
Proposed revenue sources versus historical trends
No spending allowed against proposed unless they materialize (grants, tax revenue)
Communication
Clear signals of direction, markets and agencies
Prepare public for change – sustainable adjustment

13. Quality (continued) Budget Information Decision papers
Prior year actual, current year estimate, budget year +2, Staffing, Outputs
Classification: economic, administrative, functional, program
Requests distinguish between on-going, new spending; mandatory, discretionary
Decision papers
Basis for Minister of Finance, Gov’t decision
Pulls together academic, audit, performance, evaluation of prior years financial performance, other information

14. Why is budget execution important?
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

15. What is budget execution?
Processes and institutions to implement the budget
Incentives – principle-agent problem
Reflects that budget is NOT only an accounting document
also a political document
Planning/steering device

16. Objectives of budget execution
Manage Spending and Revenues to budget
support choices of elected officials
allow budget to be planning and steering tool
promote macrofiscal discipline
Reduce opportunities for corruption
Enable program implementation
Assure resources flow to programs
allow budget to be aid to operational efficiency through spending unit advance planning, efficient administration
enable program managers to achieve objective
governance

17. General Phases of Execution
Phase 1: Allocation
Phase 2: Ministry Spending Plans
link actions with finances; cash flow needs
Phase 3: Commitments
Phase 4: Verification
Phase 5: Liquidation of Financial Obligation

18. Phases of Execution
Source: Integrated Financial Management. Michael Parry, International Management Consultants Limited. Training Workshop on Government Budgeting in Developing Countries. THE UNITED NATIONS. December 1997.

19. Budget and Policy Execution System in Hungary (1999)

20. 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

21. 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

22. Common PEM problems
Weak links between planning, 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;

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

24. Measuring PFM Systems
Field of PFM has evolved recently, moving towards more assessment standardization
New set of PFM indicators to monitor quality of PFM system at high-level
See
Recommended with approach to working with countries
Country-led reform agenda
Donor coordination around agenda
Shared information pool – common PEFA framework

25. PFM PEFA Indicators Cross-cutting Indicators
Transparency of taxpayer obligations and liabilities
Effectiveness of taxpayer registration and assessment
Effectiveness of tax collection
Predictability of funds for commitment
Recording/management of cash, debt and guarantees
Effectiveness of payroll controls
Competition, value for money and controls in procurement
Effectiveness of internal controls
Effectiveness of internal audit
Orderliness in annual budget process
Multi-year perspective
Accounts reconciliation
Resources received by service delivery units
Quality and timeliness of in-year budget reports
Quality and timeliness of annual financial statements
External audit
Legislative scrutiny of budget
Legislative scrutiny of external audit reports
Cross-cutting Indicators
Aggregate expenditure out-turn
Composition of expenditure out-turn
Aggregate revenue out-turn
payment arrears
Classification of the budget
Comprehensiveness of information
unreported government operations
Transparency of inter-governmental fiscal relations
Oversight of aggregate fiscal risk
Public access to key fiscal information

26. 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
Treasury Reference Model (Bank PE website)
A Contemporary Approach to Public Expenditure Management. Schick, Allen. World Bank Institute
Public Expenditure Handbook. World Bank, 1998.
Managing Public Expenditure: A Reference Book for Transition Countries. Richard Allen and Daniel Tommasi, Eds. OECD. Paris, 2001.
Public Financial Management Performance Measurement Framework. PEFA. Washington, D.C. June 2005.
See for PEFA Performance Measurement Framework

27. Application: Rules and Incentives
Budget Impasse
Executive-legislative relations
What rules might govern a budget impasse?
How might they effect incentives between the legislature and executive?
What might be important considerations for designing a rule?

28. Rules and Outcomes Application
Source: World Bank – OECD budget procedures database at

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

30. Budget Deviation (ratio of executed to approved budget)
Application
Dominican Republic
Budget Deviation (ratio of executed to approved budget)
Identifying trends for transparency
Source: Dominican Republic PER 2003, background data

31. 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?