1. Overview of Public Financial Management
Basic PFM Training Program
The World Bank Group

2. “The national budget is the single most important policy vehicle for giving effect to a country’s economic and social priorities, and ensuring sound and sustainable economic growth. It is through the budget process that competing policy objectives are reconciled and implemented in concrete terms.”
Allen and Tommasi (2001), page 15

3. Overview of the Presentation
Introduction
Classification of financial transactions
Budget preparation and MTEFs
Budget execution
Treasury and cash management
Accounting and financial reporting
Internal control and internal audit
External audit
Performance-based budgeting
Oversight of the budget process
Fiscal transparency
PFM diagnostics
CFA study

4. Introduction
This module provides an overview of the budget cycle and other PFM issues.
Good PFM systems contribute to the following four pillars of fiscal policy:
Macroeconomic stabilization.
Efficiency in the allocation of resources through the budget (“allocative efficiency”).
Efficiency in delivering public services (“operational efficiency”).
Fiscal transparency.

5. Classification of financial transactions
It is accepted as good practice that the budget should be comprehensive and avoid, to the extent possible, use of off-budget expenditure and accounts.
All forms of government activity with a fiscal impact – contingent liabilities, loan guarantees, tax expenditures, PPPs, etc. should be recorded in the budget.
International standards (e.g., COFOG, GFS) provide a clear and consistent framework for classifying transactions related to the budget.

6. Legislative framework: guiding principles
The legal framework for managing public finances and the budget should:
Provide a comprehensive coverage of all financial transactions and processes.
Permit a balanced division of roles and responsibilities among the main players – the executive branch, the central bank, the legislature, the external audit authority and civil society – and within the executive, the president/prime minister, the council of ministers, the finance ministry and line ministries.
Define all relevant financial relations between the government and parties with which it transacts business – e.g., local authorities, state-owned enterprises, IFIs, etc.

7. Budget preparation
The budget is normally defined as an annual process, but is best set in a multiannual framework.
The budget preparation cycle involves several stages that need to be defined both in law and a budget calendar:
Setting the macroeconomic and fiscal policy framework.
Setting initial ceilings for expenditure in aggregate and by sector.
Submission of detailed budget requests by line ministries and negotiation with the finance ministry.
Approval of the budget by the legislature.

8. The budget/planning interface
In many low- and middle-income countries, the annual budget/MTEF process coexists with a national development plan and a public investment plan (PIP).
These processes are hard to coordinate and reconcile since the budget is prepared by the MoF but the PIP by a separate planning ministry which may be more powerful than finance. A “dual budget” often exists.
Attempts to merge the budget and planning functions within a single ministry, while theoretically desirable, are often obstructed by political constraints.

9. Stages in developing an MTEF
A medium-term fiscal framework (MTFF) contains a statement of fiscal policy targets and projections.
A medium-term budget framework (MTBF) in addition contains medium-term budget estimates for the main sectors and programs.
A medium-term performance framework (MTPF) in addition contains information on the economy, efficiency and effectiveness of spending programs.

10. Budget execution (1)
Good budget preparation comes first, logically as well as chronologically. It is possible to implement poorly a well-formulated budget; it is not possible to implement well a badly formulated budget.
Efficient budget execution requires:
Ensuring conformity with the authorizations provided in the law.
Taking account of unforeseen changes in the macrofiscal environment.
Resolving shifts in priorities during execution.
Managing the purchase and use of resources efficiently.

11. Budget execution (2)
The budget execution cycle involves four main stages:
The apportionment of appropriations and release of funds to spending units.
The commitment of funds at the point at which a future obligation to pay is incurred.
The acquisition and verification (or certification) that goods have been delivered or services rendered in conformity with the purchase order or contract.
The payment to suppliers through mechanisms such as checks, cash, electronic transfer of funds, etc.

12. Treasury and cash management
An efficient treasury system is responsible for managing several core functions:
The government’s cash and liquidity.
The government banking arrangements – usually through a single account operated by the central bank.
Accounting and reporting of government transactions,
Preparation of government final accounts.
Financial planning and forecasting of cash flows.
Management of overseas development aid and government financial assets and liabilities.
Debt management is sometimes combined with treasury operations, but more usually by a separate department or agency.
Close coordination of operations between the treasury and the central bank is essential.

13. Accounting and financial reporting
Accounting systems are governed by standards set by national authorities - international accounting standards (e.g., IPSASB) also exist and are growing in influence.
Developing areas include accounting for: financial support operations given to failing financial institutions; long-term financial obligations such as pensions and healthcare; generational accounting; government contracts and PPPs.
While most developing countries continue to rely on cash-based manual systems for preparing accounts and financial reports, many advanced and middle-income countries have moved to accrual-based systems, supported by sophisticated IFMIS systems.

14. Internal control
Effective internal control and internal audit processes are essential to mitigate the risk of misuse of public resources.
There are two main models of internal control:
The ex ante centralized control of transactions exercised (usually) by officials of the MoF.
Decentralized control exercised by official of each spending ministry.
Most advanced countries (including France) have moved toward the decentralized model of control because it is compatible with a “managerial” approach to public administration.
It is often accompanied by increased emphasis on ex post monitoring of expenditure through internal audit.
In low-income countries, a centralized ex ante approach may make sense until sufficient financial capability is achieved.

15. Internal audit
The IIA has defined internal audit as an activity that “helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve effectiveness of risk management, control and governance processes.”
Internal audit is an important mechanism of control in advanced and middle-income countries. Its success is dependent upon having in place an efficient and reliable system of accounting and financial reporting, well-defined and stable management structures in the entities in which IA units are established, good systems for disseminating financial information, developed auditing skills, and a culture of trust and accountability.
As a result, many less developed countries find the development of internal audit processes challenging.

16. External audit (1)
External audit (EA) is another critical element in developing accountability and transparency in managing public finances, and combating corruption.
EA benefits from its independent professional status – with defined educational requirements, professional rules and ethics, and a recognized international standard setting body (INTOSAI).
Institutional forms vary widely, e.g., Central European Court of Accounts, Auditor General (U.K. and British Commonwealth), U.S. General Accounting Office.

17. External audit (2)
Audit takes several forms: financial audit, compliance audit, and performance audit.
EA can add value by diagnosing problems and providing clear and timely reporting of them; identifying significant systemic issues; focusing on materiality and risk, not just formality and legality.
External auditors need to develop appropriate relationships with bodies engaged in internal audit, financial inspection and anti-corruption, but such relationships are politically sensitive and can be a challenge in many developing countries, as can be ensuring that EA is free of political influence.

18. Performance-based budgeting (PBB)
PBB aims to improve the efficiency and effectiveness of public expenditure by linking the funding of government organizations to the results they deliver.
PBB is not an isolated initiative – it is part of a wider program of “managing for results” which includes civil service reform, restructuring of government organizations, and strengthening oversight through the legislature and external audit.
Preconditions for successful PBB include data on government objectives and results, accounting data that accurately records the cost of inputs and outputs, a budget process that is geared to using such data, and a program classification of the budget.
Such preconditions need much work to develop in many low-income countries.

19. Oversight of public finances
The legislature is a vitally important institution for ensuring public accountability in the use of resources.
For this mechanism to work effectively, the legislature’s role must be recognized in the constitution and legal framework; have an independent budget; and well-defined internal rules and procedures for undertaking its work.
In many countries, citizens and civil society organizations are also paying a key role in the formulation and oversight of the budget through mechanisms such as “participatory budgeting” and citizens’ report cards, etc.

20. Fiscal transparency
Transparency applies both to the processes by which decisions are taken on fiscal issues (e.g., the annual budget) and the publication of the budget and other key financial reports and documents.
Publication of timely financial information helps hold politicians and officials to account for the decisions they make and reports they produce.
Several diagnostic instruments aim to measure transparency including the IMF’s Fiscal Transparency ROSC, and the Open Budget Survey. The PEFA assessment tool also includes questions on transparency.

21. PFM diagnostic tools
Several instruments have been developed to assess the quality and performance of PFM systems including the WB’s Public Expenditure Review, the Country Financial Accountability Assessment (CFAA), and the Public Expenditure and Financial Accountability (PEFA) assessment framework.
PEFA is widely recognized as a world standard in diagnostic tools and has now been applied in over 120 countries.
These tools are applied at a broad level. Other diagnostic instruments have been developed that drill down into detailed processes such as debt management (DMPA) and public procurement (OECD-DAC).

22. CFA Study
A recent study by the World Bank, supported by the BNPP, analyzed the role and responsibilities of central finance agencies (CFAs) in a sample of ten low-income countries. It focused on the impact of “political economy” factors – incentives, informal rules, etc. – that underpin the performance of CFAs. The study concluded that:
The Bank should take account of the risks arising from weak institutions in preparing its DPLs and other support operations.
The organizational structure and capability of CFAs varies widely from country to country – there is no “good practice” paradigm.
Basic data on CFAs (e.g., staff numbers, skills, qualifications, gender balance, use of ICT systems) do not exist in many countries, and the Bank should collect such data on a regular basis to better inform its support operations.

23. Further references
Richard Allen and Daniel Tommasi (eds.), 2001, Managing Public Expenditure: A Reference Book for Transition Countries, Paris: OECD.
Anwar Shah (ed.), 2007, Budgeting and Budgetary Institutions, Washington DC: World Bank.
International Monetary Fund, Public Financial Management Blog, Washington DC: IMF.
International Monetary Fund, Technical Notes and Manuals, includes several issues on PFM topics.
PEFA website –
World Bank, 2011, Enhancing the Capability of Central Finance Agencies, draft Synthesis Report (mimeo).