1. 1 Improving Public Financial Management: The Role of Analytic Instruments Presentation to ICGFM Conference Miami, 2 April, 2003 David Shand and Parminder Brar The World Bank dshand@worldbank.org pbrar@worldbank.org

2. 2 THE IMPORTANCE OF SOUND PFM Need for accountability to citizens (and donors) Need for pro-poor budgets – and which are implemented Good PFM reduces corruption, poor PFM facilitates it Concern with good PFM should be with - all ministers, not just Minister of Finance - all ministry heads, not just Finance Ministry - all program managers, not just finance staff

3. 3 WORLD BANK ’ S WORK ON PFM Central place of PFM in Bank ’ s dialogue with most borrowing countries Substantial growth of Bank ’ s PFM work Part of public sector reform – can we reform PFM separately? Changes in Bank ’ s business – growth of adjustment lending, debt relief and sector programs Less emphasis on “ ring fenced ” PFM systems ( “ islands of excellence in a sea of failure ” ) more on country PFM systems “ Integrated Fiduciary Assessment ” proposed as future pre-requisite for all budget support lending Growth of Bank ’ s involvement with sub-national governments

4. 4 OBJECTIVES OF PFM ANALYTICAL TOOLS Importance of development as well as fiduciary objectives - complementary not opposites Best fiduciary assurance comes from a government committed to a sound PFM system Risk is to country (and other donor) funds as well as Bank funds These tools are not audits, or seeking to trace individual transactions or a “pass/fail” certification of adequacy of the PFM system for budget support lending

5. 5 OBJECTIVES - (cont ’ d) Rather a knowledge tool about the environment into which Bank funds are going Going into lending operations with “eyes open” Influencing decisions on amount, timing and form (budget support, sectoral support, investment projects) of lending Budget support lending may be appropriate in a weak PFM environment where there is clear government commitment to PFM improvement – and evidence of improvements Improved PFM may therefore be an outcome of or a precondition for adjustment lending

6. 6 PFM AS AN INTEGRATED SYSTEM Budget development – comprehensiveness, realism, classification, processes Budget execution and monitoring – internal controls, FMIS, cash and debt management External fiscal reporting and transparency Internal and external auditing Legislative scrutiny of budget execution Problems in budget execution may reflect problems in budget construction – can ’ t implement well a badly constructed budget

7. 7 PFM Diagnostic Tools Variety of PFM diagnostic instruments World Bank – - Country Financial Accountability Assessment (CFAA) - Public Expenditure Review (PER) - Country Procurement Assessment Report (CPAR) IMF Fiscal Transparency Assessment (Fiscal ROSC) Joint Bank/Fund HIPC Expenditure Tracking Assessments – 15 PFM benchmarks EC assessments of country financial management UNDP Contact

8. 8 Collaboration with Development partners Over half of current CFAAs being undertaken in collaboration with other development partners – IADB, DFID, SPA, EC, Netherlands, SIDA, NORAD etc. Reflecting the international harmonization agenda Interest of other donors in using CFAA for their own decisions on budget support But different donors will have different thresholds for this Collaboration may reduce transaction costs to countries, but poses management and quality challenges. Too many cooks ? Collaboration should also improve diagnostic quality and increase likelihood of country addressing PFM problems

9. 9 Donor Collaboration – Sharing of diagnostic work plans and needs Open and participatory reviews – results widely shared, “ no surprises ” Rationalize scope, timing and conduct of diagnostic reviews Many possible forms of collaboration – depends on country context. Possible “ lead agency ” approach

10. 10 Involving the Country Strong country participation desirable to build country commitment to PFM reforms. Continuous consultation - “ no surprises ”. A general diagnostics issue. Risk is to country as well as Bank funds – persuading the country ? Hard to improve “ by force ”. Various levels of country participation; in practice Bank generally “ holds the pen ” Involvement of key officials; may undertake some of diagnosis Collaboration among development partners facilitates country participation (although claims of “ ganging up ” )

11. 11 PFM FOLLOW UP Need to increase Bank understanding of and skills in capacity development And working collaboratively with other donors and the country PFM improvements as a condition for further lending or as components of PS Reform loans Need for regular performance measurement of PFM – is progress being made But measurement of progress within a country is more important; hard to compare different countries Agreement with other donors and country on harmonized performance indicators

12. 12 A National Perspective: India Are expenditure outcomes being achieved? Aggregate fiscal discipline Prioritization of expenditures Operational efficiency Transparency – processes and information

13. 13 National Perspective: Budget Formulation:Unrealistic revenue forecasts have resulted in unachievable fiscal deficit targets.

14. 14 National Perspective: Budget Execution:Focus remains on meeting spending targets instead of outputs or outcomes.

15. 15 National Perspective Fiscal Reform is at the top of the agenda for many governments. State Fiscal Reform Facility (2000-01 – 2004-05): Incentive Fund established to encourage states to improve fiscal discipline. Releases from the fund require a five percentage point reduction in the revenue deficit as a proportion to the State ’ s total revenue receipts in each year till 2004-05. States are required to draw up a Medium Term Fiscal Reform Program (MTFRP) which aims to bring down the fiscal deficit, eliminate the revenue deficit by 2005 and reduce the debt – GDP ratio, including contingent liabilities. MTFRP’s drawn up by 16 states. There is a community of interest in improving PFM systems.

16. 16 Diagnosis: Dialogue on PFM issues is increasing: April 2000 – March 2002: 4 WB structural adjustment loans released for fiscal reform in  Uttar Pradesh (pop. 166 m.)  Karnataka (pop.53 m.) and  Andhra Pradesh (pop. 76 m.). February 2001: IMF Fiscal Rosc April 2002: CGA / MoF Conference on Financial Reforms May 2002: IMF Data Rosc initiated By July 03: Four SFAA ’ s due for delivery June 2003: Regional Conference of CGA ’ s

17. 17 Results: Karnataka: Improved Aggregate Fiscal Management: MTFP being updated annually. Fiscal Responsibility Act enacted – binds state to achieve fiscal deficit of 3% by 2005-06. Increased performance orientation: Departmental MTFP ’ s completed in 5 departments - being rolled out to other departments. Budget simplification: Object heads reduced by 50%. Systems Modernization: 220 Treasuries and Sub Treasuries computerized. New accounting system introduced in biggest urban local body. Improved transparency: First state to publish monthly accounts on the web.Right to Information Act enacted along with Transparency in Public Procurement Act. Improved response to Audit.

18. 18 Results: Andhra Pradesh: Improved Aggregate fiscal management: MTFP being updated annually. Hard budget ceiling on departments.Line departments given much more flexibility to to prioritize expenditures within ceiling limits. Performance budgeting systems evolving. Cash management system vastly improved.Significant decrease in use of overdrafts. Incentives provided to improve collection of user charges. Systems modernization : Integrated Financial Information System being introduced. Codes and regulations being updated. Internal Audit introduced in Government, with assistance provided by Institute of Chartered Accountants of India. Monitoring and enforcement of internal controls improved. Self Diagnosis: SFAA being prepared by the Government.

19. 19 The Way Forward: Country leadership Strong Partnership Results focus