1. Budget support training Module 4 Assessment of PFM (Third eligibility criterion) Version October 2013

2. Outline 1.Introduction: fiscal policy, public finance management and eligibility criteria 2.Overview and general approach 3.a. Diagnosis of the PFM system b. PFM aspects of domestic revenue mobilisation 4.Assessing the BS eligibility criterion 5.PFM dialogue and capacity building 6.Annual PFM monitoring report 2

3. Macroeconomic Policy Objectives  Macroeconomic stability (sustainable deficits)  Stable and sustainable growth Instruments Monetary and exchange rate policy Fiscal Policy Domestic revenue mobilisation policy Public expenditures policy Debt policy Regulations Public Finance Management Function: To implement public finance policies Objectives:  Fiscal discipline  Allocation of resources according to policy objectives  Efficient public service delivery and resource management Instrument: The budget Preparation Execution (Expend., revenue) Monitoring,accounting, reporting External audit Running Head 12-Point Plain, Title Case 3 Macroeconomic policy, public finance (fiscal) policy, PFM, … … and BS eligibility criteria BS Eligibility Criteria Public policies Stable macroeconomic framework Public Finance Management (Special focus on revenue mobilisation ) Transparency and oversight of the budget

4. The budget cycle 4

5. Stages in the budget cycle 5 t t+1 t+2 Fiscal Year: t-2t-1 Budget T-1 Reporting & Audit Policy Review Budget Execution Account. & Mon. Strat. Planning & Budget Prep. Budget T+1 Reporting & Audit Policy Review Budget Execution Account. & Mon. Strat. Planning & Budget Prep. Budget T Reporting & Audit Policy Review Budget Execution Account. & Mon. Strat. Planning & Budget Prep.

6. Outline 1.Introduction: fiscal policy, public finance management and eligibility criteria 2.Overview and general approach 3.a. Diagnosis of the PFM system b. PFM aspects of domestic revenue mobilisation 4.Assessing the BS eligibility criterion 5.PFM dialogue and capacity building 6.Annual PFM monitoring report 6

7. Running Head 12-Point Plain, Title Case During design A relevant (key issues must be addressed) and credible programme to improve the PFM must be in place ( → appropriateness of actions and their sequencing, institutional arrangements, budget, political commitment, track record, etc. ) During implementation For each tranche disbursement, satisfactory implementation of the PFM reform programme has to be demonstrated (progress compared to targets, direction of change). Relevance and credibility should be maintained Assessment of the relevance and credibility of the PFM reform programme 7 The PFM system must be assessed and monitored for the three types of BS contracts

8. GGDC Focus on entire PFM system and core functions SBC Focus on restoring basic PFM functions and ensuring basic social services Assess PFM for all types of contracts SRC Focus (also) on sector specific PFM issues Running Head 12-Point Plain, Title Case Note  Assessment influences agenda of the PFM dialogue with partner country  When PFM is weak, specific preconditions prior to disbursing the first tranche might be needed  When one or more core PFM functions of the budget cycle are very weak, budget support “will not be considered”.

9. Supplementary PFM document and monitoring report Supplementary PFM document to be elaborated and attached to the Action Fiche, containing:  Diagnosis of the PFM system (including DRM) (cf. part 3 of this presentation)  Assessment of the PFM eligibility criterion (cf. part 4)  PFM dialogue and capacity building (cf. part 5) Annual PFM monitoring report (cf. part 6) 9

10. Outline of module 5 1.Introduction: fiscal policy, public finance management and eligibility criteria 2.Overview and general approach 3.a. Diagnosis of the PFM system b. PFM aspects of domestic revenue mobilisation 4.Assessing the BS eligibility criterion 5.PFM dialogue and capacity building 6.Annual PFM monitoring report 10

11. Assessing the performance of a PFM system 11 The three specific objectives of the PFM system Aggregate fiscal discipline Allocation of resources in conformity with policy objectives Operational efficiency PFM principles  respect of norms, rules, procedures and due processes  probity (honesty)  legitimacy (approved by Parliament in a democratic society)  transparency and accountability. The performance of a PFM system is its capacity of achieving the three PFM specific objectives in the most cost effective manner, respecting the PFM principles and taking into account the country context.

12. How to assess? Use available studies and assessments Assessment should include sub-national government, public agencies and parastatals Running Head 12-Point Plain, Title Case All phases of budget cycle should be assessed Special attention to be paid to revenue administration, and to transparency and oversight Summarise main findings of recent studies and assessments (notably PEFA) Identify further diagnostic work to be carried outsessed 12

13.  Donors have agreed on a single PFM assessment tool : PEFA/PMF (Public Expenditure and Financial Accountability/Performance Management Framework)  28 indicators of PFM system + 3 indicators relative to donors’ behaviour  Designed in such a manner that it minimises the subjectivity of assessors  Allows comparisons over time, and therefore, for any given country, an assessment of progress PEFA/PMF: the preferred diagnostic tool 13

14. The PEFA assessment framework (1) 14

15. Additional diagnostic tools  PER Public Expenditure Review  PETS: Public Expenditure Tracking Survey  ROSC: Review of Standards and Codes (various subjects)  OBI: Open Budget Index  CFAA: Country Financial Accountability Assessment  FRA: Fiduciary Risk Assessment  OECD/DAC NPA: National Procurement Assessment  CPAR: Country Procurement Assessment Review  DEMPA: Debt Management Performance Assessment  EC Audits 15

16. Reports of the Supreme Audit Institute  Timing and availability of the reports  Scope of the audits  Major findings and recommendations  Responses of the government  Monitoring the implementation of the recommendations 16

17. PFM at sector level In case of a SRC:  Make diagnosis of special PFM issues of that sector  Focus on the extent to which PFM system is able to efficiently deliver (sector) services  Sources of information: PER, PETS, sector reports of the SAI, Fiduciary Risks Assessments, annual reports of sector programmes, etc.  Pay attention to specific procurement systems, payroll performance, off-budget funds and level of decentralisation. 17

18. Identify weaknesses and reforms  Identify critical weaknesses and establish baseline against which progress could be monitored  Identify major reforms needed and focus on:  GGDC → all 3 major PFM objectives: fiscal discipline, strategic resource allocation and efficient service delivery  SRC → increasing efficiency of service delivery  SBC → restoring basic PFM functions and financial compliance  Summarise the Government’s PFM reform programme 18

19. Outline of module 5 1.Introduction: fiscal policy, public finance management and eligibility criteria 2.Overview and general approach 3.a. Diagnosis of the PFM system b. PFM aspects of domestic revenue mobilisation 4.Assessing the BS eligibility criterion 5.PFM dialogue and capacity building 6.Annual PFM monitoring report 19

20. PFM aspects of Domestic Revenue Mobilisation (DRM)  How to improve tax collection and administration?  How to reduce exemptions and exonerations?  How to tax the informal sector?  (Creation of) large tax payers department  More discretionary resources  Strengthened predictability of public revenues compared to (project) aid  Improving tax collection systems may help reducing corruption 20

21. PFM aspects of DRM to be assessed  Tax administration and collection system (organisation)  Programme for reform and strengthening of tax systems  Tax effort (taxes collected/potential)  Tax composition and levels (personnel, sectors, economic actors)  Tax incentives (exemptions, reductions, tax holidays, tax free zones, etc.)  Flexibility to compensate for decreasing revenue of certain taxes 21

22. Objectives of tax collection and administration  Effective and efficient tax collection  Promotion of tax compliance and enforcement of tax codes  Curbing tax evasion and avoidance  Efficient and effective appeal mechanism 22

23. Three PEFA indicators verify the conditions for effectiveness, transparency and due process Running Head 12-Point Plain, Title Case  Citizens have a clear understanding of their tax obligations and comply with registration and assessment requirements  Tax agency is able to collect all tax due Transparent tax liabilities (PEFA PI 13) Effective taxpayer registration & assessment (PEFA P I 14) Effective tax collection (PEFA PI 15) 23

24. How to strengthen tax collection and administration?  There is no ideal tax regime which is the best option for all countries……., but:  Simplify the policy, legal and administrative framework, and assure stability  Standardise and simplify the procedures  Reduce exemptions  Strengthen Tax Departments (capacity building, ICT, etc.)  Establish special departments for: large tax payers, extractive industries, high risk tax payers, fraud investigations, etc.  Improve transparency and access to information (tax levels, procedures, administrative systems, taxes collected, etc. 24

25. Overview of tax administration diagnostic tools  See overview provided in annex 11 (page 113) of the BS Guidelines  Three tools are publicly available data bases  Five tools are frameworks for country assessments  None of them are comprehensive and/or based on performance indicators 25

26. Outline 1.Introduction: fiscal policy, public finance management and eligibility criteria 2.Overview and general approach 3.a. Diagnosis of the PFM system b. PFM aspects of domestic revenue mobilisation 4.Assessing the BS eligibility criterion 5.PFM dialogue and capacity building 6.Annual PFM monitoring report 26

27. From diagnosis to improvement 27 Diagnosis of the PFM system Identify critical weakness es of the PFM system Establish the baseline against which progress will be monitored Evaluate PFM reform program and conclude on eligibility

28. Running Head 12-Point Plain, Title Case Relevance of the reform strategy  What are the objectives and targets?  Are key weaknesses being addressed?  Can the objectives and targets be monitored? Credibility of the reform Appropriateness of:  proposed actions in view of the objectives  Sequencing of the actions  institutional arrangements  budget?  political commitment  track record of past actions  implementation capacity  fight against corruption and fraud Assessing eligibility 28

29. Sequencing of PFM reform actions  Credibility and success of the reform require prioritisation and phasing  Basics first (not necessarily the weakest elements)  PFM subsystems are closely linked Note:  There is no blueprint sequencing.  Should be adapted to specific situation and needs of the PFM in a specific country 29

30. 30 Basics First  The government should foster an environment that supports and demands performance before introducing performance or outcome budgeting.  Control inputs before seeking to control outputs.  Account for cash before accounting for accruals.  Establish external controls before introducing internal control.  Establish internal control before introducing managerial accountability.  Operate a reliable accounting system before installing an integrated financial management system.  Budget for work to be done before budgeting for results to be achieved.  Enforce formal contracts in the market sector before introducing performance contracts in the public sector.  Have effective financial auditing before moving to performance auditing.  Adopt and implement predictable budgets before insisting that managers efficiently use the resources entrusted to them.

31. Institutional arrangements  Steering committee, management committee, coordination unit  Coordination within MinFin and inter-ministerial coordination  Position PFM coordination unit in organogram  Involvement of Parliament  Coordination with donors  Reporting, monitoring and evaluation mechanisms  Centralised (MinFin) and decentralised activities (other ministries).  Capacity building and technical assistance 31

32. Political support  Members and chair of the Steering Committee  Place of Coordination Unit in organogram of MinFin  Qualifications of the coordinator and its staff  Inter-ministerial coordination  References to PFM reform in official documents and speeches  Budget made available for PFM reform  Interest of Parliament in PFM reform 32

33. Fight against corruption and fraud  Should be part of a PFM reform strategy  But extends beyond PFM and credibility of the PFM reform strategy  Critical PFM components: public procurement, internal control and external audit  Provide some indication of scale and type of corruption  Describe anti-corruption policies and related institutional arrangements  Anti-corruption strategy analysed in more detail in chapter on Risk Management 33

34. Conclusions as regards the PFM reform strategy Is the strategy sufficiently relevant? What are the concerns about relevance and credibility? These concerns should be subjects for further dialogue with the authorities. Running Head 12-Point Plain, Title Case Is the strategy sufficiently credible?

35. Outline of module 5 1.Introduction: fiscal policy, public finance management and eligibility criteria 2.Overview and general approach 3.a. Diagnosis of the PFM system b. PFM aspects of domestic revenue mobilisation 4.Assessing the BS eligibility criterion 5.PFM dialogue and capacity building 6.Annual PFM monitoring report 35

36. PFM dialogue and capacity building (final chapter of PFM supplementary document) Prior agreement on institutional arrangements for policy dialogue is needed Running Head 12-Point Plain, Title Case Make distinction between strategic issues and short term objectives and measures Capacity development should be one of the issues Set up agenda for policy dialogue on PFM issues, particularly for first year 36

37. Outline of module 5 1.Introduction: fiscal policy, public finance management and eligibility criteria 2.Overview and general approach 3.a. Diagnosis of the PFM system b. PFM aspects of domestic revenue mobilisation 4.Assessing the BS eligibility criterion 5.PFM dialogue and capacity building 6.Annual PFM monitoring report 37

38. Monitoring PMF under the 3 BS contracts  GGDC → monitoring focussed on entire PFM strengthening program  SRC → monitoring could be focussed on PFM issues in the sector  SBC → monitoring should be focussed on ensuring vital state functions and delivery of basic services. 38

39. Content of annual monitoring report (1) Chap. 1: Key features (see annex 5, page 45) Chap. 2: Summarise main developments since previous year (see annex 5, p. 46) Chap. 3: Progress in improving PFM:  Use monitoring table (see appendix 1 of annex 5)  Make distinction between performance of the PFM system and reform measures to be taken  Assess institutional factors and power structures influencing performance and reform  Findings and follow-up of audit reports 39

40. Content of annual monitoring report (2) Chap.4: Continued relevance of PFM reform strategy. Use info from annual reports of PFM reform strategy and other diagnostic work Chap.5 : Continued credibility of PFM reform strategy:  Action plan and budget  Institutional arrangements  Capacity building  Political commitment  Fight against corruption and fraud 40

41. Content of annual monitoring report (3) Chap.6: Conclusions as regards assessment of continued eligibility: based on findings of sections 3, 4 and 5 of this presentation. Chap.7 : Quality of the PFM policy dialogue:  Frequency and participants of meetings  Issues discussed  Quality of papers to be discussed and minutes of meetings  Follow-up of conclusions and recommendations of meetings  Link with other coordination mechanisms 41

42. Thank you very much for your attention 42