Public Expenditure and Financial Management Overview of Issues and Approaches

1
Public Expenditure and Financial
ManagementOverview of Issues and Approaches

• Bill Dorotinsky,
• PREM public sector group

PEAM Course January 13, 2004
2
Outline

• Framework for Review
• Approaches to PEM review
• What is reviewed?
• Common Problems
• Common Solutions
• Getting the basics right

3
Three Objectives of Public Expenditure Management
Systems
Framework

• 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

• 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 matter?

• Laws and regulations
• Fiscal, budget, procurement, civil service
• Process
• Policy
• Planning
• Financial/resource management
• Organizations

6
Approaches to PEM Review

• Cycle, Process
• System
• broad scope
• organizations
• Functions/tasks
• Outcomes/Impact

7
Expenditure Management Cycle
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 and Policy Execution System in Hungary
(1999)
9
Public Finance Functions
Core Functions
Budget Execution
Macroeconomic Forecasting
Budget Formulation
Fiscal Policy
Revenue Administration
Treasury
Debt Management
Procurement Policy
Internal Audit
Non-core Functions
Lottery Gambling
Financial Asset Management
Financial Market Regulation
Financial Investigations
Procurement Administration
10
Core Tasks and Organizations

• - Macroforecasting
• Fiscal Policy
• Revenue administration
• Debt Management

Financial Management is Everyones Responsibility
11
Credibility of the Honduran Budget In-year
Deviations by Agency (percent of the executed
over the approved budget)
12
Common PEM problems

• Weak links between 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 dont reach intended beneficiaries
• Budget executed differently than approved
• Goods and services not delivered as planned

13
Common Reforms

• MTEF
• Treasury
• IFMIS
• Performance Budgeting
• Fragmentation
• Procurement, Debt
• New Public Management
• Deconcentration, decentralization
• Administrative Civil Service

14
What is an MTEF?

• Conceptual framework for thinking about public
  finance systems
• ties together multiple technical reforms
• gives paradigm for understanding import of
  technical reforms
• teaching tool
• Process, not only components of public
  expenditure systems
• process of government decision-making
• developing a public interest in decision-makers
• Multi-year emphasis
• creating a learning system
• Emphasizing policy
• steering versus rowing for senior officials,
  organizations
• linking policy, inputs, outputs, objectives
• Effort to change paradigm of actors in system

15
Core elements of an MTEF

• Multi-year fiscal envelope
• Setting broad policy priorities (sectors)
• Setting multi-year sector ceilings
• Sector budgets prepared under constraints
• Strategy, policy and objectives under constraints
• Delivering resources as budgeted

16
HIPC expenditure tracking assessments 15
indicators, benchmarks of PEM system capabilities
17
Relative need for upgrading PEM Systems
15
Agreed Assessment
(8) Number of Benchmarks met
Bolivia (5) Cameroon (4) Ethiopia (6) Gambia, The
(5) Ghana (1) Guinea (5) Madagascar (7) Malawi
(7) Mauritania (7) Mozambique (5) Nicaragua
(5) Niger (3) Sao Tome Principe (4) Senegal
(4) Zambia (3)
9
Benin (8) Burkina Faso (9) Chad (8) Guyana
(8) Honduras (8) Mali (8) Rwanda (8) Tanzania
(8) Uganda (9)
Substantial Upgrading Required
Some Upgrading Required
Little Upgrading Required
Source Actions to Strengthen the Tracking of
Poverty Related Public Spending in Heavily
Indebted Poor Countries (HIPCs), World Bank and
IMF, March 22, 2002. See http//www.worldbank.org
/hipc/hipc-review/tracking.pdf
18
The results indicated the need to improve basic
aspects of PEM systems
(Percent of countries not meeting each benchmark)
100
Note Based on 24 countries Final Assessments
90
80
70
60
50
40
Timely functional reporting from class system
Meets GFS definition of general government
Audited accounts to legislature within 1 year
Projections integrated into budg. formulation
Quality of internal audit (effective or not)
Accounts closed within two months of y/e
30
Fiscal monetary data reconciled
Extra (off) budget expend.
20
Pov. Red. Exp. Identified
Data on donor financing
Classification of budget
Low level of arrears
Regular tracking
Month reports
Outturn close?
10
0
Benchmark number
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Execution
Formulation
Reporting
Source Actions to Strengthen the Tracking of
Poverty Related Public Spending in Heavily
Indebted Poor Countries (HIPCs), World Bank and
IMF, March 22, 2002. See http//www.worldbank.org
/hipc/hipc-review/tracking.pdf
19
Comparison of selected PEM indicators for ECA
PRSP countries and HIPCs

• A recent draft study by the Banks Europe and
  Central Asia (ECA) region, entitled BUDGET
  MANAGEMENT AND PRSP in ECA PRSP COUNTRIES (June
  2003), employed an instrument similar to the HIPC
  expenditure tracking assessment. The instrument
  was applied in 11 ECA countries. Many indicators
  in the ECA study are sufficiently different to
  prevent comparison with the HIPC expenditure
  tracking results, but four can be compared
• Comprehensiveness of the budget. Budget reporting
  follows GFS. No ECA countries met the benchmark,
  compared to 10 percent of HIPCs. Budget
  comprehensiveness challenges are a particular
  legacy of the former socialist countries, with
  the public sector still being defined in many
  countries.
• Multi-year forecasts integrated into the budget
  process. Ten percent of ECA countries met the
  benchmark, compared to 18 percent of HIPCs.
  Relatively more emphasis has been placed in ECA
  countries on budget execution during the 1990s,
  and budget formulation, including medium-term
  forecasts and MTEFs, are a more recent
  phenomenon.
• Internal audit effectiveness. None of the ECA
  countries met the benchmark, compared to about 12
  percent of HIPCs. Even though internal audit has
  generally been neglected in Africa, the function
  nominally existed. For ECA countries, the
  socialist heritage did not include internal audit
  functions.
• Audited accounts presented to the legislature.
  Fifty-five percent of ECA countries met the
  benchmark, compared to 17 percent of HIPCs. ECA
  countries, as noted above, have placed relatively
  greater emphasis on budget execution, including
  auditing and reporting, in the 1990s, and this
  is reflected in the results. HIPCs in Africa have
  focused more on budget formulation (MTEFs) rather
  than budget reporting.
• HIPC countries generally scored better than ECA
  PRSP countries, and these reflect the differing
  initial conditions, capacity for reform, and
  differing PEM reform emphasis in the regions.
• Albania, Armenia, Azerbaijan, Bosnia, Georgia,
  Kyrgyz Republic, Serbia, Macedonia, Moldova,
  Montenegro, and Tajikistan. Serbia and Montenegro
  form one country, but are reported separately in
  the ECA study due to significant differences
  between the two Republics PEM systems and
  capacity.

20
HIPC Assessment Conclusions

• Execution and reporting relatively weaker
• Institutional reforms
• require continuous engagement and monitoring not
  one-off
• Country commitment also fundamental
• Unless some of these addressed, other PEM reforms
  will have limited impact
• With limited policy space for reform, important
  to focus on a few key areas, rather than laundry
  list

21
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. 1993.
• Treasury Reference Model (Bank PE website)
• A Contemporary Approach to Public Expenditure
  Management. Schick, Allen. World Bank Institute.
  1999.
• Public Expenditure Handbook. World Bank, 1998.
• Tracking of Poverty-Reducing Public Spending in
  Heavily Indebted Poor Countries, Revision 1,
  March 28, 2001, SM/01/16, and World Bank, March
  30, 2001, IDA/SECM2001-0052/1
• Actions to Strengthen the Tracking of
  Poverty-Reducing Public Spending in Heavily
  Indebted Poor Countries, Revision 2, March 21,
  2002, SM/02/30, and World Bank, March 22, 2002,
  IDA/SECM2002-30/2
• Update on Implementation of Action Plans to
  Strengthen Capacity of HIPCs to Track
  Poverty-Reducing Spending, March 11, 2003,
  SM/03/90 World Bank, March 13, 2003,
  IDA/R2003-0043.
• All HIPC Papers available at
• http//www-wbweb.worldbank.org/prem/prmps/expen
  diture/hipc.htm

22
(No Transcript)
23
(No Transcript)