The Centrality of Public Finance Policy

1
The Centrality of Public Finance Policy
Management in Development
Presented by Sanjay Pradhan Director Public
Sector Governance Board
Presented to Public Finance Analysis
Management Course May 1, 2006 Washington, DC
The World Bank
2
Governance and Development Lessons of Global
Experience

• An effective state is crucial for growth and
  poverty reduction
• Building a sound investment climate for growth
  (macroeconomic stability, rule of law, regulatory
  system, physical financial infrastructure)
• Empowering people to make growth inclusive
  through effective delivery of basic services
  (education, health, social protection)
• State effectiveness requires a two-pronged
  strategy
• Match role of the state to its institutional and
  fiscal capability including level and
  composition of public finances
• Strengthen state capability both capacity and
  accountability in state functions, including
  public finance management

3
The Centrality of Public Finance System for Good
Governance and Development

• A well functioning PF system is crucial for
• Enabling the state to finance deliver key
  public services and infrastructure to achieve
  MDGs
• Achieving three levels of fiscal outcomes
• aggregate fiscal discipline
• allocation of resources according to strategic
  priorities
• efficient and effective use of public resources
• Ensuring transparency and accountability of a
  government to its citizens
• Providing assurance to donors that their funds
  are being used for the purposes intended

4
Recent global developments have put PF systems in
the spotlight
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Two Aspects of Public Finance Systems

• Focus on Public Finance System includes
• Efficiency, equity sustainability of public
  expenditures and how they are financed
  (numbers)
• Efficiency effectiveness in how public
  finances are raised, allocated and utilized
  (institutions)
• Two Aspects of PF Systems
• Public Finance Policy Aggregate fiscal stance,
  level and composition of public expenditures
  revenues
• Public Finance Management Institutional
  mechanisms that ensure fiscal discipline,
  allocative and operational efficiency

6
Key Issues in Public Expenditure Analysis

• Public Expenditure Analysis
• Rationale for Government Intervention Market
  Failure, Redistribution
• Mechanisms for Intervention Regulation,
  Subsidy, Public Provision
• Cost-benefit Cost-effectiveness of Expenditure
  Allocations
• Some Issues
• Data Methodological Limitations of
  cost-benefit analysis Analyzing broad
  allocations of spending
• Benefit valuation Intersectoral Allocations
• Growth impact of expenditure programs
• Generating Fiscal Space for infrastructure
  social programs

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Public Finance Analysis, Fiscal Space
Governance Diamond

• Fiscal policy level composition of public
  finance is important not only for stability but
  also crucially for growth
• Governments have 4 basic alternatives for
  additional fiscal space revenue, grant aid,
  borrowing efficiency savings as shown in the
  fiscal diamond
• Improved governance is crucial for all dimensions

Fiscal Space
Increase of
Grant Aid in
GDP
5
4
3
2
Improved
Improved Revenue Effort in GDP
1
Expenditure
0
Efficiency
in GDP
New
Borrowing in
GDP
8
Challenges in Public Finance Management

• PFM systems in many countries are still very weak
• Governance and corruption indicators reveal major
  challenges
• Fragmentation of donor approaches and overlapping
  diagnostics

9
Robust PF System can mitigate key risks from
corruption
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Majority of PEM Systems Still Require Substantial
Upgrading
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Main elements of a strengthened approach to PFM

• PFM Strengthened Approach
• A country-led agenda including a PFM reform
  strategy and action plan
• A donor coordinated program of support
  coordinated, coherent, multi-year program of PFM
  work that supports and is aligned with the
  governments PFM strategy
• A results focus with objective performance
  measurement

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The Performance Measurement Framework
Performance Measurement Framework

• PFM Performance Report
• Integrative, narrative report based on indicators
  using observable, empirical evidence.
• Updated periodically, depending on country
  circumstances and operational needs
• Contributes to coordinated donor assessment
• Feeds into government-donor policy dialogue

• A standard set of high level indicators
• Widely accepted but limited in number
• Broad measures of performance relative to key PFM
  system characteristics
• Enabling credible monitoring of performance and
  progress over time

Credible results measurement framework with
standardized reporting should help shift focus to
capacity building
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Trends in PFM can be monitoredNet Change in HIPC
Tracking Indicators, 2001-2004
8
7
7
6
6
6
5
4
3
2
2
1
1
0
Decline in
3
Decline in
1-2
No change
Improvement
Improvement
categories
categories
in
1-2
in
3
or more
categories
categories
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PFM operations perform satisfactorily regardless
of governance starting point, but ACSR
operations are successful in stronger settings
All projects All projects All projects CPIA (Q16) lt 3.0 CPIA (Q16) lt 3.0 CPIA (Q16) from 3.0 to 3.5 CPIA (Q16) from 3.0 to 3.5 CPIA (Q16) Greater or equal to 3.5 CPIA (Q16) Greater or equal to 3.5
No. of projects Projects with Satisfactory or better () No. of projects Projects with Satisfactory or better () No. of projects Projects with Satisfactory or better () No. of projects Projects with Satisfactory or better ()
PFM 39 85 15 87 18 83 6 83
ACSR 24 58 11 36 9 78 3 100
OED Evaluated PSGB-mapped projects with PFM
(without ACSR) and ACSR (without PFM) primary
themes, FY00-FY05
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Improving PFM A Platform Approach
Platform 4 Integration of accountability and
review processes for both finance and performance
management
Cambodia Sequence of Platforms
Enables more accountability for performance
management
Enables focus on what is done with money
Platform 3 Improved linkage of priorities and
service targets to budget planning and
implementation
Broad Activities
Enables a basis for accountability
Platform 2 Improved internal control and public
access to key fiscal information to hold managers
accountable

• Full design of FMIS
• Develop IT
• Management
• Strategy
• Initial design of asset register

Platform 1 A credible budget delivering a
reliable and predictable resource to budget
managers
Broad Activities

• Re-design budget cycle (e.g. MTEF)
• Pilot program based budgeting budget analysis
• Further fiscal
• Decentralization

Broad Activities

• Re-design
• Budgeting
• Classification system
• Initial design of FMIS for core business
  processes
• Strengthen external audit and define internal
  audit function

Broad Activities

• Integration of budget (recurrent capital
  budgets)
• Strengthen macro and revenue
• Forecasting
• Streamline spending processes

Source See Study of measures used to address
weaknesses in Public Financial Management systems
in the context of policy-based support, by Peter
Brooke, at www.pefa.org
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Reforming PFM SystemsStrengthen Links with
Broader Accountability Systems
Citizens/Firms

• Political Institutions
• Political Parties Leadership
• Social Econ Interest Groups

Executive-Central Govt

• Oversight Groups in Society
• Civil Society Watchdogs
• Media
• Business Associations

• Check Balance Institutions
• Parliament
• Judiciary
• Oversight institutions

Citizens/Firms
Citizens/Firms
PFM Systems
Service Delivery Regulatory Agencies
Subnational Govt Communities
Citizens/Firms
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Strengthening Demand for Public Financial
Accountability
Civil Society Oversight transparent, competitive
procurement (Slovakia)
Strengthening Supreme Audit Institutions
(Hungary)
Transparent, competitive e-procurement (LAC)
Strengthening Public Accounts Committees of
Parliament (Kenya, Ghana, Zambia -- AFR)
Procurement oversight by CSOs (Philippines)
Accountability, Transparency Integrity
Project (Tanzania)
Strengthening Public Accounts Committees of
Parliament (India)
Participatory Budgeting, Puerto Alegra (Brazil)
Public Expenditure Tracking Information
Campaigns (Ghana, Madagascar, Mozambique, Peru,
Senegal, Tanzania, Zambia)
Key Issue Instrument to Support Demand-side
Interventions
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Philippines Procurement ReformMobilizing
Support Oversight by Civil Society
Transparency and Accountability Network (20
member groups)
Walang Ku-Corrupt Movement
(Youth)

• Drew other civil society groups
• into the advocacy efforts and
• coordinated the activities

PAGBA AGAP (w/in Govt)
CBCP (Church)
Philippine Contractors Association (private
sector main stakeholder)
Local chambers of Commerce (Private
sector)
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The Media CampaignThe Communications Strategy
Reaching Out
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BIR Officials Amass Unexplained Wealth By
Tess Bacalla, Philippine Center for Investigative
Journalism
Media,Transparency, and Combating Corruption
Owner Regional Director in the Bureau of
Internal Revenue forced to resign currently
facing corruption charges other officials
suspended, also facing charges







CAR MODEL
BENEFICIAL OWNER
REGISTERED OWNER




Nissan Patrol
Edwin Abella

Sulpicio S. Bulanon Jr.


BIR Reg'l Director,

1817 Jordan Plains Subd.,

Quezon City
Quezon City (listed address of Abella in his
SALs)










Merrick Abella (son of Abella)
Suzuki Grand Vitara
Ditto
24 Xavierville, Loyola Heights,



Q
uezon City




Nissan Cefiro
Ditto
Elizabeth S. Buendia



152 Road 8,
-
asa, Quezon City




BMW
Lucien E. Sayuno

Limtra Dev. Corp.




BIR Reg'l Director,

Zone 4, Dasmariñas, Cavite


Makati City






BMW
Ditto
Marie Rachel D. Mene

c/o Metrocor and Holdings, GF,



Makati City




Honda Accord
Danilo A. Duncano

Daniel Anthony P. Duncano

BIR Reg'l Director,

2618 JP Rizal, New Capital Estate, Quezon City





Quezon City




Mitsubishi L200
Corazon P. Pangcog

Alberto P. Pangcog (husband)



Asst.
Reg'l Director,

B2 L23 Lagro Subd., Quezon City


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Strategic directions for PF work for future
to integrated, harmonized, PFM assessments
From fragmented, overlapping PFM diagnostics
to more systematic PF policy analysis
From ad hoc PE analysis
to capacity building improving PF performance
From diagnosis producing reports
to strengthening demand-side pressures
accountability systems
From technocratic, supply-side interventions
to integrated country PF teams
From silos of separate EP, FM, Procurement, PSG
teams
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Broadening of the PF Agenda

• From PREM preoccupation in early years of PERs to
  broad cross-network interest
• PFAM course is offered in collaboration with HD,
  INF and AGR networks, as well as participation of
  IMF
• PEFA Indicators developed in partnership between
  FM, Procurement and PREM within Bank, and with
  PEFA donor partners
• Integrated Public Finance Thematic Group
• Finally Thanks to Course Organizers
• Anand Rajaram, Bill Dorotinsky, Tuan Minh Le as
  thematic leaders
• Excellent supporting work by Juliet Teodosio,
  Zhicheng Li Swift, Nataliya Biletska

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• Discussion

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EXTRA SLIDES
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Anticorruption has many dimensions Bank
operations focus only on some

• Effective Public Sector Management
• Ethical leadership asset declaration, conflict
  of interest rules
• Meritocratic civil service with adequate pay
• Transparency accountability in budget mgnt
• Transparent, competitive procurement
• Anticorruption in sectors

• Political Accountability
• Political competition, broad-based political
  parties
• Transparency regulation of party financing
• Disclosure of parliamentary votes

• Institutional Checks Balances
• Independent, effective judiciary
• Legislative oversight (PACs, PECs)
• Independent oversight institutions (SAI)
• Global initiatives UN, OECD Convention,
  anti-money laundering

GOOD GOVERNANCE

• Private Sector Interface
• Effective, streamlined regulation
• Transparent public-private dialogue
• Break-up of monopolies
• Transparency in Extractive Industries
• Corporate governance
• Collective business associations

• Civil Society Media
• Freedom of press
• Freedom of information
• Civil society watchdogs
• Public hearings of draft laws
• Report cards, client surveys
• Participatory country diagnostic surveys

• Local Participation Community Empowerment
• Decentralization with accountability
• Community Driven Development (CDD)
• Oversight by parent-teacher associations user
  groups
• Beneficiary participation in projects

Primary focus of WB operations in governance
26
Cutting-edge diagnostics help unbundle
corruption identify entry points
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Robust PFM can mitigate key risks from corruption
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Improvements in Satisfaction public Services
in Bangalore
94
96
100
92
85
90
78
77
73
73
73
80
67
70
60
47
50
satisfied
42
41
34
34
40
32
32
25
30
16
14
20
9
6
5
4
10
1
n/a
n/a
0
Police
Electricity
City council
Telephones
Public buses
Water supply
Land authority
Public hospitals
Transport authority
Agencies
1994
1999
2003
Source Public Affairs Committee, India
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Corruption is not just a developing country
problem
Percentage of firms that pay public procurement
kickbacks by country of origin of foreign direct
investment
Source Are Foreign Investors and Multinationals
Engaging in Corrupt Practices in Transition
Economies? by Kaufmann, Hellman, Jones, in
Transition, May-June 2000. Note Survey Question
was How often nowadays do firms like yours need
to make extra, unofficial payments to public
officials to gain government contracts? Firms
responding sometimes or more frequently were
classified as paying kickbacks. These figures are
subject to significant margins of error and thus
should be regarded as approximate.
30
Transparency in Extractive Industries
Publish What You Pay (PWYP) (focus on home governments) Publish What You Pay (PWYP) (focus on home governments)
Initiation The PWYP campaign was founded by Global Witness, CAFOD, Oxfam, Save the Children UK, Transparency International UK and the Open Society Institute.
Participants There are now several Publish What You Pay national NGO coalitions around the world, including in Azerbaijan, Chad, Congo Brazzaville, Democratic Republic of Congo, France, Kazakhstan, The Netherlands, Nigeria, the United States and the United Kingdom.
Extractive Industries Transparency Initiative (EITI) (focus on host governments) Extractive Industries Transparency Initiative (EITI) (focus on host governments)
Initiation The UK Prime Minister, Tony Blair announced the EITI initiative at the World Summit on Sustainable Development in Johannesburg, September 2002. In January 2005, the International EITI Secretariat in the UK Department for International Development (DFID) produced the first version of the EITI Source book.
Participants Governments, donors, companies, industry associations, international organizations, NGOs and investors
Countries Azerbaijan, Congo, Republic of, Ghana, Kyrgyz Republic, Nigeria, Sao Tome and Principe, Timor Leste, Trinidad Tobago
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(No Transcript)
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Ethics Infrastructure
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Progress in Meeting HIPC Benchmarks (Percentage
of benchmarks met by indicator)
Source Fund-Bank AAP database 2005
34
Performance Measurement Framework
The PFM performance areas monitored in the
framework
All represent different aspects of risk to client
and Bank funds, projects and objectives