Capacity Building in Public Financial Management-

Key Issues

Parminder Brar Financial Management Anchor

The World Bank

May 2, 2005

22

1. Definitions2. Track record3. Why is PFM capacity building important? 4. Why is scaling up critical?5. Donor practices6. What do we need to do differently?

Overview

33

Definitions: Capacity Development

n Capacity is “ the ability to perform functions, solve problems and set and achieve objectives “ (UNDP, 2002). Capacity development is about developing people, institutions, practices.

Source: WBI “Capacity Enhancement Brief”

44

Core Areas of PFMn Budget Formulationn Budget Executionn Cash Managementn Internal Controlsn Accountingn Auditingn Legislative Oversight

Other Related Areasn Fiscal policy management, Debt management, FX management,

Pension etc.

Definition: Public Financial Management

55

Little upgrading required Some upgrading required Substantial upgradingrequired

2004

Ethiopia (7)Ghana (7)Honduras (7)Senegal (7)Sierra Leone (7)Chad (7)Cameroon (7)Guinea (5)Malawi (5)Niger (5)Democratic Republic of Congo (4)Bolivia (4)Madagascar (4)Mozambique (4)SãoTomé & Principe (4)Gambia, The (3)Zambia (3)Guinea Bissau (0)

Guyana (10)Burkina Faso (9)Benin (8)Rwanda (8)Uganda (8)

Tanzania (11)Mali (11)

18

5

2

Need for upgrading PEM Systems (HIPC tracking)

9

15

Substantial UpgradingRequired

Benin (8)Burkina Faso (9)Chad (8)Guyana (8)Honduras (8)Mail (8)Rwanda (8)Tanzania (8)Uganda (9)

Some Upgrading Required

Little Upgrading Required

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)

(8) Number of Benchmarks met

Need for upgrading PEM Systems (HIPC tracking)

9

15

Substantial UpgradingRequired

Benin (8)Burkina Faso (9)Chad (8)Guyana (8)Honduras (8)Mail (8)Rwanda (8)Tanzania (8)Uganda (9)

Some Upgrading Required

Little Upgrading Required

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)

(8) Number of Benchmarks met

2001 Assessment

2004 Assessment

HIPC Assessments in 2001 and 2004 show that PFM systems remain weak. Capacity development efforts have had limited impact.

The track record

Source: World Bank HIPC Assessments

66

0

10

20

30

40

50

60

70

80

90

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

% of countries meeting benchmark in 2001 % of countries meeting benchmark in 2004

Formulation Execution Reporting Procurement

Indicators that deteriorated in 2004 : Off budget expenditures increased (2), Reliability of budget decreased (3), Data on donor financing reduced (4), Payment arrears increased (8), Quality of internal audit worsened (9), Timeliness of monthly expenditure reports deteriorated (12).

The track record

77

0

10

20

30

40

50

60

70

80

90

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

% of countries meeting benchmark in 2001 % of countries meeting benchmark in 2004

Formulation Execution Reporting Procurement

Indicators that improved in 2004: Coverage of budget entity (1), Classification of budget (5), Identification of poverty reducing expenditures (6), Projections integrated into budget formulation (7), PETS (10), Reconciliation (11), Classification of expenditures (13), Timeliness of accounts closure (14), Timeliness of audit (15).

The track record

88

The track record of PFM interventions is mixed:

§ IFMIS projects, on average,

- took 7 years to be complete, ranging from 9.1 years for AFR to 5.8 years for LCR, average Bank-financed cost was $12.3 million, component changes in 75 % of projects, only 6% of projects are assessed to be highly likely to be sustainable (self assessed sustainability)

§ MTEF’s : A recent preliminary review has shown that the process was relatively mature only in Uganda, South Africa and Albania.

§ Civil Service Reforms: Very few civil service reform projects succeeded between 1987-1997 in Africa

§ Decentralization: The “Lessons from the 1990’s” study has shown that decentralization is not synonymous with greater accountability and delivery of public services.

The track record

99

Data sources: World Bank CPIA sheets

22 2516 14 16 17 17 16

1615

14 19 18 18 1814

7 51510 10111215

05

101520253035404550

1996

1997

1998

1999

2000

2001

2002

2003

Num

ber o

f cou

ntri

es

2.6

2.7

2.8

2.9

3.0

3.1

3.2

3.3

Ave

rage

CPI

A CPIA>=3.5

3.0<=CPIA<3.5

CPIA<3.0

SSA Simple Average

PFM systems remain weak but overall CPIA indicators in SSA are improving.

The track record

1010

n Over the last decade, the development community has come to understand the importance of Public Financial Management for reaching the Millennium Development Goals, as well as the need for accountability systems that perform well in client countries.

n We have needed a cultural and personality change: we must learn to listen, to simplify, to harmonize, to follow, to lead – to do whatever is necessary to improve development results.

n We have an obligation to be more systematic about identifying what gets results, intensifying our support for partnerships that deliver results, measuring and reporting on these results, and, together, charting progress towards our common goals.

James D. Wolfensohn

Why is capacity development in PFM important?

1111

Community of interest among domestic and external stakeholders to improve PFM performance.

Enabling countries to judge impact of PFM reforms over time

Recognition that improved country PFM performance is a key contributor to successful development

Increasing reliance on country PFM systems in aid flows

Increased results focus of development agencies

Why is capacity development in PFM important?

1212

• Increased impact when approach is to strengthen systems impacting all spending. New approach is to seek to develop and use country systems, rather than ring-fenced systems for donor projects

• Ring-fenced systems have not generally not developed country capacity, and have often diverted the best country capacity for donor use

• Scaling up is critical for improving sustainability. Countries have incentives to improve own systems.

• Reduce transaction costs. “….annual compliance costs fall in a range of US$ 118-215 million, of which 50-60 percent are incremental to the costs of compliance with the borrower’s own requirements for procurement, audit…” (WB Task Force, 2004)

• Focus on institutional capacity building.

Why is scaling up in PFM critical?

1313

Official Development Assistance accounts for less than 5% of Government expenditures in developing countries.

Region Country Net Comm Amt ($m) ODA as share of Government

Expenditure

SAR India 12,623.7 2.1%

EAP China 12,442.7 2.2%

LCR Brazil 3,821.2 0.1%

ECA Turkey 3,775.1 0.0%

LCR Mexico 3,602.3 0.0%

LCR Argentina 3,135.6 0.2%

EAP Indonesia 2,923.4 7.7%

EAP Vietnam 2,502.9 23.5%

SAR Bangladesh 2,186.0 21.4%

ECA Russian Federation 2,143.1 4.6%

The scaling up agenda is not an option. It is an imperative if the MDG’s are to be achieved.

Why is scaling up in PFM critical?

1414

Number of people living on less than $1 per day(millions)

0

100

200

300

400

500

600

700

800

900

1981 1984 1987 1990 1993 1996 1999 2001

EastAsia

Sub-SaharanAfrica

Average GDP per capita growth of 5.9%

Average GDP per capita growth of –0.7%

Africa presents a particular challenge.

Why is scaling up in PFM critical?

Source: WB: JP Presentation to SPA, January 2005

1515

It is now clear that most countries in SSA will not achieve the MDG’s. Scaling up for improving PFM system is therefore all the more urgent.

Most countries in SSA will NOT reach MDGs

-50

0

50

100

Child

malnutr

ition

Primary

scho

ol com

pletio

n

Gend

er eq

uality

in sc

hool

Child

mortalit

y

Materna

l mort

ality

Births

atten

ded

HIV/A

IDS p

revale

nce

Acces

s to w

ater

Likely/possibleUnlikelyNo data

0

50%

100%

Why is scaling up in PFM critical?

Source: World Bank: PD Presentation to SPA, January 2005

1616

Data sources: OECD IDS online databases. OECD reported Gross ODA was calculated by adding ODA loans received to its ODA net.

SPA countries (excl. Nigeria) Gross ODA flow

The Gap6.1 5.6 5.6 6.6 6.7

22

17

131212

0

5

10

15

20

25

1999 2000 2001 2002 2003

Gro

ss O

DA

$U

S b

illio

n

OECD report

SPA country reportThe mystery gap

Donor practices need to be aligned with the scaling up agenda.

Donor practices

1717Data sources: OECD IDS online database and SPA country report

0

5

10

15

20

25

1999 2000 2001 2002 2003

$US

bill

ion

TechnicalcooperationDebt forgivenessgrantEmergency

Development food aid

GovernmentassistanceGross ODA reportedby SPA countriesWhat countries see

What donors see

Explainable gap

Unexplained

SPA countries (excl. Nigeria) Gross ODA flow

Donor practices need to be aligned with the scaling up agenda.

Donor practices

1818

Data sources: OECD IDS online database and SPA country report

Unexplained difference

$1.5b$2.1b

$3.1b

$4.9b

$3.2b

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1999 2000 2001 2002 2003

Cu

rren

t $U

S b

.

SPA countries (excl. Nigeria) Gross ODA flow

Donor practices need to be aligned with the scaling up agenda.

Donor practices

1919

Donor practices need to be aligned with the scaling up agenda.

Donor practices

Data Source: www.oecd.org/dac

2020

Number of donor missions per annum:

Donor practices

Data Source: www.oecd.org/dac

2121

•Country ownership, leadership and commitment to the PFM reform agenda – including a PFM reform strategy and action plan

•Focus on increased use of Country Systems - necessary to improve development impact.

•Donor coordinated program of support – coordinated, coherent, multi-year program of PFM work that supports and is aligned with the government’s PFM strategy

•Issues of appropriateness and sequencing of reforms –“appropriate” fit versus “best” fit.

•Shared information pool with a focus on results – agreed set of PFM indicators for measuring and monitoring results over time

•Realistic expectations

What do we need to do differently?

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Country ownership of the PFM agenda

Country ownership is critical. The reform program has to be tailored to match with the existing human resources, institutions, legal system, administrative and political culture.

Source: WBI “Capacity Enhancement Brief”

2323

Fragmented

Government reform strategy influenced by ad-hoc donor requests encourages a fragmented approach

to PFM reforms

Donor 1

Donor 2

Donor 4

Donor 3

Treasury reforms

Procurement

External audit

Budget preparation

A Strengthened Approach

A government-led reform strategy, supported by a coordinated program of work by donors, facilitates an integrated

and sequenced reform process.

Government-led PFM Reform Strategy

Coordinated program of support by donors

Donor co-ordination and alignment

2424

n Foster an environment that supports and demands performance before introducing performance and outcome budgeting

n Budget for work to be done before budgeting for results to be achieved

n Adopt and implement predictable budgets before insisting that managers efficiently use the resources entrusted to them

n Control inputs before seeking to control outputsn Establish internal controls before introducing managerial

accountabilityn Establish external controls before introducing internal controln Account for cash before accounting for accrualsn Operate a reliable accounting system before installing an

integrated financial management systemn Have effective financial auditing before moving to performance

auditing

Appropriateness and sequencing

Allan Schick: “Get the Basics Right”.

2525

Ø Work in progress

Ø High level of international consultation. PEFA Steering Committee, OECD DAC, clients in Africa region, CIS....

Ø 17 assessments completed. Most are desk studies. One assessment done by the UK Treasury.

Ø 28 high-level indicators

Ø Builds on 16 HIPC indicators, but broader

Ø Based on available data and analytic work

Ø Can be customized where appropriate (including for sub-national level)

Ø Can be supplemented by detailed indicators on specific aspects as needed e.g., procurement, audit, revenue, budgeting, internal controls

Ø Indicators expected to remain constant over time to allow progress to be monitored

Results measurement framework

2626

n Recognize that PFM expertise needs to be supplemented by capacity building / change management skills

n Understand the challenges – Understand the political economy implications– Base plans on good diagnostics– Understand the institutional constraints

n Have clear objectives, and plan for early wins n Understand the client’s priorities and constraints n Use an array of instrumentsn Be opportunisticn Develop locally-appropriate solutions – “think globally, act locally”n Build effective external partnerships with donors, professional bodies n Build internal islands of excellence / specialization n Learn to perform in sub-optimal environments n Recognize that capacity-building is an incremental process

Realistic expectations

2727

Realistic expectations

Source: WBI “Capacity Enhancement Brief”

Modify program in light of experience gained.

2828

Indicators of Progress:n Partners have operational development strategiesn Reliable country systemsn Aid flows are aligned on national prioritiesn Strengthen capacity by co-ordinated supportn Use of country systemsn Strengthen capacity by avoiding parallel implementation structuresn Aid is more predictablen Aid is untiedn Use of common arrangements or proceduresn Encourage shared analysisn Results oriented frameworksn Mutual accountability

Implement the Paris Declaration on Aid Effectiveness

2929

Thank you.