Approaches to PFM reform Module 1 2 Why

Approaches to PFM reform Module 1. 2 Why reform PFM systems? Why establish a sequence? 1

Day 1: Approaches to PFM reform • Module 1. 1. PFM objectives and budgetary approaches • Module 1. 2. Why reform PFM systems? Why establish a sequence? • Module 1. 3. The starting point: assessing PFM systems • Module 1. 4. Conditions for successful reform 2

Module 1. 2. Objectives of the module After a brief presentation of the objectives of reform, this module introduces basic notions (or essential functions) of a budgetary system & examines issues related to “sequencing” (determining the different steps) of budgetary reform 3

Module 1. 2. Outline • Why reform? • Why establish sequence? • The foundations (or essential functions) of PFM • The platform approach 4 • How to address reforms that are too complex in the context of a given country

Why reform a budgetary system? • Reforms of PFM system aim at improving performance: i. e. Strengthen at each stage of the PFM cycle • Improving performance of a PFM system generally requires to combine three different approaches: (i) strengthen, (ii) improve, (iii) reform • Relative importance of each approach depends on the country context 5

• Strengthen existing system Combine: • • Training (i) strengthen; • Introduce tools (ii) improve; • Improve (iii) reform 6 • Manuals, systems & processes • Training • Reform • Reshape laws, regulations, processes • Change institutional arrangements • Create structures to manage 6 reforms

Module 1. 2. Outline • Why reform? • Why establish sequence? • The foundations (or essential functions) of PFM • The platform approach • How to process reforms that are too complex for the context of a given country 7

Why establish a sequence of reforms? (1) • In developed countries, experience demonstrates that budgetary reform takes a long time • Over 5 years for an accounting reform in UK • In France: LOLF – prepared in 1999; voted in 2001; Implemented in 2006 Budget • Experience shows that premature introduction of complex instruments in developing/transition countries is counterproductive 8

Why establish a sequence of reforms? (2) • A budgetary system is shaped by a number of factors, both political & cultural - changing these to reshape the system takes time. • Reform is a continuous & permanent process: crucial to go through the process of learning by experience (There is no magic formula!) Correct errors, Adapt to changes Step by step improvement 9

Module 1. 2. Outline • Why reform? • Why establish a sequencing? • The foundations (or essential functions) of PFM • The platform approach • How to process reforms that are too complex for the context of a given country 10

Allen Schick: the foundations first! • In 1998, Schick decides to react against the attempts to export the New Zealand model & apply it to developing countries. • He recommends to first consolidate ‘foundations’, rather than “leapfrogging”: often referred to as “core functions” (Basic first) Schick, Allen. 1998. “Why Most Developing Countries Should Not Try New. Zealand Reforms. ” The World Bank Research Observer 11

Schick recommends a sound base, to: • create environment that enables & demands performance before introducing results-based budgetary systems • control cash before products • account for disbursements before accruals • introduce external control over sector ministries before internal control, only then give responsibility to managers • have sound accounting system before establishing IFMIS • define work to be done before defining expected results • ensure implementation of private sector contracts before introducing performance contracts in public sector • introduce performance audit only if financial audit effective • adopt and execute reliable & predictable budgets before asking managers to manage resources effectively 12

Guidance for development of internal supervision Following same thought, Schick identifies 3 stages to the development of control systems: 1. supervision by third party external to spending ministries (i. e. Mo. F) 2. internal supervision within spending ministries 3. Strengthen managerial accountability Schick considers following these 3 stages necessary to develop a budgetary culture: nevertheless, third party supervision (1 st stage) must be fair & realistic in order to constitute a solid foundation 13

What are the objectives and dimensions of the foundations? Aggregate fiscal discipline Be accountable towards citizens, be receptive Role of Parliament in democratic societies Resource allocation & fiscal policy consistent with objectives Proper procedures (integrity, regularity) 14 Efficient public service provision and tax administration ?

How to define ‘foundations’? Also called “core functions’’. Definitions linked to hierarchy amongst PFM objectives in module 1. 1 Suggested definitions: • Set of functions necessary to ensure that other functions are sustainably applicable, at limited cost • Functions aimed at ensuring budgetary discipline (integrity, regularity – financial compliance) • Taking in account, at least in the 2 nd stage, of ‘‘budget credibility’’ under PEFA (i. e. Budget executed according to initial provisions) • Budget credibility requires a level of aggregate fiscal discipline (consideration for macroeconomic stability) 15

Examples of basic functions • Administrative as well as economic classification of expenses (consistent with GFS) • Satisfactory level of comprehensiveness of budget • Taxpayer registration • Regular monitoring of financial budget – cash & commitments • Registry of physical assets for “risky” assets (e. g. Vehicles, computers) • End-of-year accounts • Budget Review for the n-1 Budget transmitted to Parliament at latest at same time as n+1 year Budget 16

‘‘Foundations first’’: Should we have reservations concerning this approach? • Rarely start from scratch: • “Advanced” reforms may be implemented, even if not all core functions have been(!) • Systems have strengths & weaknesses: always have to have 100% of ‘foundations’? • Reforms must be attractive from beginning • Central control is not panacea • Risks of hyper-centralisation, & corruption of supervisors: Schick highlights loyalty of centre • Sectoral ministries must be involved in the reforms: cannot only be controlled 17

Module 1. 2. Outline • Why reform? • Why establish a sequencing? • The foundations (or essential functions) of PFM • The platform approach • How to process reforms that are too complex for the context of a given country 18

The ‘platform approach’ • The platform: a coherent set of measures that achieve a set of realistic improvements in public finance management • The platform strategy is composed of a sequence of different platforms • Each platform sets the ground for the next one Cf. Peter Brooke. Rapport pour PEFA et DFID briefing paper 2005 19

Example: Cambodia 20

Shortcomings of the platform approach Implemented in Cambodia, Kenya, …Too early to judge (? ), but can sometimes be very complex: According to Allen • Insufficient emphasis on institutional constraints, underestimation of resistances • Activity overload. In Cambodia: platform comprised 27 activities, 250 specific actions • Unrealistic time horizon, mediocre prioritization • Micro-management 21

Platform approach: avoid being schematic, keep it simple • As platforms follow each other, some will inevitably overlap • existing system must be taken into account, as it may be more “advanced” • previous “platforms” must be strengthened • First platform (foundations+? ) can be defined, & probably second: but can we really go any further? ? 22

Module 1. 2. Outline • Why reform? • Why establish a sequencing? • The foundations (or essential functions) of PFM • The platform approach • How to process reforms that are too complex for the context of a given country 23

The dilemma • Many developing countries implement complex reforms, whereas their foundations (or “core functions”) are only partially implemented (c. f. module 1. 4): e. g. MTEF, programme budget, accrual accounting, etc. • Implementing such reforms goes against logical order, but it may be driven by: • Pressure from donors • Internal determination to show that country is on the path of modernisation & capable to carry out complex reforms, etc. 24

How to handle such situations? Strengthening foundations must be priority: however, if not possible to avoid complex reforms, is necessary to: • Ensure that basic measures & necessary preconditions for the complex reform are included in reform programme • Cf. priorities defined by domains of PFM (Cf day 2 modules - e. g. : introducing assets registers if country wishes to develop accrual accounting) • Reshape complex reform measures & limit their ambition 25 • E. g. , a programme budget may initially be limited to an information document

Key message • A budgetary reform encompasses a series of distinct stages. During first stage of reform, utmost attention should be paid to the foundations of budgetary system, i. e. functions that ensure budgetary discipline. 26