Public Expenditure and Financial Management Overview of Issues

Public Expenditure and Financial Management Overview of Issues and Approaches Bill Dorotinsky, PREM public sector group The World Bank PEAM Course January 13, 2004

Outline • Framework for Review • Approaches to PEM review – What is reviewed? • Common Problems • Common Solutions • Getting the basics right The World Bank 2

Framework Three Objectives of Public Expenditure Management Systems • 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 The World Bank 3

Framework Basic principles of PEM • 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 The World Bank 4

What institutions matter? • Laws and regulations – Fiscal, budget, procurement, civil service • Process – Policy – Planning – Financial/resource management • Organizations The World Bank 5

Approaches to PEM Review • Cycle, Process • System – broad scope – organizations • Functions/tasks • Outcomes/Impact The World Bank 6

Expenditure Management Cycle Financial management system boundaries Project appraisal Planning system Resource allocation Medium term plans, e. g. three year rolling plans Annual budgets Development, recurrent and revenue idity Liqu ent agem man Expenditure review Public expenditure review Institutions Pro Accountability Fund release procedure, e. g. . . warranting Audit system t ev revi ent ew g Pos n ori it on m t jec re itu d l n pe ntro x E co Reports and financial statements g itorin Mon ling ntrol o c & Accounting for revenue and expenditure 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. The World Bank 7

Budget and Policy Execution System in Hungary (1999) The World Bank 8

Core Functions Public Finance Functions Macroeconomic Forecasting Debt Management Fiscal Policy Revenue Administration Non-core Functions Budget Formulation Treasury Internal Audit Financial Asset Management Financial Investigations The World Bank Procurement Administration Budget Execution Procurement Policy Lottery & Gambling Financial Market Regulation 9

Core Tasks and Organizations - Macroforecasting - Fiscal Policy - Revenue administration - Debt Management - internal control - program management - spending (commitments) - recording & reporting - payment orders - verification of receipt of goods/services - program/cash plans Financial Management is Everyone’s Responsibility The World Bank 10

Credibility of the Honduran Budget – In-year Deviations by Agency (percent of the executed over the approved budget) The World Bank 11

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 don’t reach intended beneficiaries – Budget executed differently than approved • Goods and services not delivered as planned The World Bank 12

Common Reforms • MTEF • Treasury – IFMIS • Performance Budgeting • ‘Fragmentation’ – Procurement, Debt • New Public Management • Deconcentration, decentralization • Administrative & Civil Service The World Bank 13

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 The World Bank 14

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 The World Bank 15

HIPC expenditure tracking assessment’s 15 indicators, benchmarks of PEM system capabilities Budget Management Benchmark Description Comprehensiveness 1. Composition of the budget entity Formulation 2. Limitations to use of off-budget transactions 3. Reliability of budget as guide to outturn 4. Data on donor financing Meets GFS definition of general government Extra (or off) budget expenditure is not substantial Level and composition of outturn is "quite close" to budget Both capital and current donor funded expenditures included Classification 5. Classification of budget transactions 6. Identification of poverty-reducing expenditure Functional and/or program information provided Identified through use of classification system (e. g. , a virtual poverty fund) Projection 7. Quality of multi-year expenditure projections Projections are integrated into budget formulation Internal Control Execution 8. Level of payment arrears 9. Quality of internal audit 10. Use of tracking surveys Low-level of arrears accumulated Internal audit function (whether effective or not) Tracking used on regular basis Reconciliation 11. Quality of fiscal/banking data reconciliation Reconciliation of fiscal and monetary data carried out on routine basis Reporting 12. Timeliness of internal budget reports Monthly expenditure reports provided within four weeks of end of month 13. Classification used for budget tracking Timely functional reporting derived from classification system Final Audited Accounts 14. Timeliness of accounts closure 15. Timeliness of final audited accounts The World Bank Accounts closed within two months of year end Audited accounts presented to legislature within one year 16

Relative need for upgrading PEM Systems 15 Agreed Assessment (8) Number of Benchmarks met 9 Benin (8) Burkina Faso (9) Chad (8) Guyana (8) Honduras (8) Mali (8) Rwanda (8) Tanzania (8) Uganda (9) Little Upgrading Required Some 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) Substantial 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-review/tracking. pdf The World Bank 17

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 Fiscal & monetary data reconciled Month reports 3 4 5 6 7 8 9 10 11 12 Formulation Execution Audited accounts to legislature within 1 year Regular tracking 2 Accounts closed within two months of y/e Quality of internal audit (effective or not) 0% Benchmark number: 1 Low level of arrears 10% Projections integrated into budg. formulation 20% Pov. Red. Exp. Identified 30% Classification of budget 40% Data on donor financing 50% Outturn close? 60% Extra (off) budget expend. 70% Meets GFS definition of general government 80% Timely functional reporting from class system 90% 13 14 15 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-review/tracking. pdf The World Bank 18

Comparison of selected PEM indicators for ECA PRSP countries and HIPCs A recent draft study by the Bank’s 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 1990’s, 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 1990’s, 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. The World Bank 19

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 The World Bank 20

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/SECM 2001 -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/SECM 2002 -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/R 2003 -0043. • • All HIPC Papers available at: http: //www-wbweb. worldbank. org/prem/prmps/expenditure/hipc. htm The World Bank 21

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