What public financial management reforms actually work?

For over a decade the World Bank, followed by the other donors, has been pushing a standard reform agenda for public financial management. This has usually involved large scale reforms such as the Medium Term Expenditure Framework (MTEF), an Integrated Financial Management System (IFMIS), decentralisation and so on. But where is the evidence that this approach to public financial management reform actually works – especially in the ultimate goal of reducing poverty?

Two important studies issued earlier this year have reviewed the experience across Africa and the Middle East, at least in terms of assessments of public financial management against the PEFA framework.

Mat Andrews, of the Kennedy School of Governance, finds “alarmingly similar reforms” across Sub-Saharan Africa and appeals for “less similarity of reforms and more context appropriateness”. A World Bank study of the Middle East and North Africa finds that medium term sector strategies (MTEF) and large information technology projects (IFMIS) are amongst the most challenging public financial management reforms.

It is to be hoped that the donor community will learn the lessons of this research. The least we can expect is that only reforms which have been proved to be successful in a similar environment are promoted. Developing countries need to learn from the experience of others and not just repeat their mistakes. Reform of public financial management has consisted too much of solutions in search of a problem. We need far more analysis and understanding of individual public financial management systems and processes. We need less dependence on consultants and more on the expert knowledge of the local public financial management practitioners.

Further details of the results of the two surveys are provided below.

How Far Have Public Financial Management Reforms Come in Africa?

Mat Andrews (2010) Harvard: Kennedy School of Governance

web.hks.harvard.edu/publications/getFile.aspx?Id=548

How strong has African public financial management become? How do African public financial management systems now facilitate effective public financial management? Where are the next challenges and how can they be met?

This paper addresses these questions, using PEFA analyses to identify central themes of the continent’s recent public financial management story. The themes emerge from the quantitative and qualitative data from the 31 central government PEFAs completed prior to mid-2008 in Sub-Saharan Africa. The World Bank (2010) study reviewed above similarly uses the results of PEFA analyses for 10 countries in North Africa and the Middle East.

Some of the key findings of this research are:

“Three themes are identified across the process areas in African public financial management systems:

(i) Budgets are made better than they are executed;

(ii) Practice lags behind the creation of processes and laws; and

(iii) Actor concentration pays:

The first theme relates the observation that budget preparation processes are comparatively stronger than budget execution and oversight processes across all African countries. In public financial management jargon, this is commonly presented as ‘upstream processes are stronger than downstream processes’.

The second theme is more nuanced, showing across all process areas that African public financial management systems generally suffer from an implementation deficit—laws and processes may be in place but seldom affect actual behavior. The theme reflects a new institutional differentiation between de jure and de facto reform and is shown in the words of one recent diagnostic, “Legislation and procedures have been improved ... [but] implementation has not yet been achieved.”

The third theme offers even more specificity, suggesting that processes are stronger when narrower, concentrated sets of actors are involved in implementation. Processes are weaker where they involve multiple players, especially outside of central public financial management entities like the budget department or treasury.” (page 1)

“Themes also arise in explaining why countries fall into different leagues. A range of factors are seen to influence the quality of public financial management systems and outcomes, presented as five major themes:

· Growing economies have stronger public financial management.

· Stability delivers PFM progress, although there may be a peculiar ‘starting from scratch’ dividend for countries enjoying post conflict stability.

· States with larger domestic, non-mineral income sources have stronger public financial management.

· Longer periods of broad reform commitment foster public financial management progress.

· And, Colonial heritage matters (maybe).” (page 3)

On the final of the above points, Andrews says that this is certainly true for external audit and may also be true for internal audit.

The paper also questions whether “context is taken seriously in reform design?” (page 42). The paper identifies five leagues in terms of the quality of public financial management (at least shown by the PEFA reports). “The leagues were shown to be significantly different. However, they have alarmingly similar reforms in place” (page 44). So, for example, of the 31 countries reviewed an MTEF was implemented in 28 countries, programme budgeting in 25 and an IFMIS in 20. All the countries had introduced commitment controls, COFOG analysis of expenditure, a single treasury account and IPSAS.

As a result of the study, Andrews makes the following three recommendations for public financial management reform:

· there should be less focus on technicalities and more on reform ‘space’

· there should be less concentration and more coverage

· there should be less similarity of reforms and more context appropriateness.

Public Financial Management Reform in the Middle East and North Africa: An Overview of Regional Experience

http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/MENAEXT/0,,contentMDK:22634529~pagePK:146736~piPK:226340~theSitePK:256299,00.html

This World Bank survey reviews the experience of public financial management reform across the Middle East and North Africa. This includes a review of the results for PEFA reviews for 10 countries across the region.

One of the most important functions governments perform is that of mobilizing and deploying financial resources to achieve their objectives. The way in which this money is spent has huge implications for their broader development trajectory.

For governments to perform their spending function well, their public financial management (PFM) practices should meet certain well-established criteria

Government spending should be affordable, in that it takes place within a framework that ensures expenditure is consistent with monetary and fiscal policy objectives and sustainable in the long term.

Governments should optimize the allocation of public resources between different sectors and expenditure categories in a way that reflects their policy priorities, including sustainable growth as well as human and social development.

Such expenditure should be efficient, in that it maximizes output for a given set of inputs, and effective, in that it supports the successful realization of the government’s goals.

It should also be transparent; and regular, that is conducted in accordance with the relevant laws and regulations; and undertaken with appropriate checks and balances to ensure financial probity.

While such objectives are relatively straightforward, their realization can be challenging. The study provides 10 lessons or promising practices from the experience in the region:

· Know the Value—and Limitations—of Political Economy Analysis

· PFM Reform as Means and Not Ends

· Context Matters, so Swim with the Current

· The Wisdom of “Muddling Through”—Grand Strategy versus Incremental

· Establish Basic Systems before Contemplating More Advanced Reforms

· When Possible, Keep Reforms Quick, Simple and Mutually Reinforcing

· Be Wary of Large Financial Management Information Systems

· Internal Challenges: Leadership, Coordination, Skills and Incentives

· External Stakeholders—Useful, but Don’t Count on Them

· Lessons for Donors: Be More Strategic, Selective, Modest and Flexible.

In many countries in the Middle East and North Africa, public financial management reforms have been on the agenda for a decade or more. This report seeks to reflect upon this experience to date and better understand the nature of the public financial management challenges confronting these countries.

A summary of the successful and challenging public financial management reforms in the region is provided by the following table (page 35):

Successful PFM Reforms	Mixed	Challenging PFM Reforms
• Improving budget classification • Improving budget transparency • Reforms in tax and customs	• Enhance macro-fiscal capacity • Budget integration • Streamlining ex-ante control processes • Commitment control • Payroll management • Treasury operations • Reform of accounting systems • Internal and external audit	• Medium term sector strategies • Improving budget scope and coverage • Introducing performance into the budget • Procurement reforms • Large information technology projects

This study surveys these reforms across ten Arab countries: Algeria, Egypt, Iraq, Jordan, Lebanon, Morocco, Syria, Tunisia, the West Bank and Gaza and Yemen. They were selected partly because they are places where the World Bank has been heavily engaged on public financial management issues and been able to gather a wealth of comparative information.

They also represent an interesting cross-section of administrative traditions and different levels of development. Taken together, these countries are home to over two thirds of MENA’s population and nearly one third of its GDP. Many of the findings from this analysis will be of relevance to other MENA countries as well.