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CONTENTS

Foreword vYoshihiro Iwasaki

Chapter 1 Governance, Corruption, and Public Finance:An Overview 1Vito Tanzi

Part I – PUBLIC FINANCIAL MANAGEMENT

Chapter 2 Government Policies and theBudget Process 21Francesco Forte

Chapter 3 Public Financial Management:Getting the Basics Right 47Arigapudi Premchand

Chapter 4 Information and Communication Technologyfor Public Finance 89Clay Wescott and Salvatore Schiavo-Campo

Chapter 5 Reform Priorities for Public FinancialManagement in Developing Countries 107Salvatore Schiavo-Campo andDaniel Tommasi

Chapter 6 Beyond the Basics: The Philippine Case 135Benjamin Diokno

I V GOVERNANCE, CORRUPTION, AND PUBLIC FINANCIAL MANAGEMENT

Part II – PUBLIC FINANCIAL ACCOUNTABILITY

Chapter 7 Public Financial Accountability 145Arigapudi Premchand

Chapter 8 Transparency and Accountability forPublic Financial Integrity 193Nihal Jayawickrama

Chapter 9 Some Observations on Public FinancialAccountability and Integrity inPacific Island Countries 207Savenaca Siwatibau

Chapter 10 Public Financial Accountability for Integrityand Results: The Case of the PhilippineBureau of the Treasury 219Leonor Briones

Annexes

I An Anti-Corruption Policy for Asiaand the Pacific 233Asian Development Bank

II The IMF Code of Fiscal Transparency 243

Note on Contributors 250

FOREWORD

Reflecting the evolving needs of Asia and the Pacific, theAsian Development Bank has been transforming itself from

primarily a project lender to a broad-based development insti-tution. This transformation is consistent with the internationalconsensus that the development impact of external assistanceis crucially linked to the soundness of the recipient country’seconomic and social policies.

The successful implementation of such policies is in turnlinked to the quality of governance and the caliber of a givencountry’s public sector. It is in recognition of this linkage thatthe ADB approved in 1995 a policy paper on Governance forSound Development Management, and in July 1998 an Anti-corruption Policy. These policies on governance and anticor-ruption can only be translated into practice by significant andsustained improvements in the efficiency, integrity, and effec-tiveness of public-sector management, and also in accountabil-ity and transparency of corporate and financial governance inthe private sector. This is indeed one of the many lessons of theAsian financial crisis. The Bank is determined to heed theselessons and help its member countries turn crisis into oppor-tunity for renewed economic and social progress on a new andstronger basis. Among the many areas of public-sector improve-ment, strengthening the management of and accountability forpublic expenditure is central.

The challenges faced by developing countries are tostrengthen fiscal discipline, bring resource allocation in line withpolicy priorities, create an enabling environment for publicfinancial managers, and protect due process. The Bank can assistby putting at their disposal the basic conceptual framework,the principles of good budgeting, a synthesis of internationalconsensus on desirable reforms, and the lessons of internationalexperience, both the successes and the failures. This book isone step in this direction. It is our hope that it will prove of

V I GOVERNANCE, CORRUPTION, AND PUBLIC FINANCIAL MANAGEMENT

practical value and of interest. It is based on a selection of paperspresented at two major events organized by the ADB: a Semi-nar on Public Financial Management and Accountability at the1999 Annual Meeting and the ADB-organized module on thesame subject at the World Conference on Governance in Ma-nila in June 1999. Our sincere thanks go to all the eminentcontributors, as well as Marilyn Pizarro for research assistance,Me-an Asico for copy-editing, Merly Mallion for organizationalassistance, and Ruby de Vera for production assistance.

Yoshihiro IwasakiChief, Strategy and Policy Office

Asian Development Bank

Chapter 1

Governance, Corruption, andPublic Finance: An Overview

Vito Tanzi

Introduction

Growing attention has been directed in recent years to the roleof government. Governance in general and corruption inparticular have been much discussed because of the way theyaffect, and are affected by, the role of government. Dictionariesgenerally define “governance” as government. Thus, goodgovernance is good government. In recent writing, however,governance has taken on a more substantive, though still notprecisely defined, meaning.

Good governance is an essential part of a frameworkfor economic and financial management which also includes:macroeconomic stability; commitment to social and economicequity; and the promotion of efficient institutions throughstructural reforms such as trade liberalization and domesticderegulation.

Poor governance may result from factors such asincompetence, ignorance, lack of efficient institutions, thepursuit of economically inefficient ideologies, or misguidedeconomic models. It is often linked to corruption and rentseeking. A good part of this paper will thus deal with corruption.However, it should be understood that corruption is notidentical with poor governance, which extends well beyondcorruption, although poor governance often leads tocorruption and corruption is an important element of poorgovernance.

2 GOVERNANCE, CORRUPTION, AND PUBLIC FINANCIAL MANAGEMENT

Before dealing with governance and corruption issuesvis-à-vis public revenue and public expenditure, I would liketo note two simple relationships emerging from internationalexperience: (i) corruption is generally less frequent in richercountries; and (ii) there is a negative correlation between therate of growth and corruption. Thus, more corrupt countriestend to be poorer, and to grow slower (if at all).

Corruption

Views about corruption have undergone a great change in recentyears. Not too many years ago, the economic successes of thecountries of South East Asia were attributed by some observersto a presumably positive impact of corruption on facilitatingdecision making. However, after the crisis of 1997–1998, theseviews changed and many observers, both inside and outsidethe crisis countries, blamed corruption for the crisis. Forexample, it was pointed out that some individual investors hadbeen able to borrow very large sums from banks at low rates,sums which had been invested in highly questionable projects.After the crisis there has been a strong interest in increasingthe transparency of institutions and in promoting more arm’slength relationships in economic deals. Whether this interestwill generate concrete changes remains to be seen.

Corruption has also attracted a lot of attention in Russia,Pakistan, Kenya and many other countries. Many observershave connected the poor functioning of these economies tovarious governance problems. In fact, there is now a growingawareness among economic observers and economists thatthese governance problems have a negative impact on eco-nomic performance. For this reason, the new architecture forthe world financial system is paying a lot of attention totransparency and governance issues. Standard and codes ofconduct are being developed and countries are being urgedto adhere to them.

Governance, Corruption, and Public Finance: An Overview 3

Several international organizations including theAsian Development Bank, the International Monetary Fund,the Inter-American Development Bank, the OECD, and theWorld Bank have intensified their work in this area and havebeen promoting a campaign against corruption and for moretransparent and well-governed economies. The work of theseinstitutions has been complementary and with a commonobjective, namely, to promote good governance and by sodoing to improve the quality of policy making. It is hopedthat this improvement will reduce the frequency and severityof financial crises and will promote economic growth.

Until recent years, some economists presented whatcould be called a romantic view of corruption. Such a view madecorruption seem almost a virtuous activity. For example, it wasargued that corruption “oiled the economic mechanism” or“greased the economic wheel” and made economies moreefficient by removing rigidities which put obstacles toinvestment and economic activity in general. Some argued thatcorruption allocated investment to the most efficient uses—because the most efficient investors would be able to paythe highest bribes. Some argued that even the efficiency inthe use of time could be improved by corruption becausethose whose time was most valuable could save on its useby paying the highest bribes to move in front of bureaucraticlines. Finally, it was even argued that corruption made itpossible for the government to keep wages low—because thebribes that the public sector employees received made themaccept lower wages. Low wages allowed taxes to remain lowand low taxes stimulate growth. Various theoretical articlessupported these somewhat unorthodox and at times evenbizarre conclusions.

This romantic view of corruption has been replaced, inmore recent years, by a more realistic and much less favorableview. In fact, the more recent view is that, rather than being theoil that lubricates the economic mechanism, corruption is therust that slows it down. It has been argued that rigidities created


by regulations are not God given but are, rather, man createdand thus endogenous to the system. Once bureaucrats realizethat they can take advantage of regulations, they will producemore of these. There will thus be more regulations and thesewill probably become less transparent. The highest bribes willbe paid not necessarily by those most efficient at producingbut by those most efficient at rent seeking. Furthermore, thepotentially most able individuals will channel their energiestowards rent seeking rather than towards socially productiveactivities. It has also been pointed out that corruption iscontagious so that its nefarious effects spread with the passingof time and affect a progressively larger proportions of therelevant population.

Corruption can be defined in different ways. However,the most common definition is that it is the abuse of publicpower to promote private benefits. Thus, a public employeewho abuses his/her public position to derive benefits for oneselfor friends, relatives or political associates is engaging in an actof corruption. Not all cases of corruption involve the paymentof bribes.

An important question is whether corruption can bemeasured directly. A moment of thought indicates that such anattempt is unlikely to be successful. It is not even clear whatone would wish to measure. Should one attempt to measureacts of corruption? Or amount of bribes paid? Or number ofpersons involved? Or number of transactions contaminated bycorruption? It is not clear which but, in any case, none of theseattempts at measuring corruption would be successful. For thisreason, not surprisingly, there is no direct measurement ofcorruption available for any country.

While no direct measurement of corruption exists,following a trend that is becoming more and more common ineconomics and in other fields such as political science andsociology, in recent years, data have become available thatattempt to measure not corruption per se but people’sperceptions of the prevalence of corruption.


In this approach, presumably informed observers areasked to rank countries, often on a score of 1 (most corrupt) to10 (least corrupt). It is not always clear whether the samplesare random and large enough to provide statistically accept-able results. It is also not clear to which extent the data are fullycomparable across countries and over time. However, there arenow at least six institutions, including Transparency Interna-tional and the World Bank, that have been generating data onthe perception of corruption. In spite of their shortcomings, thedata are being used with increasing frequency by economistsin their cross-country statistical studies. It is important to addthat the users often ignore the weakness of the data and may,at times, draw perhaps too strong conclusions from them. Atthe same time, it is important to point out that there is a highcorrelation among the various indexes of corruption providedby the various institutions. This gives some assurance that theyare broadly on target.

Various factors contribute to corruption. See Tanzi (1998)for more details. Some of these factors have a direct impact;others only an indirect one. Among the factors which have adirect impact we should include (a) regulations and authori-zations; (b) complex tax systems; (c) government spendingdecisions; (d) public provision of goods and services at belowmarket prices; (e) situations in which public employees havediscretionary power over economic decisions; and (f) need tofinance political parties. Among the indirect causes must beincluded (a) the quality of the bureaucracy; (b) the level of publicwages; (c) institutional controls, both internal and external;(d) the severity of the penalty system; (e) the transparency ofrules, laws, and processes; and (f) the example provided by theleadership of the country.

The factors listed above are probably the most importantthat in various ways determine the extent of corruption in a country.In the next section we discuss in some detail the relationshipbetween the structure of public revenue and public expenditureand governance in general and corruption in particular.


Governance and Taxation

Good governance calls for taxes that are based on clearly writtenlaws and do not require frequent contacts between tax payersand tax administrators, which are more likely to lead to actsof corruption by tax administrators. Corruption is likely tobe a major problem to tax and customs administrations inthe following situations (Tanzi, 1998):

• The laws have many exemptions and specialtreatments.

• The laws are difficult to understand and are subjectto different interpretations so that taxpayers needassistance in complying with them.

• Frequent contacts between taxpayers and taxadministrators are required to determine taxliabilities and pay taxes.

• Tax administrators are paid low wages.• Acts of corruption on the part of tax administrators

are ignored, not easily discovered, or, when discov-ered, are not penalized or penalized only mildly.

• Administrative procedures (e.g., the selection of taxpayers or audits) lack transparency and are notclosely monitored within the tax or customsadministration.

• Tax administrators have discretion over importantdecisions, such as those related to the provision oftax incentives, the determination of tax liabilities,the selection of audits, and litigations.

• More broadly, the state (the principal) exercises weakcontrol over the agents that carries out its functions.

In case of political corruption, those who represent thestate (president, prime minister, ministers) or their close relativesand cronies may use the tax and customs administrations topursue rent seeking and corrupt practices. They can even writethe laws to their own advantage.


In some countries (e.g., Peru and Uganda), the taxadministration became so riddled with corruption that thegovernment decided to close it down and replace it with a newand more independent one. Several countries have had verycorrupt customs administrations. This has led in some cases tothe jailing of the director of customs and in others to thereplacement of the domestic customs organizations with foreigncompanies providing preshipment inspection services.

Reports from several countries indicate an unusuallylarge number of applicants for poorly paid jobs in tax orcustoms administration, suggesting that the applicants areaware of the opportunities for extra incomes that these jobscan create.

Governance and Public Spending

Corruption can affect public expenditure in different ways. Thecategories of public expenditure most affected by corruptionare discussed below. In all these areas, lack of transparency andof effective institutional controls are the main factors leadingto poor governance.

Public investment projects have frequently lent them-selves to acts of high-level corruption or rent seeking. Becauseof the discretion that some high-level public officials haveover decisions regarding public investment projects, this typeof public spending can become distorted, both in size andin composition, by corruption and rent seeking. Publicprojects have, at times, been carried out specifically toprovide some individuals or political groups with opportu-nit ies to receive “commissions” from the projectimplementers, or to benefit particular areas or individuals.This has reduced the efficiency of such expenditures and hasresulted in projects that would not have otherwise beenjustified on the basis of objective criteria of investmentselection such as cost-benefit analysis.


Procurement, i.e., the purchase of goods and services, isanother area that is often affected by poor governance. To lessenthe possibility of corruption, some countries have developedcomplex and costly procedures which may have reducedcorruption at the cost of sharp increases in the prices of somegoods and delays in the corresponding government activities.

Extrabudgetary accounts for given types of expenditureor revenue are common in many countries. Some of them areset up for legitimate purposes (pension funds, road funds, etc.).Others may be set up to reduce the political and administrativecontrols that are likely to accompany budgetary spending.In some countries, the money received from foreign aid or fromthe sale of natural resources such as oil and other mineralsis channeled into special accounts which are typically lesstransparent and less closely controlled than budgetary funds.Some of this money may find its way into illegitimate usesor pockets.

“Ghost” workers, dead pensioners, etc., are often used byunscrupulous individuals to collect unearned payments, in theabsence of adequate human resource databases and poorexpenditure controls.

Goods and services provided at below-market prices in mostcountries—foreign exchange, credit, electricity, water, publichousing, some basic commodities, access to educational andhealth facilities, access to public land, and so on—have providedfertile ground for abuses and corruption by individuals whobenefit enormously from access to such goods and services.

At times, because of limited supply and large demand,rationing or queuing becomes unavoidable. Excess demand iscreated and decisions have to be made to apportion the limitedsupply. These decisions are often made by public employees.Those who want these goods (the users) are often willing to paybribes to get access (or greater access) to what the governmentis providing. It is thus not surprising that cases of corruptionhave been reported in all the areas mentioned above. Often, poorinstitutional capacity hinders the control of abuses.


Other Discretionary Decisions

Besides the areas mentioned above, public officials in manycountries may be granted discretion over important decisions;in these cases, corruption, including high-level or politicalcorruption, can reach significant proportions. The mostimportant of these discretionary decisions are as follows:

• Provision of tax incentives against income taxes,value-added taxes, and foreign trade taxes, whichmay be worth millions of dollars in reduced futureliabilities to those who benefit from the exemptions.

• Decisions regarding the particular use of private land(zoning laws), which determine its market value. Apiece of land that can be used only for agriculture willhave low market value, while land on which high-rise buildings can be built becomes very expensive.

• Decisions regarding the use of government-ownedland (e.g., for logging). Major cases of corruptionrelated to permissions granted to cut trees in publiclyowned forests or to exploit public lands for their min-eral wealth have been reported in several countries.

• Decisions authorizing major foreign investments,often in conjunction with domestic interests, whichprovide the investors with monopoly power oraccess to valuable natural resources.

• Decisions related to the sale of public-sector assets,including the right to extract natural resources.

• Decisions on the privatization of state-ownedenterprises and on the conditions attached to thatprocess, such as the degree of regulation of the industry.

• Decisions providing monopoly power to particularexport, import, or domestic activities. “Cronycapitalism” has often been linked to such decisions.

Decisions such as those described above are often wortha lot to individuals or enterprises. Some of these will naturally

1 0 GOVERNANCE, CORRUPTION, AND PUBLIC FINANCIAL MANAGEMENT

attempt to get favorable decisions, in some cases by payingbribes and in other cases by simply exploiting close personalrelations with public officials. The bribes may be paid to low-paid public officials whose “temptation price” may be far lessthan the value of the potential benefit to the bribers.

Some Quantitative Results

Corruption and poor governance may affect economicperformance through their impact on tax revenue, publicspending, and fiscal deficit. In particular, a study to investigateempirically the impact of corruption on tax structure shows that:

• High-level corruption reduces tax revenue.• Corruption reduces most the revenue from social

security tax, then sales tax revenues; it reducespersonal income taxes least.

• A one-point increase in the corruption index reducestax revenue collected by 2.7 percent of GDP.

• Corruption increases tax evasion. The sampleshowed a negative relationship between corruptionand the productivity of the value-added tax (VAT)per unit of nominal rate.

Using some of the indices of corruption now available,various researchers have tested several hypotheses bearing onthe relationship between corruption and growth. These results,summarized below, show that governance matters a lot in theallocation and management of public resources.

Corruption and investment

Most economists accept that a positive connection exists betweeninvestment and growth. Therefore, if corruption affects invest-ment, it must also affect growth. Corruption may affect investment

Governance, Corruption, and Public Finance: An Overview 1 1

in different ways. It may affect the amount of total investment,the amount of foreign direct investment, the size of publicinvestment, and, of course, the quality of investment decisions.

In several papers, Paolo Mauro of the IMF has shownthat corruption can have a significant negative impact on theratio of total investment to GDP (Mauro 1997). Regressing theinvestment ratio in relation to the corruption index, GDP percapita in 1960, secondary education in 1960, and populationgrowth, he showed that a reduction in corruption couldsignificantly increase the investment/GDP ratio. On the otherhand, a drop in the investment/GDP ratio as a result ofcorruption was shown to have an important effect on growth.Mauro estimated that a reduction in corruption equivalent totwo points in the corruption index would raise the annualgrowth rate by about 0.5 percent through its positive effect onthe investment/GDP ratio. In addition, as discussed later,corruption is likely to affect adversely the quality of investment.

Corruption and foreign direct investment. In a paperfocusing on foreign direct investment (FDI), Shang Jin Wei(1997a) showed that while a one-percentage-point increase inthe marginal tax rate on foreign investment reduces FDI byabout 3.3 percent, an increase in the corruption index by a singlepoint reduces the inflow of FDI by about 11 percent. Thus, anincrease in the corruption index from, say, the Singapore levelto the Mexican level, would reduce FDI almost as much as aone-fourth increase in the marginal tax rate.

In a related work, Wei (1997b) also showed that theunpredictability of corruption (as measured by the dispersionof individual ratings of corruption) has a further negative impacton FDI. A higher level of dispersion makes corruption behavelike an unpredictable and random tax. Wei concluded that “theeffect of uncertainty on FDI is negative, statistically significantand…large. An increase in uncertainty from the level ofSingapore to that of Mexico…is equivalent to raising the taxrate on multinational firms by 32 percentage points.”


Corruption and public investment. Tanzi and Davoodi(1998) have argued that corruption is likely to increase publicinvestment because public investment can be easilymanipulated by powerful political or bureaucratic personalities,and often gives rise to the payment of higher “commissions”by those who carry out the project. Regressing public investmentas a share of GDP against the corruption index, real per capitaGDP, and the share of government revenue in GDP, Tanzi andDavoodi showed the corruption index to be highly significant(at the 1 percent level). The more corruption there is, the morepublic investment there will be. (See also Ades and Di Tella [1997].)

The reduction in the total investment ratio and the FDIratio can be assumed to have a clear negative impact on growth.However, an increase in the share of public investment in GDPhas a more ambiguous impact on growth. More evidence isneeded to reach a definite conclusion.

Corruption and operation and maintenanceexpenditure. Despite great difficulties in getting good data,Tanzi and Davoodi have provided evidence that, other thingsbeing equal, high corruption is associated with: (i) low operationand maintenance expenditure; and (ii) poor quality ofinfrastructure.

In terms of statistical significance, the impact ofcorruption is strongest on the quality of roads, power outages,and railway diesels in use. Most of these relationships survivewhen real per capita GDP is added to the equation as anindependent variable. Thus, the costs of corruption should alsobe measured in terms of the deterioration in the quality of theexisting infrastructure. These costs can be very high in termsof their impact on growth.

Ades and Di Tella (1997) have also tried to estimate theimpact of industrial policies (identified with procurementpreferences for “national champions” and unequal fiscaltreatment of different enterprises). They found corruption tobe higher in countries pursuing an active industrial policy.


To sum up, corruption reduces total investment, distortsits composition, and reduces the quality of a country’sinfrastructure. The combined impact of these changes oneconomic growth is bound to be negative and substantial.

Corruption and the composition of public spending. Inaddition to the above, corruption may have other effects onexpenditure, which may be important for growth. Mauro’sresearch has shown that more corrupt countries spend less foreducation and health. This result has been confirmed by Gupta,Davoodi, and Alonso-Terme (1998). Because these categoriesof expenditures are generally assumed to promote growth,corruption in this regard can also have a negative effect on growth.

Finally, both Mauro (1997) and Tanzi and Davoodi (1997)have shown that in countries with high corruption, the GDPshare of tax revenue collected tends to be lower because someof the tax revenue is diverted to the pockets of tax administrators.Thus, the true burden of taxation on the taxpayers is not reduced.An overly high level of taxation may lead to a suboptimal levelof public spending and, perhaps, to higher fiscal deficits.

Policy Conclusions

Governance problems may arise in connection with manyprincipal-agent relationships. In any one of the relationshipsshown in the figure below problems of poor governance canemerge. These problems exist in any society but tend to be moresevere in some countries and under certain conditions. Whatcan be done?

One strategy is to pursue a zero-tolerance approach tocorruption without changing the role of the state. Such an approachwould rely on:

• ethics offices;• anticorruption commissions;• tighter controls on public officials;


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??Figure 1.1

Principal-Agent Problems in Policymaking

Ideal Government

Actual Government

Individual Ministers

Principal Secretaries, Heads of Institutions

Heads of Departments

Heads of Divisions

Individual Civil Servants

Taxes Spending Other


• higher penalties for those who are caught in acts ofcorruption;

• higher wages for public-sector employees;• reduction in the right to privacy of government

employees and those who deal with them (forexample, by requiring employees to report on thevalue of their assets);

• anticorruption efforts undertaken at the internationallevel, such as those sponsored by the OECD, theADB, the World Bank, and other regional orinternational organizations, or at the national level byactive civil society and a free press.

This approach would undoubtedly help in improvinggovernance but, unless accompanied by efforts to modify andreduce the role of the state in the economy, it may not go farenough. To make significant progress against corruption andpoor governance, it is also important to modify the role of thestate by reducing its reliance on regulations, authorizations,quasi-fiscal activities, and other activities and tools that lendthemselves to abuse by public officials. It is also important tomake the state’s actions more transparent.

In the context of the architecture of the internationalfinancial system, the IMF in 1998 developed a Code of GoodPractices on Fiscal Transparency aimed at increasing transparencyin fiscal policy. The Code contained several principles that couldbe followed by countries to increase fiscal transparency. Theapplication of these principles would make fiscal policy moretransparent and in the process reduce the scope for poorgovernance. Among the principles are the following:

• The government sector should be clearlydistinguished from the rest of the economy, andpolicy and management roles within governmentshould be well defined.

• There should be a clear legal and administrativeframework for fiscal management.


• The public should be provided with full informationon the past, current, and projected activity ofgovernment.

• A public commitment should be made regarding thetimely publication of fiscal information.

• Budget documentation should specify fiscal policyobjectives, the macroeconomic framework, the policybasis for the budget, and identifiable major fiscal risks.

• Budget data should be classified and presented ina way that facilitates policy analysis and promotesaccountability.

• Procedures for the execution and monitoring ofapproved expenditures should be clearly specified.

• The integrity of fiscal information should be subjectto public and independent scrutiny.

In conclusion, actions to improve governance and tofight corruption need to be taken on several fronts. Both thedemand for acts of corruption and the supply of such acts wouldneed to be reduced.

References

Ades, Alberto, and Rafael Di Tella. 1997, “National Championsand Corruption: Some Unpleasant InterventionistArithmetic,” Economic Journal, Vol. 107 (July), pp.1023-42.

Gupta, Sanjeev, Hamid Davoodi, and Rosa Alonso-Terme. 1998.Does Corruption Affect Income Inequality and Poverty?Washington, D.C.: International Monetary Fund.

Mauro, Paolo. 1997. Why Worry About Corruption? Washington,D.C.: International Monetary Fund.


Tanzi, Vito. 1998. “Corruption Around the World.” IMF StaffPapers. Washington, D.C.: International Monetary Fund(December).

_______, and H. Davoodi. 1998. Roads to Nowhere: How Corruptionin Public Investment Hurts Growth. Washington, D.C.:International Monetary Fund.

Wei, Shang-Jin. 1997. Why is Corruption So Much More Taxingthan Tax? Arbitrariness Kills. Cambridge, Massachusetts:National Bureau of Economic Research.

_______. 1997. “How Taxing is Corruption on InternationalInvestors?” NBER Working Paper. Cambridge,Massachusetts: National Bureau of Economic Research.

Chapter 2

Government Policies andthe Budget Process

Francesco Forte

Introduction

The first section of this paper (related to the theme of governance)deals with the need for a monocratic budgetary process by theexecutive, for the proper allocation and management of budget-ary resources. The second section (related to the theme of financialmanagement) deals with the basics of public expenditure in rela-tion to: (i) aggregate fiscal discipline, (ii) allocative efficiency, and(iii) operational efficiency. The paper then proceeds to discussing,in turn, the requirement of transparency and financial account-ability; the role of a top-level independent national auditing of-fice; the role of the central government as supplier of priorities;and the issue of how the executive branch of government shouldkeep its budgetary commitments, through realistic forecasts, pru-dential policies, and determination to carry out its fundamentalchoices. The paper concludes with an evaluation of budget imple-mentation in terms of: the execution of natural strategies; theimplementation of the basic allocational choices; and the perfor-mance of government bodies.1

1 The focus of the paper is on emerging countries, where sustaining a high-growth path together with domestic and foreign monetary stability requiresan economic policy in which fiscal governance is paramount, and the per-spective is necessarily global. I draw on my personal experience as cabinetmember and Minister of Finance in the 1980s and as Chairman of the ItalianSenate Finance Committee in the first years of the 1990s, as well as my re-search on developing countries and on the adjustment problems faced byEuropean countries in meeting the deficit and debt criteria of the MaastrichtTreaty and the subsequent requisites of the Stability Pact.


A Monocratic Budget Process

The executive branch of government is at the core of the fiscalgovernance issue. It is, however, in a somewhat lopsided situ-ation, particularly in the effectiveness of its policy decisionmaking. On the one hand, international financial institutionsand the financial markets and investors hold it responsible forgeneral fiscal governance; on the other hand, in a democraticcountry, it is not the sole fiscal and budgetary power. The leg-islative body normally approves the national budget, and unlessthere are severe constitutional constraints legislative amend-ments may challenge the fiscal discipline imposed by the ex-ecutive.2 Furthermore, the budgets of local governments andof quasi-autonomous public entities and public corporationsmay contain deficits and debts that are not easily detected andcontrolled by the executive. These “off-budget”3 public insti-tutions represent a big problem for fiscal governance by theexecutive.4

2 In Italy the constitutional constraint on fiscal deficits exerted by article81 of the Italian postwar Constitution is too vague and badly controlledto be effective. See Forte (1999). Articles 110 and 115 in the postwar GermanConstitution (Grund Gesetz) require expenditures in the federal budgetother than those for investment to be balanced by final revenues. Accord-ing to article 113 of the same Constitution, parliamentary amendmentsincreasing expenditures or reducing revenues immediately or at any timein the future must be approved by the Federal Minister of Finance. In theFrench Constitution of 1958, article 40 disallows parliamentary amend-ments that reduce revenues or increase expenditures even if these effectsare offset by new taxes. In the US, the Gramm-Rudman-Hollings Actapproved by the Congress and the President in 1985 subjected the federalbudget to the constraint of a gradual deficit reduction, to reach balancein 1991. The new procedure was not effective at first (Leloup, Graham,and Barwick 1987). However, the US federal budget for 1999 shows asurplus.

3 The budget referred to here is obviously that of the central governmentnarrowly defined.

4 Article 112 of the German Constitution requires all off-budget expendi-tures to be approved by the Federal Minister.

Government Policies and the Budget Process 2 3

Some of these institutions are natural components of awell-organized pluralistic system of government that conformsto the requirements of a modern market economy, open to theglobal markets. Thus, even if a robust executive with a pow-erful head is needed to steer the country in today’s globaleconomy, local governments with their autonomous budgetsare necessary for an orderly and efficient economy and civilsociety in an age of urban growth.

But many other off-budget public or quasi-public insti-tutions with a noncommercial or commercial orientation havea much more dubious qualification. They often seem to behybrid entities, acting as quasi-government institutions vis-à-vis the market, to enjoy the privileges of public entities, and asquasi-market institutions vis-à-vis the government, to claimautonomy and exemptions from its fiscal discipline.5 Gener-ally, off-budget entities that may be considered public enter-prises must be clearly distinguished from the (ofteninnumerable) noncommercial public entities in health, welfare,culture, education, recreation, research, and other areas, whichmust be considered nonprofit public institutions, and the regu-latory agencies, whose budgets should be consolidated withthe budget of the government that owns or controls them. Thenational budget, obtained by consolidating the central and localgovernment budgets will give the executive a full picture ofthe scope of its budgetary tasks.

Off-budget public enterprises in the industrial, trade,or financial sector, whether supervised by central or localgovernment, should be organized as private corporations with-out privileged access to the banking system and the financialmarket.6 Where possible, they should be privatized, to subject

5 For the fiscal issues raised by the “blurring of the public and private sec-tors” by these entities, see Heller (1997).

6 These are actually the rules prescribed for public enterprises in theMaastricht Treaty, to avoid distorting competition and to control exces-sive public debt in the European Union.


them to market discipline and the demands of fiscal prudence.7But until they are privatized, their capital expenditures shouldbe included with the investment expenditures of the govern-ment to which they belong,8 and their debt should be accountedfor as a contingent liability in that government’s accounts inthe year in which these arise. If public service justifies the con-tinued operation of a losing public enterprise, say, the staterailways or a municipal bus service, that enterprise shouldreceive a yearly grant from the government which should beconsidered in balancing its current account.9

The financial autonomy of off-budget noncommercialentities should be severely limited. Their current and capitalexpenditures, on the one hand, and their revenues and trans-fers from government, on the other, should balance, and theyshould have no access to credit from the banks or the financialmarket.10

Local governments should not only be obliged to bal-ance their current account as off-budget public enterprises. Togive the executive full control of the public debt and its man-agement, local governments should finance their capital invest-ments only with their own revenues, capital transfers from thecentral government, or loans from a specialized credit institu-

7 In some cases the government might simply retain a small (e.g., less than5 percent) “golden share.”

8 Frequently the losses of off-budget entities are temporarily financed withborrowings from creditors and banks.

9 The European Union has tried to confine government transfers fornoninvestment purposes to exceptional public service enterprises. But theapplicability of this rule to state railways and muncipal transportationservices has yet to be enforced.

10 Maastricht rules, in this respect, merely state that no public institutionshould have privileged access to credit. In Italy health institutions do nothave access to credit from credit institutions and the financial markets.However, the fact that suppliers can discount their credits at banks hasled to hidden debts for these health institutions which the central gov-ernment feels obliged to take upon itself from time to time, to avoid in-terruption in health services.


tion of the central government that requires revenueguarantees.11

Many public services may be provided by private enter-prises under a regulatory authority. All public investments that,in the judgment of the executive, can be run with market resourcesshould be privatized to save scarce public resources for high-priorityinvestments that are inherently public. Water supply and sewer-age systems, telecommunications, transport, postal services, envi-ronmental services, and related investments may be handed overto the market economy,12 perhaps with land for the investment.Private investors, for their part, can supply school buildings,hospitals, justice and law-enforcement facilities, and other public-service buildings, in exchange for rents and leases from the gov-ernment. In Britain, all the services in the municipality of Coventryhave been leased to private business.

To own less in order to control more effectively seems tobe a very important general principle for government in an eraof growth in information, technology, and global finance. Untilnow, however, we in Italy (and also in Germany) have thoughtdifferently, such that big state corporations have often dictatedto the government, rather than the other way around.

Aggregate Fiscal Discipline, AllocativeEfficiency, and Operational EfficiencyDrawing on international experience and particularly the re-cent successful fiscal adjustment in Italy,13 I suggest two maininstitutional devices, which should interact: (i) the discussion

11 This system works quite well in Italy, through the Cassa Depositi e Prestiti(Loans and Deposits Fund), a specialized financial corporation whollyowned by the Treasury which was established in the previous century.

12 Such extensive privatization has been carried out particularly in the UK.See HM Treasury (1997), Sawkins and McMaster (1997), and World Bank(1997).

13 See, among others, Tarshys (1986), Schick (1986), and OECD (1987).


and approval by the executive and by the legislature of a finan-cial and economic plan for the next three or four years,14 somemonths before the budget discussion; and (ii) budget prepara-tion by the executive, on the basis of the foregoing plan.

The financial and economic plan should be binding withrespect to the budgetary allocations for first year, and indica-tive for subsequent years except for the deficit figure. It shouldbe prepared and updated yearly by the treasury and budgetminister (or the finance minister), under the strict supervisionof the head of government (the president of the republic or thepremier) assisted by the council of economic advisers (or simi-lar body). The plan should be discussed in the cabinet but ina presidential system does not require ministerial approval. 15

However, it is important that the various branches of the gov-ernment agree on the figures it contains, to provide the budgetwith a rational basis. Its main feature is its binding limit on thedeficit and net indebtedness, in relation to GDP, in the centralgovernment and national budgets for the next three (or four)years. The national budget, according to the standard defini-tion, consolidates the budgets of the central government, off-budget noncommercial institutions, and local governments.

14 Each year, another year is added to replace the past year. This kind ofpreliminary budgetary document, introduced in Italy by Law n. 362 (1988)and made more effective in the ’90s, has allowed the Cabinet to cutdrastically the high deficit in the central government and national bud-gets, such that the country entered the Monetary Union in 1997 with onlya 2.7 percent deficit (in relation to GDP) in the national budget. The Ital-ian triennial, known as the “Documento di Programmazione Economicae Finanziaria,” is approved by the Cabinet in June and by the Parliamentin September, and the vote is binding for the first of its three years. Thebudget and the financial law approved by the Cabinet in September andpresented to the Parliament in October are based on this document. Thus,the deficit and indebtedness figures for the succeeding financial year (orthe next calendar year), cannot be modified by the Parliament which hasalready approved them. For more on this budgetary document, see DaEmpoli, De Ioanna, Vegas (1988 and new ed.)

15 As in the Philippines or Indonesia.


In budget preparation, as noted, the treasury ministershould have sole responsibility to the executive (monocraticbudgeting).16 The treasury minister should also be responsibleto the legislature for the central government and nationalbudgets, on behalf of the executive. The treasury minister mayaccept legislative amendments, after consulting with the min-ister responsible for the relevant expenditures or revenues andin the most important cases with the head of government. Incase of amendments reallocating resources among the branchesof government, to which the treasury minister does not objectin principle, the head of government will have the final deci-sion in consultation with the cabinet.

The logic and content of this two-stage procedure canbe explained as follows. The financial and economic plan con-sists of macroeconomic and fiscal figures as well as strategicguidelines for legislation and policy measures needed to attainthe quantitative targets in the medium to long term. Therefore,new legislative proposals from the cabinet to the legislature toachieve the quantitative targets of the plan should accompanythe proposed budget law. The preliminary approval of thecontents of the plan by the legislature constrains its amendingpower in the subsequent discussion of the budget, but doesnot legally constrain it to approve the related legislation, forwhich the plan only sets guidelines. The parliamentary major-ity supporting the cabinet should, however, be politically com-mitted to approve the legislation, and within the time prescribedin the plan.

The head of government, through the financial andeconomic plan, thus commits the cabinet to a medium- to long-term budgetary strategy supported by structural reforms.

The macroeconomic figures in the plan include expectedreal GDP growth, inflation rates, main balance-of-paymentfigures such as ratio to GDP, foreign debt as a percentage of

16 In Germany, France, UK, and US, a monocratic budget procedure is clearlyapplied within four different types of constitutional structures.


exports,17 rates of individual and aggregate consumption,savings and investment as percentages of GDP, level of em-ployment, and rate of unemployment.

The fiscal figures in the plan should be stated in moneyterms, in constant prices, and as percentages of GDP and overthe previous year’s figures. The figures should include: aggre-gate current and capital expenditures; tax and nontax (trans-fers and other receipts) revenues; the resulting deficit or surplusin the current account, the capital account, and the aggregatebalance; and total public debt, distinguishing between domes-tic and foreign debt and expressing the latter as a percentageof exports.18 The primary budget, with its balance betweenexpenditures other than interest on debt and all revenues, isdistinguished from the secondary budget, which includes debtservice. The financial and economic plan is also the means bywhich the executive obtains agreement among the variousbranches of government on the main budgetary allocations inthe central government and national budgets, particularly foroff-budget noncommercial institutions and public enterprisesand for local governments. To allow an assessment of their broadeffect on the market, public expenditures in the primary bud-get should be classified into purchases of goods and services,wages, and transfers to families, to the economy, and abroad(if any).

A two-stage consolidation of public sector operationsappears useful, to make operational choices transparent. In thefirst stage, the central government budget should be formedby consolidating the budgets of all off-budget noncommercial

17 This amount should include commercial debt without general governmentguarantees, commercial debt with general government guarantees, andpublic debt.

18 Obviously this figure includes only the public foreign debt. Full nationaldebt liabilities must also include government guarantees on commercialforeign debt. The aggregate foreign debt figure, including commercialforeign debt, should be among the macroeconomic data in the financialand economic plan.


institutions and public enterprises, and adding the aggregateand the resulting deficits and liabilities to the central govern-ment budget. All local government budgets should also beconsolidated in a “local government” budget at this stage. Thenational budget is then obtained by consolidating the budgetsfor the central and local governments. Clearly, among itsallocative choices, the executive must decide on the amount oftransfers to off-budget noncommercial institutions and publicenterprises and to local governments, in relation to their needsand overall budget constraints. It must also decide on theappropriate legislative or other interventions on the expendi-ture and on the revenue side to meet targets.

To allow the cabinet to discuss the main allocativechoices for the central and local government and nationalbudgets, expenditures—current and capital—should be classi-fied according to main functions, and revenues according to maincategories (direct taxes, domestic indirect taxes, indirect taxeson international affairs, social security contributions, transfers,other revenues19). The expenditure and revenue figures shouldbe given in both nominal and real terms, and as percentagesof GDP. Real rates of increase or decrease in expenditures (byfunctions) and revenues (by categories) over previous years andforecasts for the medium term should also be given.

The standard classification by functions on the expen-diture side20 crosses that of the government ministries and maybe too general. Four or five subclasses of the main functions or

19 The World Bank in its World Development Report classifies central govern-ment revenues into taxes on income, profit, and capital gains (i.e., directtaxes); social security contributions; domestic taxes on goods and services(i.e., domestic indirect taxes); taxes on international trade and transac-tions (i.e., indirect taxes on international affairs); other taxes; and nontaxrevenues.

20 According to the World Development Report of the World Bank: defense,education, health, housing and amenities, social security and welfare,economic services, and others.


any of these functions should be given to provide a less globalpicture and allow better allocative choices.21

The head of government and the treasury (or finance)minister, as we have seen, have a leading role in the prepara-tion and discussion of the financial and economic plan by thecabinet. This discussion, in turn, gives them the full support ofthe various branches of the government in having the planapproved by the legislature. Thus, the treasury minister shouldbe able to manage the approval of the central governmentbudget, the consolidated central government sector budget, andthe national budget and the accompanying financial legislationin the parliamentary debate, within the framework of the financialand economic plan. As noted repeatedly, the head of government,assisted by the treasury minister, must have monocratic powerin budget preparation, which cannot be sustained economicallyand operationally if the allocation of resources is not subjectedto fiscal discipline through a medium-term program. Thus, acombination of financial and economic planning and monocraticbudgeting seems necessary from the point of view of both fiscaldiscipline and resource allocation.22 Operational efficiency in

21 The World Bank, in its World Development Report , for instance, classifiesexpenditure on education (including both public and private education)into primary, secondary, and tertiary. To these, one should add vocationaleducation and preschool education.

22 Italy’s experience in this area provides “negative” evidence of the validityof combining a financial and economic plan with monocratic budgetintg.Indeed, in the absence of monocratic budgeting, the fiscal discipline neededto meet Maastricht criteria has been achieved partly by increasing the taxburden and reducing the public expenditure on investments, while particu-larly generous old-age pension schemes have allowed these current expen-ditures to soar in relation to GDP. On the other hand, the Italian financial andeconomic plan does not allocate expenditures by function for either the centralgovernment budget or the national budget, nor does it include a sector budgetfor major off-budget noncommercial institutions and public enterprises. Thus,the huge deficts of the state railways and of the old-age social security in-stitutions escape the attention that they deserve from the point of view of“keeping the basics right.” On the question of the quality of fiscal adjustmentand fiscal deficits, see Selowsky (1999).


both budget legislation and budget execution will benefit fromthis combination of approaches.23

Budget Transparency andFiscal AccountabilityA policy of fiscal discipline inherently tends to distort budget-ary outcomes through “opportunistic accounting” to reduce theofficial deficit and debts of the central government, to shiftdeficits and debts off-budget, and to move from true budget-ary obligations to nonbudgetary commitments.24 In a sense,deficits and debts are similar to the dust on the floor of anapartment which the cleaners may merely sweep under the rugsand the furniture, rather than work hard to remove. Thus, cutsin transfers to welfare institutions from the central governmentbudget may lead these institutions to accumulate debts withbeneficiaries or suppliers (for instance, suppliers of pharma-ceuticals and food to hospitals) who, as in Italy, may discounttheir credits with banks.

Obviously, if the accounting is transparent and theobligations are correctly accounted for, the consolidation of thebudget for noncommercial institutions with the central govern-ment budget will show that the dust has only gone under thecarpet and is still in the room. But the consolidation might bedone improperly. Sometimes, cash budgets are consolidated withthe central government budget, rather than budgets showingthe obligations of nongovernmental public institutions. On theother hand, even when consolidating central and local govern-ment sector budgets in terms of obligations, debts may be

23 In a presidential republic, monocratic budgeting depends on the president’sbudgetary power while the financial and economic plan depends oncooperation between his office and the treasury.

24 For a discussion of “opportunistic accounting” or “creative accounting”as practiced in European countries to facilitate compliance with Maastrichtdeficit and debt rules, see Forte (1997).


concealed through legal devices. A typical fix consists in account-ing as obligations on the expenditure side the amounts actuallycredited, i. e. credits payable—a spurious concept of credits whichis close to the cash concept. By opportunistic accounting rules,credits payable may be made greatly different from matured ob-ligations. To narrow the credits for expenditures to credits payable,norms accompanying the budgetary law may limit the spendingcapacity of each government entity to a given percentage of itstotal appropriations of a past period.25 By this rule, a host of pendingobligations may be postponed to the future, without giving riseto present “credits” on the expenditure side of the budget.

Sometimes this practice may reduce the impact of thecash flow from the national budget on monetary circulation.26

The question, however, is whether these temporary adjustmentsrepresent true savings for the budget or only a temporary relief,which merely shifts problems to the future, aggravating futureliabilities. In principle, even if these obligations are not includedin the budget and hence in the deficit of the year of maturity,they should be included in the new indebtedness for that year,thus adding to the total public debt amount for that year. Butanother opportunistic accounting practice is that of includingin public debt only the public debts issued on the markets pluscentral and local government debts payable.27

Generally speaking, to be transparent and fiscally account-able, a budget should conform to prudential accounting principles.28

25 This procedure has been extensively applied in Italy to meet Maastrichtparameters on deficit and debt.

26 In some circumstances, this kind of maneuver has been useful in Italy tocombat inflation. But the damage to the functioning of the public economyand to the market economy of delayed payments of budgetary obliga-tions may be substantial.

27 Excluding the debts of off-budget noncommercial institutions and the defi-cits of off-budget public enterprises.

28 I have dealt with these issues in a paper presented to the “EU Accessionand Sovereign Debt Management” workshop and subsequently publishedin European Commission and World Bank, European Union Accession: TheChallenge for Public Liability Management in Central Europe, 1998.


By this I mean a sort of asymmetric methodology in which, incase of doubt, one adopts an “expansive” forecast on the ex-penditure side and a more restrictive one on the revenue side,thus biasing forecast errors towards overestimating expendi-ture and underestimating revenue. 29

Following this prudential methodology, the expendi-ture side should include all the obligations in the year in whichthey are incurred, even if not payable that year. This should bedone both for real expenditures and for transfers. In the firstcase one must adopt the criterion of the time when the goodor service pertaining to that obligation was actually supplied.30

In the second case, the criterion is the year in which the trans-fer is due.31

Often, purchases of assets of other entities—public orquasi-public, domestic or international, particularly of publicfinancial institutions—are written below the line in governmentbudgets, assuming that they are financing items which do notcreate a net expenditure. But prudential accounting implies thatif these assets do not yield any revenue to the government, theyshould be considered as transfers to be entered above the line.32

According to prudential accounting, the revenues to be enteredon the revenue side of the government budget for a given yearshould be those whose obligations were generated that year

29 On this point, see also Schiavo-Campo and Tommasi, 1999.30 This principle and most of the others mentioned above have been adopted

by the member countries of the European Union, under ESA 95 (in Eurostat1996) which applies to their budgets from 1999 onward. See Forte (1997).

31 See the previous note. Payments for new pensions or for wage increasesof public employees or for public works might be postponed not becauseof cash constraints but because of the need to determine the amountsactually due. But if the persons to whom the new pensions are due havethe status of pensioners; if the employees to whom the wage increases aredue have rendered their services; and if the public works have beenexecuted, under prudential accounting the obligations pertaining to theseevents must be entered in the budget, even if the payments are not yetdue in full.

32 On this principle, see Blower and Cheasty (1991).


and have the real possibility of being encashed in the not-too-distant future (not necessarily in the same year). The entryshould correspond only to the percentage of the official creditthat may be encashed, or discounted for the postponement ofthe payment if it is legally to be made in installments.33

Obviously, the above prudential accounting is intendedto achieve effective fiscal discipline. However, aside from the needthat the obligation-based budget be approved by the legisla-ture, a cash budget may prove useful for monetary policy objec-tives, particularly in a period of inflation.

Cash budgets for the various governments and govern-ment sectors may also give a quick picture of their impact onaggregate demand and on monetary flow. Periodic reports to theexecutive by the treasury on budgetary cash flows and deficitsmay therefore improve fiscal governance.34 However, to avoidconfusion, under prudential accounting these documents shouldcarefully distinguish above-the-line operations from below-the-lineoperations. On the revenue side, tax revenues, transfers, receiptsfrom sales of services and goods other than public assets are enteredabove the line, and receipts from the sale of public real and finan-cial assets are entered below the line. On the expenditure side,payments for current and capital expenditures, including thepurchase of assets of public or quasi-public entities that are notexpected to be revenue producing, are entered above the line, whiledisbursements for past obligations and revenue-producing assetpurchases are entered below the line. The balance is the amountof cash that the treasury needs to generate through new publicdebt. Transparency in the area of public debt requires that govern-ments finance themselves only by issuing bonds and other cer-tificates on the market.35

33 ESA 95 is less clear on this important issue.34 In Italy, the basic budgetary reform, through Law n. 468, 1978, requires

the Treasury to present a periodic cash budget to the Parliament forinformation purposes. On the relevance of cash deficits to fiscal manage-ment, see Balassone and Franco (1996).

35 This is one of the main rules of the Maastricht Treaty for fiscal discipline.


Accountability for the budget, and therefore effectivegovernance by the head of government of the national budgetand particularly of its own budget, generally implies a “put”rather than a “call” option, in the terminology of derivatives.In other words, the cabinet must “ask” others to conform to theprescribed behaviors and not “be asked” and constrained byothers to intervene in their favor when they need money.

Thus, public debt should preferably not be short-termdebt. Contingent liabilities should be minimized, as they con-stitute a “hidden risk to fiscal stability” (Polackova 1999) and,anyway, should be accounted for in an official annex to thecentral government budget. According to the German Consti-tution, contingent liabilities must be authorized by law insofaras they might give rise to future debt.36 Good governancerequires the executive to be very careful in providing guaran-tees to debts of other entities. Such guarantees might avoid moreexpensive interventions such as loans or straight transfers tothese entities but nonetheless could create an uncontrolledhidden burden for the central government.37

National Auditing Office

It is a gigantic task to gather information from the variousbranches of the central government, off-budget noncommer-cial institutions and public entities, and local governments,prepare the financial and economic plan and the central gov-ernment and national budgets, monitor their implementation,and prepare the financial statements. Computerization maygreatly ease the task but cannot solve it without top-levelcoordination. Experience shows that to accomplish this task aspecialized central auditing office is needed. This office may

36 See article 115 of the Grund Gesetz.37 See Polackova (1999) and Forte (1999) in the same volume.


be directly under the chief executive38 or under the treasuryminister and reporting to the chief executive.39 In any case, itmust be organized as an autonomous agency with officialsscattered among the various branches of the central govern-ment and its main off-budget commercial and noncommercialentities, to assist and supervise their internal auditors.

A primary task of the central auditing office is to pro-vide a standardized system of accounts for gathering homoge-neous data for the preparation of the sector budgets for the centraland local governments. Normally public institutions enteringthese two consolidated sector budgets differ in their systemsof accounts. Some of the differences are unnecessary and shouldbe eliminated by imposing standardized accounting rules.40

However, such a reform may take time to be approved andimplemented, particularly because it requires a learning pro-cess and changes in the information processing networks. Onthe other hand, some differences in accounting rules are un-avoidable, because the budgets of public enterprises shouldfollow the accounting rules of private corporations,41 whilegovernment budgets at the various levels and the budgets ofnoncommercial government agencies and institutions shouldfollow the general criteria adopted for governmental institu-tions. Prudential accounting differs for the two kinds of bud-gets, particularly in such areas as the purchase of assets andcontingent liabilities. Thus, to avoid gathering heterogeneousdata, the central auditing office should prepare standard formsto reconcile the accounting criteria for the various governmentbranches, agencies, institutions, and public-service enterprises.

38 The president of the republic in a system where he is also the head of thegovernment, as in the US.

39 In the US federal system, this task is performed by the Office of Manage-ment and Budget.

40 As those of the UN, to be adapted to the specific situations of the emerg-ing countries. See also Eurostat (1996) and IMP (1996).

41 See, for instance, International Accounting Standard Committee (1997)


The basis of auditing should not be limited to merecollection of ex-ante and ex-post financial data of expendituresand revenues. It seems very important also to collect economicand resource information.42 Among the latter, it is quite impor-tant to know the amount and type of personnel employed inthe various institutions and offices and the extent of theiractivity, expressed in terms of standard indicators (for instance,the average, maximum, and minimum number of students perteacher in a given type of school in the various districts, or thetime lag until a patient is visited by the public health service).Among the economic data, prices paid (such as the unit costof each kilometer of roads built according to given standards)are very important. Comparisons of price actually paid andstandard market prices are useful in pinpointing corruption andirresponsible behaviors.

Central Government as a Supplierof Public PrioritiesPublic budgets have an inertial tendency to increase every yearin real terms. The problem of avoiding this inertial growth andof focusing the central and local government sector budgets onthe right activities is thus the first priority of the executive forachieving allocative efficiency and public consensus. For asustainable balance between the public sector and the market economy,collective needs might at times be satisfied with a lower aggre-gate level of public expenditure, implying a lower tax level andreduced pressure of public debt on the interest rates. And whenreal GDP growth is significant, lowering the ratio of publicexpenditure to GDP, even without reducing the aggregate levelof public expenditure in real terms, may be a wise choice.

But to strike a right balance between functions, the execu-tive must also be able to react to inertial tendencies of public

42 See on this theme the basic paper of Polivka and Stryker (1983).


expenditures in some government sectors to show a differen-tial increase at the expense of others. Zero-base budgeting hasbeen suggested in response to this differential tendency to growin the various sectors of public spending. This seems to be anunnecessarily drastic change in budgetary practices, however,which risks failure for lack of operational consensus among thevarious bureaucracies concerned. Within any broad class ofpublic expenditure, shifts among subclasses may improvequality (e.g., shifts from secondary to vocational education).On the other hand, geographic allocation, too, should be sys-tematically considered. Normally, the executive produces onlyfunctional classifications of public expenditures among thevarious branches of the public administration at the central andlocal level. Rarely does the executive produce and propose tothe legislature, in budgets, the geographical distribution of ex-penditures by functions. However, misallocations may arisefrom the fact that some regions are undersupplied while oth-ers, for mere historical reasons, or other reasons, are oversup-plied or do not need any increase.

But how should allocational priorities at the cabinet levelbe assessed? The major preliminary choices are “political de-cisions” for which the head of government must take respon-sibility before the legislature. The aggregate rate of growth ofpublic expenditure is one such choice. Another broad “politi-cal” decision relates to the priorities among the four main publicfunctions: law and order, public goods for production, civil andsocial welfare.43 I would suggest a shift of emphasis in favorof the supply of goods for production over those for socialwelfare. In a structural perspective, “production” of publicgoods may have a much higher profitability in terms both ofeconomic growth and employment, and may be also moreresponsive to the demands of equity and social welfare.

43 Some of these classes cross the functional classification of public goods.Vocational education typically belongs to the category of “goods for pro-duction” while other kinds of educational expenditures belong to civiland social welfare.


Many allocative choices cannot be decided on the basisof broad political judgment but need detailed field research intothe demand and supply of public goods which are comple-mented by private supplies, as in the case of education, healthservices, or water supply. Basic needs should be assessed glo-bally: those currently satisfied by governments; by nonprofitinstitutions; by the market; those that remain systematicallyunsatisfied; and hidden needs that sometimes (as in the areaof civil needs and of welfare for the less favored) have a higherpriority.

To get consensus on its allocative choices, the chiefexecutive should promote hearings in the legislature on thevarious important needs, in the various areas of the country.The legislature, to this end, should also hear organizationsrepresenting the various interests: associations of entrepreneursand independent workers, workers’ unions, cultural and so-cial associations, and local government institutions and repre-sentatives. When fiscal discipline requires containment ofexpenses, choosing among priorities may be hard. Exploringthe degree of consensus on them in the society is therefore par-ticularly important, to avoid surprises later on.

But meeting public service priorities does not neces-sarily imply more financial resources. Unsatisfied demand forpublic goods many times arises from lack of quality in publicservices. In turn, bad quality may arise from excessive regula-tion, lack of clarity in the division of competencies among thevarious authorities, administrative duplication between thecentral government and the regional and local governments,time-consuming bureaucratic behaviors, and corruption. Someremedies consist in reducing the amount of regulations, sim-plifying procedures, obliging government administrators to betransparent in their choices and to end the various practiceswithin defined time spans, after which the authorizations re-quired are automatically given. Incentives should be given toinduce the bureaucracies to adopt more efficient behaviors.


Binding Commitments in BudgetaryDecisions of the ExecutiveNot all budgetary decisions of the executive should be conceivedas binding. It is better to stick firmly to a selected list of basiccommitments than to try to be inflexible on the entire budget-ary spectrum.

Within the broad fiscal constraint set in the financialand economic plan, legislative amendments may improve thequality of allocative choices and in any case they facilitate theiracceptance in the country. Some flexibility in the legislativedebate on the budgets presented by the executive should alsobe allowed, particularly for the allocation of expenditures amongthe various functions and the relative weights of the varioustax burdens, provided that the broad “political” priorities agreedupon in the financial and economic plan are respected.

The executive should make realistic binding commit-ments relative to the “fundamentals.” The targets to which theexecutive is strongly committed may appear unattainable overtime, even with corrective measures, for four main reasons. One,the general economic picture, on which the fiscal choices werebased, was wrongly assessed or has changed because of unex-pected events. Two, expenditure and revenue trends based onthe given general economic picture may have been assessedinaccurately. Three, the effects of legal and administrativemeasures devised to restrain public expenditures and to increasetax revenues may have been overvalued. Four, the legal andadministrative measures needed to reach the given targets maynot have been fully implemented.

The executive is often understandably sanguine aboutgeneral economic trends: official pessimism could undulydepress the financial markets. However, unrealistic officialvaluations of the domestic economic trend and lack of carefulconsideration of the international perspectives, after a while,are proven false and this reduces the reliability of the executivefor its own commitments as well. Having to revise revenues


downward and some expenditures upward may call for un-pleasant corrective measures. As stressed earlier, to avoid thisproblem expenditures should be forecast expansively and rev-enues conservatively. Generally, all forecasts of the domesticand international economy should be prudent. Public macro-economic variables should be related to the variables of themarket economy, within prudential limits. The elasticity of taxrevenues with respect to the economic variables should beassessed in an asymmetric way: underestimating slightly theelasticity of revenues to economic improvement while doingthe opposite for their elasticity to the worsening of economicconditions.

Fiscal adjustment targets may be missed because therules introduced in the budget legislation to limit expendituresand to raise revenues may be too optimistic. Drawing on myEuropean experience, for instance, deficits of public-serviceenterprises may be larger than expected because the new con-straints imposed on them are inefficient and improvements intax collection may prove illusory. One should be careful inassessing the probable effects of these measures in real practice.

Ex-post corrections are much better than noncompliancewith binding commitments. However, because they are under-taken as urgent measures, they may lack structural quality.And—again I draw on my European experience—they com-municate to the citizenry and to the markets a sense of frus-tration about the reliability of the government’s fiscal policyand the usefulness of the sacrifices required. Thus, it seemsadvisable to leave a certain amount of flexibility in the budget,with some reserves on the revenues and expenditures side, sothat if unforeseen deterioration in the accounts does take place,new corrective measures can be avoided.


Evaluation of Budget Implementationand Concluding RemarksThe implementation of the budgetary choices of the executivewill be judged on the basis of the degree of success of the strat-egy and the performance in the various sectors of activity at themacro and micro levels. Two types of control institutions arerequired and generally adopted in the best budgetary legisla-tion: internal auditors guided by the central auditing office, andan external control institution (as in the Court of Accounts inmany European countries) which monitors the central govern-ment and its main institutions and reports to the legislature.

In a private corporation, internal control is done con-tinuously by the budget office. External control is done byprofessional auditors who certify the accounts, but above allby the market, through the stock exchanges. Here, actual prof-its and growth prospects are the indicators of the success of thestrategy adopted and of the efficiency and effectiveness of itsimplementation. Governments do not have such specific con-trol. The legislature and public opinion cannot take the placeof the stock markets. But domestic and international financialmarkets judge governments, too. As with private corporations,what matters for government budgets are:

• The timely implementation of the medium- to long-term structural strategies adopted by the executive;

• The results in terms of the macroeconomic and fis-cal parameters; and

• The indicators of quality from the point of view ofthe efficiency, effectiveness, and equity of fiscalaction.

It is beyond the scope of this paper to examine themethodological aspects of budgetary control. Let me end, there-fore, with a quote from a 1998 lecture by World Bank ChiefEconomist Joseph Stiglitz on “Economics in Government”:Making government processes more open, transparent and democratic,


with more participation and more effort at consensus formation, islikely to result not only in a process that is fairer, but one with outcomesthat are more likely to be in accord with the general interest.

References

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Blejer, M. I., and A. Cheasty. “The Measurement of Fiscal Deficits:Analytical and Methodological Issues.” Journal of Eco-nomic Literature 29, (December 1991): 1644–1678.

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Chapter 3

Public Financial Management:Getting the Basics Right

Arigapudi Premchand

Introduction

Public financial management in its broadest sense1 links acommunity’s aspirations with its resources, and the present withthe future. It therefore lies at the very heart of the operationsand the fiscal policy of government.

During the last five decades, financial management atall levels of government and in bodies that are supervised bygovernment has undergone a major change. The historical roleof financial management in monarchies was described as serv-ing or saving the king. Then financial management became animportant tool for the advancement of social ends and for theformulation and implementation of fiscal policies. There weremany attempts to update financial management systems—theiroverall design, operational techniques, and procedures. Comple-mentary changes were sought in the institutions and organi-zations that were entrusted with the task of public financialmanagement. To be sure, these changes were not uniformlyimplemented in countries and public organizations, nor did thechanges, where made, always represent a coherent strategy.

1 In the broad-based sense, financial management includes financial plan-ning, budget formulation and implementation, payments to and frompublic bodies, accounting, financial reporting and internal evaluation.More narrowly, financial management is interpreted as limited to record-ing, accounting, financial reporting, internal audit, and evaluation. Thispaper adopts the broader definition of the term.


Rather, changes came in a piecemeal fashion, in response tochanging requirements. In some cases, the impetus came fromwithin, as a result of a considerable accumulation of problemsand potential risks for the pursuit of appropriate fiscal poli-cies. In most developing countries, however, the impetus camefrom a general awareness of the shortcomings of inheritedcolonial systems and an acute consciousness of the efforts beingmade in industrial countries.

Notwithstanding efforts to strengthen the existing sys-tems of management and related attempts at installing modernfinancial management systems, a survey of the existing situa-tion in several countries—industrial and developing, as well asthose in the Asian region—reveals a quiet crisis in the makingin the performance of financial management systems. There isa pervasive feeling that financial management systems have notsucceeded in moderating the growth of expenditures or in re-sponding effectively to changing needs, and that public resourcescontinue to go to waste. More significantly, it is felt that thereis an enormous gulf between the rhetoric and delivery of ser-vices, that client needs are not properly recognized, that sys-tems lag in anticipating crises and in formulating action plansaimed at containing and resolving the crises, and that mostoperations lend themselves to widespread fraud not so muchbecause of the cupidity of selected groups of people, but be-cause of poorly designed programs. Meanwhile, the languageused to evaluate government budget plans has also changed.Earlier metaphors were drawn from the military terminology(attack, counterattack, etc.). Now terms are those used in fiction(illusion, fantasy, etc.). The end result is loss of credibility of publicbodies, which are seen as engaged in extensive window dress-ing to cover their own inadequacies. There has been furthererosion in the public trust of public bodies in the context of therecognition that most problems have their origins not so muchin systemic inadequacies as in circumvention and manipulationof the systems to meet the needs of the iron triangle of politi-cians, bureaucrats, and selected groups of beneficiaries.

Public Financial Management: Getting the Basics Right 4 9

These issues have been recognized since the early 1990sand are being addressed in industrial countries. The pursuit ofa new public management philosophy has also found support-ers in the developing world. There has been a good deal ofdebate on the relevance of this philosophy, and its implemen-tation, where attempted, remains incomplete or, in some cases,even counterproductive. The components of this new philoso-phy and the new demands for transparency and accountabilityhave so far had only a marginal impact on financial manage-ment as practiced in many countries. There is a growing sensethat governments are so thoroughly mired in problems that theycannot rise above those problems and recognize them for whatthey are. This has, in turn, contributed to the perception thatgovernments have lost the capacity for self-determination.Legislatures point to government failures; governments, in turn,point to the international financial institutions or to globalfinancial movements, while the citizens allege that the enor-mous and growing bureaucracies are more keen to promote theirown interests. Action, when taken, is based more on passionthan on logic, or on someone else’s experience, or on prescrip-tions written without a look at the patient.

It is argued in this chapter that, to be effective, finan-cial management should address the structural issues. Thesystems would then have developed capacities to be transpar-ent, to be accountable, and, more specifically, to be more effec-tive in managing the country’s finances, which is their principaltask. But addressing the structural issues does not mean for-mulating a revolutionary, all-inclusive strategy, but the morerealistic task of formulating a feasible framework forimprovement.

In considering the realities of government financialmanagement in Asia and the Pacific, it is important to keep insight the following features.

Asian countries offer immense diversity. There are bigcountries and small-island economies; land-locked economiesand open economies; countries with a distinct market orientation


and others that are in selective transition from central planningto market-based approaches. There are countries that have beensubmitting annual budgets for more than a century, while thereare also countries that submitted their first budget barely twodecades ago. There are countries that have been making assidu-ous efforts to modernize their financial management systems,while there are countries that have remained immune to change.There are several countries that have made enormous invest-ment in the application of electronic technology to governmentoperations and there are others where the processes continueto be manually operated. There are countries that have systemsbased on the British model, while there are some that followthe US system of financial management, and there are coun-tries that continue to follow the Soviet practices associated withthe bygone era of centralized management. In addition, thereare countries that are modeled on the Dutch, French, andPortuguese colonial systems. This rich diversity notwithstand-ing, there are common features and problems, as discussedbelow, which may, however, be present in varying degrees indifferent countries. Comments made here would therefore applydifferently to different countries.

The principles of financial management—effective stew-ardship of public resources and efficient provision of services—are common to all countries. But the institutions set up for thepurpose, and the systems and procedures specified, differbetween countries contributing to divergent practices. Somepractices may be more efficient than others but that consider-ation alone does not determine the course taken. This paper isconcerned with the practices and issues that arise at the opera-tional level.

Notwithstanding the differences in heritage, institu-tions, and approaches among the countries of the region, theideological factors that hitherto dominated government poli-cies have yielded to more pragmatic considerations. In mostcountries, the portfolio of government expenditures has beenchanging with transfers becoming a dominant feature. Increas-


ingly, central or federal governments are more concerned withthe formulation of policies, while implementation is taking placeat the regional/state/local levels, or through autonomousbodies, or through state-owned enterprises. Selectively, someprograms are also being implemented through nongovernmen-tal organizations. Furthermore, greater reliance is being placedon contracting out services. These approaches have broughtabout a separation of funding from the delivery of services. Inthe circumstances, financial management at the central levelstends to be more concerned with the formulation of policiesand monitoring of performance by the implementation agen-cies that may be in or outside the government framework. Theimplications of this separation remain to be fully comprehendedand the financial management systems adjusted to reflect thechanging portfolio of expenditure.

Realities

The perception that financial management systems are ineffec-tive and expensive has its roots in the operating problems ofthe systems. In considering the adequacy of the existing sys-tems and their capacity to respond to changing requirements,these problems need to be given proper weight. Accordingly,these issues are discussed below with reference to the perti-nent stages of the financial management system.

Policy formulation

The transformation of the community’s aspirations into feasiblepolicies with well-recognized financial implications is at thevery heart of financial management. Issues not addressed duringpolicy formulation tend to grow in magnitude during imple-mentation and may frequently contribute to major reversals inthe pursuit of policies or major slippages that may lead tocontrary results. Moreover, policy measures aim at building


confidence in the community and in the financial markets, andto that extent policy formulation should be seen as transparentand empirical, too. Notwithstanding the obvious importanceof this phase, governments encounter numerous issues, whichare described below.

In most countries, the inertial rate of growth of publicexpenditures tends to be higher than the rate of growth ofrevenues. In this context, and as the Plowden Committee (1961,UK) noted, the central problem of expenditure management is“how to bring the growth of public expenditure under controland how to contain it within such limits as the government maythink desirable.” Although the question was raised nearly fourdecades ago, it continues to elude firm and proactive policiesfrom governments.

Government expenditures need not always be reduced.Indeed, there are frequent opportunities for governments to getinvolved with the task of stimulating the economy. In this regard,there is generally a long lag in providing a policy response;often, results occur when there is no longer any need for them.The lack of a positive strategy has contributed to too many andunderused infrastructure projects in some places, and to thecreation of assets with doubtful value, in others. Further, thepursuit of the golden rule (of borrowing only for investment)has not always yielded the expected results in that projectsfunded with borrowed funds have tended to be far less pro-ductive than expected.

The above aspects are expected to be taken into accountthrough the formulation of a multi-year expenditure strategycovering all categories of outlays. In practice, however, suchmedium-term outlooks are available for investment projectsonly. The future financial implications of current and continu-ing policies are also not available in several countries. An in-evitable consequence of this is the adoption of ad hoc and“stop-and-go” approaches.

Without a medium-term strategy to anticipate the ef-fects of current trends, responses by governments tended to be


less than needed. As reported by the IMF and the World Bank,most developing countries, instead of providing leadership bysending appropriate signals, often panicked and resorted tomeasures such as underfunding, the build-up of payment ar-rears, cosmetic rather than substantive economic measures, anddeferral of nonexisting projects. These failures illustrate thatthe systems of management lacked data on expenditure pro-files and dynamics, which, if available and used wisely, couldhave contributed to the perception that there was a firm handguiding the government business.

Financial management in government has the task ofpromoting cost-consciousness or economy in the use of re-sources. These approaches could be induced either by the marketor, where such an opportunity is not available, through thepromulgation of rules, and limits on spending and borrowing.In most governments, however, policymaking shows the pur-suit of a two-track approach—one relating to revenues andanother dealing with expenditure. The latter is often pursuedindependently such that the spending agencies do not suffi-ciently internalize the resource constraint.

Moreover, the cash-based financial management sys-tems of most governments render difficult the estimation of thefull costs of government operations. By extension, there are noorganized data on the informal or hidden debt of government,contributing, in turn, to distortions in policymaking.

The existing processes of policymaking have also con-tributed to the perception that in the allocation of resourcesgreater weight tends to be given to those who thump the tableharder or lobby more effectively. There is a view that much ofannual decision making is influenced by the military-indus-trial complex, the construction complex, the social-servicecomplex, and donors. Lack of transparency has exacerbated thisperception.

Governments everywhere recognize the need foreconomy and efficiency, yet most policy decisions militateagainst these principles. Several programs are allocated


resources with reference to “norms” and yardsticks, which makethem in effect, supply-driven and unrelated to resource avail-ability. Moreover, some policies are subject to judicial interpre-tation and governments are at the receiving end with littlealternative but to implement them. This is the case in most Com-monwealth countries. The absence of built-in incentives toeconomize in the use of resources and vulnerability to externaldecision-making centers have made financial managementdifficult.

Policymaking in most governments tends to be con-cerned with future needs. Such preoccupation with the futureprevents them from looking into the previous policies and theeffectiveness with which they were implemented. As a result,those previously approved programs acquire some legitimacythrough sheer existence, even if they have not been successfulin fulfilling their objectives.

Budget formulation

This stage represents the formal first step in annual budgeting,and is intended to finalize the allocation of resources beforesubmission to the legislature for review and final approval. Here,again, a number of shortcomings of the systems have becomeevident in recent years. These include the following.

As noted above, the resource constraint is not, in mostcases, conveyed to the spending agencies with the result thatthe bottom-up compilation of estimates contributes to levels ofoutlays that are far in excess of available resources. Inevitably,in the circumstances, the central agencies engage not so muchin a review of the merits of competing programs as in adjust-ments at the fringes. This permits the programs to enter intothe budget or to continue, thus contributing to a steady growthin expenditures.

Budget estimates are often subject to different types ofwindow dressing, depending on the context and the strategicpurpose. Revenues and current expenditures tend to be under-


estimated and capital or development expenditures are over-stated so that they serve as a basis for securing higher levelsof donor commitments. The doctoring of estimates, however,leads to unrealistic expectations and when the truth is revealed,it contributes to erosion in the credibility of governments.

The review of budget estimates differs widely amongcountries in the region. Following the tradition, there are manycountries that tend to look into the minutiae, such as, the objectsof expenditure. As a part of this tradition, considerable empha-sis is laid on the control of staff in the belief that once thenumbers of employees are limited, the rate of growth of expen-diture could be moderated. In reality, however, the bulk of theexpenditure is now in the form of transfers to other agenciesrather than on direct personnel. Elsewhere, in recognition ofthe futility of controlling personnel, emphasis is laid on thedetermination of “running costs” for programs. These alloca-tions are considered in some countries as firm ceilings and thespending agencies are given the freedom to adjust outlays onthe components of running costs. The annual increases areprovided in conformity with the estimated rate of growth ofthe economy. These experiences reflect the gradual shift in theanchor of expenditure control. In most cases, however, a firmanchor is conspicuous by its absence.

Budget timetables also differ considerably betweencountries. Budgets in the British-type systems are usually short,while countries that are modeled on the US system have thelongest timetables, in that it takes about sixteen months beforethe start of the fiscal year for the budget to be prepared. In theBritish system, supplementary budgets are also traditionallysubmitted thrice during the year. This practice, together witha type of budget review focusing on adjustment at the fringes,makes the annual budget a putative one, and the spendingagencies frequently entertain the notion that what was lost inthe initial round can always be recovered in the later stages. Inthe US-based systems, the long lead time contributes to unre-alistic budget estimates.


In China, the fiscal year starts without an approvedbudget. The budget is approved in April, at the end of the firstquarter. Meanwhile, the outlays for the first quarter are restrictedto the levels of the previous year. In other countries in the region(e.g., Indonesia, Saudi Arabia), development budgets do notlapse at the end of the year. Thus, several types of outlays arecarried over from the previous year. This feature complicatesthe estimation of the impact of fiscal policy.

More significantly, in several countries the approvedbudget ceases to have operational importance. What is imple-mented is a cash-limited budget: expenditures are limited tothe actual government revenues. This feature alone has con-tributed to a loss of credibility of the original budget.

Organizationally, the existence of extrabudgetary ac-counts, or the separate compilation of current and developmentbudgets, has helped create multiple centers of decision mak-ing, and lack of coordination among them. In some countries,the focus in annual budget making is not on the main budgetbut on the special accounts where allocations tend to varysignificantly from one year to another. In some countries, theseparation of the plan budget has introduced avoidable rigid-ity into the system, not to mention an incomplete view.

The annual search for reductions in expenditures hasconsolidated the traditional ritual of seeking reductions in theconsumption of utilities and the use of staff cars and relatedequipment. In the absence of efforts to streamline programs,these efforts have not been successful and the “slack” in manyprograms continues.

Budget structures

The financial transactions of governments are expected to beclassified so as to make the legislators and the public alike gaina perspective on the objectives that are sought to be achievedthrough the budget. In addition, the classification should be soarranged as to facilitate internal management of programs as


well as the compilation of accounts. In practice, however, theexperience in the Asian countries reveals a widely differingpicture. In some countries, the classifications have been im-proved to the point that the compilation of national incomeaccounts has been rendered easy. Elsewhere, however, there isa continuing reliance on the traditional line items. In at leastone country, the effort of the government to introduce a pro-gram-based classification was rejected by the legislature becausethe new classification needed to be clarified. By and large, how-ever, the following issues are recognized.

Most classifications emphasize inputs, and it is diffi-cult to have a perspective on the likely output and outcome.In some cases, performance budgets (limited in one country todevelopment outlays) are prepared on a supplementary basisto provide information to the public. These budgets, however,are yet to attain a prominent role in the allocation of resources.Of course, when “performance” is misspecified and/or effec-tive monitoring difficult or nonexistent, these budgets shouldnot play a role in resource allocation.

In some cases, the line-item classification is so traditionalthat separate exercises, remote both in time and space from themain budgetary process, are undertaken and data provided.

In several cases, the program or output categories aretoo broad to permit an understanding of the objectives. Incurrent budgets, extensive line-item details are provided, whileproject outlays tend to be bulky and lacking in detail. In a fewcases, categories such as “policy formulation” and “miscella-neous” tend to be dominant and the result is that they obscuremore than what they reveal.

Very few countries in the region rigorously apply theprinciples specified for the separation of current and capitaloutlays. There are several equivalents, such as “investmentbudget,” “construction budget,” “development budget,” and“below-the-line transactions” and the practices differ widelyin this regard. More significantly, items are frequentlytransferred from one section to another, contributing to


discontinuities. No country in the region (except for Australiaand New Zealand, which have been experimenting with formsof accrual accounting) maintains depreciation or provides forcapital charge.

The success of fiscal policy depends on the congruenceachieved between budgetary intent and outcome. In a numberof countries, particularly those that are patterned on BritishCommonwealth practices, the outcome tends to be different withexcess expenditures and higher fiscal deficits. In some coun-tries, the budget outcome tends to be the same as indicated inthe estimates. Not all these are to be taken at face value, how-ever, as there is also a build-up in the hidden debt. In addition,several uneconomic practices, as enumerated below, makeimplementation cumbersome and in some casescounterproductive.

It is expected that the amounts and the related budgetauthority for expenditure be released to the spending agenciesin a time-sliced fashion. The traditional practice of issuingwarrants and exchequer releases was intended to cover thisaspect. Most countries do not have an organized cash releasesystem that takes into account the seasonality of outlays. Rather,the control process proceeds on the formula of “one size fitsall.” In some countries, paperwork relating to these releaseshas become extensive and contributes to rent seeking.

Freedom to switch outlays from one category to anotheris rather restricted. Such restrictions, which were devised whenthe economy was normal and even placid, were intended toprotect legislative rights. In practice, however, the day-to-daydynamics and changing price levels make the flexible use ofresources an imperative.

Many governments have yet to install cash managementsystems, which, while facilitating the smooth implementationof the budget, would pave the way for coordinated domesticmanagement. The practice of limiting outlays to collected rev-enues has exacerbated this problem. In effect, there is a mas-sive underfunding of the programs and projects provided for


in the budget. This, in turn, contributes to widespread discon-tent and growth of distrust in the government.

Spending agencies are expected to devote their effortsto procuring economies in expenditure and efficiency in opera-tions, among other things. While the practices referred to abovehave undoubtedly contributed to a process of “muddlingthrough,” it is doubtful whether efficiency has been enhanced.Moreover, the lack of incentives to economize and the practiceof basing future allocations on the previous years’ actual ex-penditures effectively prevent the spending agencies frompursuing this agenda.

In a number of countries, there is an enormous rush ofexpenditure (reflecting in part the lack of cash managementsystems) toward the end of the fiscal year, so that funds do notlapse. Inevitably, this gives rise to unnecessary and unproduc-tive expenditures.

In regard to projects, the cost escalation during imple-mentation is so severe that the eventual cost could be four timeshigher than the original estimate. To some extent, this is attrib-utable to underfunding. In most cases, however, the causes arepoor-quality initial budget estimates, lack of adjustment forinflation trends, and mid-course changes in the design of theproject, not to mention the long time lag between the preparationof the initial estimates and provision of formal funding for them.

In regard to contracted-out services, contractors tendto follow their own schedules with no regard for the resourcesof the government. This adds to the strains of government andillustrates the case for evolving effective controls for servicecontracts.

Payments system

The system of payments refers to the operational proceduresfor receiving monies from the public and for making paymentsto them. Traditionally, this task was undertaken by treasuries,but the gradual growth of the banking system and its spread


to the remote rural areas have facilitated the task of payments.Notwithstanding this facility, in at least one country the trea-sury is organized to deal with all payments (to and by thegovernment) without any contact with the banking system andis thus involved in managing the flow of currency. The follow-ing problems are also experienced.

Centralization of government payments in some coun-tries contributes to excessive paperwork and frequent delays.

Governments make payments using a variety of labor-intensive procedures. These include book adjustments, issueof checks, and payment authority. Payroll and pension paymentsremain to be computerized.

Electronic payment systems still have to be introducedin governments.

These practices show how expensive government op-erations are.

Government accounting and financial reporting

Government accounts have the dual purpose of meeting inter-nal management requirements while providing the public witha window on government operations. In both these aspects, theexperience shows that several systemic, technological, andmanpower problems are experienced.

Most accounting systems in Asian countries are cash-based. Thus, they do not permit an assessment of the cost ofprograms or an understanding of the real and contingent li-abilities. Inasmuch as very little cost data are available, account-ing has not found, in practice, the prominent place that wasenvisaged for it.

Accounting structures have changed little in recent yearsand continue in all their complexity. This, in turn, has contrib-uted to long delays in the preparation of the monthly and annualaccounts.

The annual accounts are usually furnished late, delay-ing, in turn, the audit and legislative review. Further, most


accounting information is provided in such broad categoriesthat the range of their illumination is limited.

As the accounting organization, which is usually dis-tant, has not been successful in providing up-to-date data,spending agencies have taken to installing management infor-mation systems to meet their requirements. Apart from redun-dant work, two sets of data are produced; one on the basis ofauthority issued and another based on actual payment.

In some countries, massive investments in mainframetechnology have been made. In the absence of rationalization ofthe accounting structure, this has contributed, at best, only tothe mechanical processing of what was hitherto done manually.

Some governments are seeking to introduce accrual-based accounting and financial reporting systems (preparationof balance sheet, etc.,) to conform broadly to generally acceptedaccounting principles. But some innovations, such as respon-sibility accounting, suggest that what have been practicallydiscarded by the commercial sector is being undertaken by thepublic bodies after a long lag.

Accounting, in most cases, is being done by people whohave no professional training in the subject, but who haveacquired rudimentary skills while working on the job. Althoughthe effort itself is commendable, the issue arises whether therecould be material change if accounting were to be done byprofessionals.

In several countries, foreign-aid accounting continuesto be an area that needs improvement in coverage and timeliness.

Internal financial management

As governments have grown in size, so have the operations ofspending agencies. It was expected that the centralized controlthat was hitherto administered by the finance ministries wouldbe relaxed, and that spending agencies would be endowed withfinancial powers commensurate with their tasks and respon-sibilities. Moreover, there would be financial responsibility only


when there was an integration of administrative and financialaspects. There are limits to which financial consciousness canbe inculcated from outside. Although, as Keynes remarked, thetreasury has a prominent role in keeping the “wickedness” ofspending agencies under control, the issue is one of limits andthe tenor of control exercised by the finance ministry. Theexperience of several countries in the region shows the broadproblem areas delineated below.

Ministries of finance have grown in size over the yearsand have taken up many tasks that are debatable. Further, witheach economic crisis, they have tended to centralize even more,thus negating the purpose of previous decentralization. Thisalso suggests that the ministries of finance may not have paidsufficient attention to their own core tasks. Experience alsoshows that the finance ministries have not proven to be idealexemplars as they have routinely spent more than budgeted.

The spending agencies, responsible as they are forimplementing policies and providing services (street-levelbureaucracy), have not been able to manage their affairs andtake risks because the system does not promote that behavior.

Audit

The financial management cycle in public bodies reaches itspenultimate stage when their accounts are audited and arefurther reviewed by the legislature. The contribution of auditin the countries of the region reflects the uneven growth of thisinstitution. In a few countries, audit agencies have been work-ing for over a century. In a few others, audit agencies were setup only during the 1970s. Both types have, however, yet to beeffective instruments contributing to improved financial man-agement. This phenomenon has its roots in the following factors.

Many audit agencies are legally prevented from review-ing “policies.” Most of them cannot follow the trail of money,as they do not have the right to look into the books of contrac-tors, autonomous agencies, and local governments. Many of


them have yet to start doing performance audits. Substantialareas such as public debt and exchange reserve managementremain outside the scope of audit.

The effectiveness of audit agencies depends, on theone hand, on the timely rendition of accounts and, on theother, on legislative schedules. Caught between the two,audit agencies have not been successful in bringing up theissues on time.

Most audit agencies continue to be engaged in finan-cial audit, following the approaches adopted years ago. Al-though the International Organization of Audit Institutions hasrecommended peer review, this remains to be undertaken inmost countries.

Legislative control

The body that has the final oversight responsibility for themanagement of the people’s money is the elected legislature.Despite this fundamental responsibility, the widely varyingexperience in Asian countries does not inspire confidence. Somecountries have had legislative oversight for several decades. Inother countries, the legislature does not have the power to makeindividual appropriations. In still others, the legislature doesnot have complete access to the budget documents. The fol-lowing factors may also have contributed to the erosion of therole of the legislature.

In several countries, there has been a massive shift ofdecision making from legislatures to the executive. These in-clude decisions on external borrowing, provision of guarantees,and the use of foreign exchange reserves. In some cases wherethe legislatures have approval powers, governments have rou-tinely circumvented these. Arrangements made with interna-tional financial institutions have, for the most part, been secretand have not needed legislative approval.

Even in countries that have endowed their legislatureswith extensive powers, many agency budgets are approved


during the guillotine hour. The contribution of the consultativecommittees remains vague.

Moreover, the process of separating some expenditures(such as consolidated fund services and charged expenditures,which include public debt charges) from legislative voting hasshrunk the domain of the legislature.

The preceding survey shows that the system is the rootof all problems. There is admittedly a dysfunction or disequilib-rium between what is expected and what the machinery has beendelivering. There is, in general, a lack of a coherent strategy aboutwhat needs to be done and how it may be done. The lack of strat-egy has contributed to disparate approaches, making evident theneed for harmony at every stage. A financial management sys-tem that does not promote the internalization of the resource con-straint has but limited capacity to aid in the formulation of policiesand their implementation. These issues, to be sure, have beenperiodically addressed but with limited results. Each innovationwas superimposed on the previous one with the result that apalimpsest phenomenon has emerged. Practitioners may con-tinue to rely on the traditional approach as it is the one withwhich they are familiar. More significantly, the experience showsa type of institutional recidivism with the same problems resur-facing so frequently. In turn, this raises the issue as to how theinterests of the public are served if uneconomic transactionscontinue to dominate the scene. It is in this context that the ideasaimed at remedying the above items have to be considered.

Ideas and Issues

Evolution

Public financial management systems have undergone continu-ous conceptual development. An introspective look into the lastfive decades shows at least seven waves of development, eachone leaving its distinct imprint on the growth of the system.


Immediately after the Second World War, there was a generalrecognition that the traditional approach of preparing andimplementing a budget in terms of objects of expenditures (orinput categories) would no longer be adequate to meet thegrowing tasks of government and the curiosities of the publicand the legislature. The question then was what is the commu-nity getting for all the outlay of governments at all levels. Thiscontributed to the formulation of performance budgeting sys-tems. Notwithstanding the inherent attraction of the alternativesystem, governments and officialdom were slow to move fromthe traditional system to the new one. Even before performancebudgeting developed roots in government, there was a view that,notwithstanding the best of implementation practices, this sys-tem would have little impact on the growth of public expendi-ture. Governments needed an approach that would persuadethe public that efforts were being made to contain expenditures.To this end, an approach that emphasized the need for explicitmedium-range financial planning (as very few problems getsolved within a fiscal year) was promoted. It had a programstructure that shifted the traditional emphasis from inputs toobjectives and accomplishments, envisaged the application ofinformation technology, and, more significantly, sought theallocation of resources on the basis of analytical quantitativecriteria such as the family of techniques of cost-benefit analysis.The application of this approach was limited mostly to indus-trial countries including the Soviet Union, which sought to applyit to defense operations. The spread of this approach to devel-oping countries was extremely limited (a couple of Asian coun-tries attempted a variant of this approach) as there was a viewthat some of the features of this system, which came to be knownas PPBS, were already available and were being applied in theformulation of development plans.

Meanwhile, the growth of public expenditures contin-ued unabated, and there emerged a growing chasm betweenthe available resources and the expenditures needed to fulfillexisting commitments and established needs. There was


recognition that the systems of financial management exacer-bated the deficit problem as the fiscal slippages contributed tohigher budget deficits. The response to this problem was thatbudgeting and the overall system of financial managementshould explicitly internalize the resource constraint and the mac-roeconomic linkages. This emphasis on financial managementsystems as instruments for securing macroeconomic stabilityled to extensive changes in the operational spheres of financialmanagement. Success was, however, limited.2 This, in turn,spawned an intensive search for other systems and techniquesthat could be used by governments in their fight to stem theinexorable growth in public expenditures. These efforts, whichare now more than a decade old, have evolved, for purposesof our discussion, in three stages.

The first of these stages was aimed at securing fiscalconsolidation (a euphemism for the restructuring of govern-ment agencies and their civil services), privatization of stateenterprises, and reform of entitlement programs in the devel-oped western countries. Although these aspects may be viewedas policy measures, they left their own indelible imprint on thesystems of financial management. The terms “lean and mean”and “getting more for less” became a part of the operationallexicon of financial management systems. The second stagedrew inspiration from the practices of the corporate world,which, in turn, emphasized the provision of managerial au-tonomy, the specification of results and binding resource ceil-ings, and client orientation. The third stage arose from theemphasis on improved governance through transparency, ac-countability, and a code of civil conduct based on recognizedethical practices. These different stages are illustrated below.3

2 For an elaboration, see the chapter entitled “Expenditure Managementand Fiscal Stress,” in Premchand, Public Expenditure Management, 1992.

3 In the analytical framework formulated by Kuhn, each paradigm seeksto replace the former. In the case of financial management, however, allparadigms, except the traditional line-item approach, coexist and havebecome multiple dimensions of the same function.


Changing Paradigms in Public Financial Management

Control through Control of minutiaebudget line-items Budgeting through an aggregation process

Emphasis on accounting and paymentcontrols

Prior approval from the Ministry ofFinance in most cases

General emphasis on inputs

Performance budgeting Emphasis on performanceparadigm Specification of results

Activity of program-oriented classificationEmphasis on cost controls

Planning paradigm Emphasis on development programs andprojects

Exploration of alternatives and applicationof quantitative techniques of analysis

Longer-term horizonProgram classification

Macroeconomic policy Containment of budget deficitsparadigm Moderation of expenditure rate of growth

Efforts to ensure that budgetoutcome is congruent with intent

Fiscal consolidation Restructuring of government operationsparadigm with emphasis on contracting out to

private sector and nonprofit organizationsReorganization of the civil servicePrivatization of public enterprisesBenefit and entitlement reform

Corporate practice Creation of task-oriented agenciesparadigm Determination of global budgetary ceilings

Provision of managerial autonomySpecification of resultsPerformance contractClient orientation

Governance paradigm Transparency of government transactionsAccountabilityEthical practices


The second and third stages described above also consti-tute the main planks of what is now known as the New PublicManagement. This philosophy (hereafter referred to as NPM) lacksa standard definition, with the result that many writers enumer-ate the contents in different ways. To a very large extent, NPM isinfluenced by management practices in the corporate world, andalso by the public-choice school of economics. NPM is concernedwith all aspects of government as a whole and, as such, somefinancial management elements have also come to find place inthis approach. The main elements of NPM and the correspondingelements of public financial management are illustrated below.

New Public Management (NPM) andFinancial Management Systems

Major Themes of NPM Financial Management Improvements

Policy improvement Medium-term rolling expenditure planningRisk managementSpecification of resource ceilings and results

Organizational Establishment of task-oriented agenciesrestructuring Improved internal control systems

Appointment of chief financial officersEstablishment of treasury divisions

Market testing Renewed emphasis on competitivetendering and bidding

Seller/buyer nexus

Transparency Improved budget classificationData on costs and performanceFrequent publication of financial statementsFinancial management initiative for

reorganizing internal information systemsFrequent publication of data through

electronic media

Accountability Performance contractSpecified oversight bodies

Application of electronic Integrated financial management systemstechnology covering financial planning, budgeting,

accounting, and reporting


Problems inherent in the newmanagement approaches

The new approaches illustrated in the two tables have a num-ber of problem areas:

Public interest versus public pressure. A significant pointof departure from the traditional approaches is the emphasisplaced on much-needed customer orientation and the need tobe responsive to changing patterns of demand. In the corporateworld, the consumer pays in full for the services rendered. Inthe public sector, it is more than likely that the service is eitherfree or, more frequently, subsidized. Where there is a publiclyfunded service, there will be public pressures to change or toseek higher budgetary allocations. Where many of the featuresof the services provided are legislated, increased pressures andassociated lobbying will be brought to bear on the legislature.Where, however, the design of services is within the jurisdictionof the program manager, the pressures take more subtle formsthat may not always lead to improved delivery of services orto macroeconomic stability. The distinction between interest andpressure, or, more specifically, the borderline where interesttransforms itself into pressure, and the way in which suchpressure may be addressed, has not been given due recognition.

Legislative regime versus social control. Increasingly, as apart of the new approaches, there has also been a demand forsocial control of governmental finances and greater participa-tion in the policy processes. Implicit in this approach is theunderlying assumption that the legislative processes and pro-cedures have not been entirely successful in enabling partici-patory management and that, in any event, the managementof public money is too important to be left to legislators be-longing to various political parties. But social control could alsomean serious erosion of the credibility of the existing legisla-tive institutions, and could contribute to greater public pressures


and the formation of public movements designed to stop orsecure greater allocation of funds. Social control could alsocontribute to a good deal of defensive policymaking that couldprove to be counterproductive. The full implications of theseaspects are explored in a later chapter on accountability.

Bureaucracy versus management. The new approachesimply a total indictment of the existing patterns of work, whichare considered hidebound, rule-oriented, and generally uneco-nomic. Managerial approaches, on the other hand, are expectedto be task-oriented and flexible. This very flexibility, however,becomes an issue of accountability. To what extent is the leg-islature willing to provide that flexibility within the overallframework of accountability? Is it ready to trust the decisionof a public servant? The answers to these issues are becomingincreasingly problematic, as legislatures keep on adding moreand more legislation and administrative rules which can po-tentially hamper managerial flexibility in government.

Organizational aspects: Process versus technology. The needfor the progressive application of electronic technology to gov-ernment operations is no longer a matter of debate. The onlyissues are how and when. Meanwhile, the experience of severalcountries shows that, in the absence of efforts to streamline theprocess as a first step, information technology could become afifth wheel to the coach. The way in which the process of gov-ernment financial management has to be adapted to make theapplication of technology effective remains an area that awaitsa blueprint. (See chapter 4 for an elaboration of these issues.)

Integrated versus segmented. How should the newforms of management be introduced—in one swoop orthrough a pilot program which could be considered forextension to the whole government after sufficient experi-ence has been gained? Some prefer the former, while othersprefer the latter evolutionary approach. The answer depends


largely on administrative capacity, which is typically verylimited in developing countries.

Entity versus ministry. The focus of the application ofthe new management approaches is the “entity.” An entity inthe corporate sector can often be different in form, purposes,and content from an entity in the public sector. In fact, entitiesin the public sector tend to be highly uneven in organizationalstructures and budgetary allocations. In such circumstances,the preparation of independent financial statements, as is en-visaged in the introduction of accrual accounting at the entitylevel, could be less useful. For the purposes of policy formu-lation and implementation, the department represents the hubof operations. Focus on entities could contribute to undesir-able and unnecessary fragmentation.

Problems that persist even afterfull implementation

As noted earlier, many of the new approaches still have to befully implemented, and as such the assumption of full imple-mentation may demand a leap of faith. For analytical conve-nience, however, let us assume that the systems have beenimplemented as envisaged and that they have become opera-tional. It is likely that problems will persist in management,accountability, and transparency because of the changing port-folio of expenditure. In most countries, the share of govern-ment expenditures on directly provided services is shrinking.In the United States, this is about 4 percent, and even when thewage component of defense outlays is added it just reaches 8percent. Increasingly, central or federal governments are becom-ing cash distribution centers, while actual services are deliv-ered by autonomous agencies, state or provincial governments,contractors from the corporate sector, and nongovernmental or-ganizations. As third-party payments have emerged as a majorcategory, the distance between government and the client has


become even more remote. At the street level, services are beingdelivered on a third-party basis with the transaction completedbetween the buyer and the seller, or the provider and the re-ceiver. This phenomenon has implications for management ingovernment.

From a management point of view, the policy feedbackbecomes difficult as services are provided on a contractual basis.Indeed, many argue that a policy deficit is emerging. Theapproach also contributes to a growing dependence on contrac-tors by government. As it is, one of the weakest points ingovernment financial management is the ability to managecontracts to reap the advantages of bulk purchases. Given thisweakness, placing greater reliance on contractual services couldonly exacerbate the problem. The appointment of chief finan-cial officers or comptrollers is unlikely to be helpful in a con-text where the design of services is specified in legislation andwhere the services are provided by contractors. The problembecomes even more acute in a context where little is knownabout the internal controls of the contractor or the cost controlsin government. The chief financial officers may seek to inte-grate systems and may secure full compliance of specifiedsystems, but this would be like maintaining a hollow shell.

From the accountability point of view, the creation oftask-oriented agencies with power to borrow on their own mayweaken actual accountability. The agencies may be expected tocompile annual reports on accountability and on finances, butthese provide too infrequent opportunities to exercise the req-uisite oversight. In fact, it is quite likely that many of theseagencies may also be outside the ambit of the supreme auditinstitutions.

Even within the normally accepted framework, severalareas have remained unaffected by the new emphasis on ac-countability. For example, public debt charges remain outsidethe normal procedures of annual appropriation and, in severalcases including industrial countries, remain to be audited bythe supreme audit institutions. Outlays on defense continue to


be opaque and not always fully accountable. Thus, when au-tonomous agencies have their own forms of simplified account-ability, and when sizeable outlays of the annual budget continueto be managed by governments without requiring the annuallegislative approval, or are not even audited, assertions aboutenhanced accountability lack credibility. (See chapter 6 for afuller discussion of public financial accountability.)

As for transparency, the revised budget classifications,which are output-oriented, do not appear to be radically dif-ferent from the previous ones, particularly in a context wheremajor parts of departmental expenditures continue to be de-voted to categories such as “policy advice.” This usage becomeseven more debatable when the same policies are continued yearafter year with little change, if any. Also, the annual financialstatements issued by organizations are more oriented to theneeds of investors and stockbrokers than the general public.

Neglected high-risk areas

The design of the new management approaches does not in-clude sufficient clarity or detail, among others, in the follow-ing four areas:

• uncertainty management;• contract management;• relationship between central and spending agencies;

and• inadequacies and discontent in public financial man-

agement.

Uncertainty. The most important problem with a pro-found impact on all the financial operations of government isthe way in which uncertainty is addressed. Most budget esti-mates leave very little margin to the financial manager. At thesame time, there are some categories of expenditure that aredemand-driven and that contribute to a budget outcome thatis different from the estimated. Faced with uncertainty, many


central agencies end up reserving various tasks for furtherscrutiny or to be taken up only after specific approval has beenreceived. Within the agencies, managers are caught up in serv-ing the clientele, while at the same time conforming to theestimates and to the associated budget discipline. In the ab-sence of procedures and techniques specifically aimed at deal-ing with uncertainty, repetitive budgeting and associateddilatory procedures tend to be adopted. If these are to beavoided, it is important to specifically address uncertainty andto introduce contingency planning techniques.

Contract management. As noted above, this is one of theweakest areas in government financial management. Repeatedassertions about the advantages of competitive tendering andcontracting are unlikely to prove helpful, unless they are backedby improved procedures for the compilation of costs within thegovernment that can then be used as benchmarks for monitor-ing the activities of contractors.

Many of the present ills of government contractors areassociated with three factors:

• lack of a firm design at the outset, and frequentimprovisations after the start of the project;

• long delays in the acquisition of sites; and• cost-plus basis for the award of contracts.

The net result is that the actual cost turns out to beconsiderably higher than initially estimated. What type ofimproved controls, including forward planning, would beappropriate? Are there alternatives to cost-plus arrangements,and how can they be utilized for the benefit of governments?

Relationship between central and spending agencies. Al-though the new approaches place considerable emphasis ondecentralization, the latter is considered more in terms of thestructural relationship between central and local governmentsrather than in terms of the specification of responsibilities of


central agencies and spending agencies. The attempt to delin-eate internal controls (the reports prepared by the Cadbury Com-mittee, the committee of sponsoring organizations of theTreadway commission, and the Canadian Institute of CharteredAccountants have dealt with these aspects in detail) has ledplanners to envisage the establishment of a control environmentwhere risks and control objectives are identified and evaluatedand there are information and communication, control. andmonitoring and corrective mechanisms. The envisioned controlframework is somewhat static rather than part of the dynamicpartnership between the central and spending agencies in agovernment. The framework is based on the premise that eachentity has functional financial freedom—a premise that is highlydebatable in the context of government functioning.

The reforms undertaken so far or envisaged in themedium term have not paid much attention to the thorny issueof this delicate relationship between the central and spendingagencies. The public or the community is generally unaware ofthis issue, which is viewed more as an internal issue of thebureaucracy. But this has a pervasive impact on all phases offinancial management. The reforms envisage the responsibil-ity of the central agencies as more in the realm of macroeco-nomic management, and the day-to-day micromanagement ofprograms and projects as within the jurisdiction of spendingagencies. The expectation is that once the budget ceilings havebeen determined by the central agencies, the spending agen-cies will have the freedom to carry on with their tasks. Realityis, however, different. Global ceilings are predicated on certainassumptions. Once these assumptions change, the whole pro-cess may have to be revisited, not once, but as frequently aschanges in the economic situation demand. Attention thereforeneeds to be paid to the specifications of the macro and microtasks and the green, yellow, and red zone controls.

Inadequacies and discontent. As a result of changingparadigms, there has been an increase in the objectives to be


served by the financial management system. The success of thenew systems depends on their capacity to meet all the objec-tives. This adequacy test is illustrated in the table below. Thistable shows that some of the systems such as performancebudgeting, are ineffective in terms of fulfilling the requirementsof macroeconomic stability. A combination of various systemsor their selected features would be needed as a minimumthreshold. Such a combination is not yet available. By exten-sion, it may be noted that not all objectives may be pursued atthe same time, and at any given stage, some may have to begiven greater importance than others. Such systems have alimited major focus and as such are not in a position to addressthe diverse objectives. The selection of objectives is conditionedby needs as well as the capacity to achieve them.

Several factors shown in the table below impede theimplementation of fiscal policy. Many of these factors, whichcover revenues, expenditures, lending and borrowing, andselling and buying operations, create perverse incentives thattend to affect the overall tenor of the financial managementsystem.


Type

s of

Syst

ems

(1)

Line

-Item

Budg

ets

Mac

ro-

econ

omic

Stab

ility

(2)

Gene

ral

emph

asis

on i

nput

s;in

its

mos

tre

cent

form

, is

used

in

the

Unite

dSt

ates

tose

cure

cut

sin

leg

isla-

tively

ap-

prov

edpr

ogra

ma

and

proj

ects

Effe

ctiv

eBu

dget

ing

(3)

Can

beus

ed i

n its

own

way,

to m

atch

outla

yswi

th r

e-so

urce

s

Fina

ncia

lD

isci

plin

e(4

)

Can

beus

ed t

ose

cure

budg

etar

you

tcom

eco

ngru

ent

with

esti

-m

ates

Effi

cien

cyG

ains

(5)

Littl

eca

pabi

lity

Prog

ram

and

Proj

ect

Man

age-

men

t(6

)

Littl

eca

pabi

lity

Fina

ncia

lD

iscl

osur

e(7

)

Shed

s ve

rylit

tle li

ght

on p

olici

es

Tran

s-pa

renc

y(8

)

Show

son

ly t

hebr

oad

ob-

jectio

nw

hich

mon

ey i

ssp

ent

Acc

ount

-ab

ility

(9)

Prov

ides

ana

rrow

base

d ac

-co

untin

gof

mon

eyra

ised

and

spen

t

Clie

ntO

rien

ta-

tion

(10)

Very

litt

le

Polit

ical

Acc

ept-

abili

ty(1

1)

In it

s sim

-pl

icity

and

long

tra

di-

tion,

itfo

und

alar

ge m

ea-

sure

of

polit

ical

acce

ptab

il-ity

Citiz

enPa

rtic

ipa-

tion

(12)

Very

litt

le

Ade

quac

y of

Bud

get F

inan

cial

Man

agem

ent S

yste

ms


Perf

or-

man

ceBu

dget

ing

Had

very

little

orie

n-tat

ion t

oth

e ma

cro-

econ

omic

polic

ies;

infac

t, scr

u-pu

lous

adhe

renc

eto

spe

cified

perfo

r-m

ance

stand

ards

coul

d co

n-tri

bute

toste

adily

incr

easin

gex

pend

i-tu

re

Like

tra

di-

tiona

l sy

s-tem

s, th

isto

o ca

n be

used

to

secu

rebu

dget

bala

nce

As a

bove

Prop

erly

utili

zed,

this

shou

ldco

ntrib

ute

to e

ffi-

cien

cyga

ins

and

to m

ore

effe

ctiv

eco

st co

n-tro

ls

Mos

t us

e-fu

l in

en-

surin

gpr

oper

man

age-

men

t

Shed

sm

ore

light

on p

erfo

r-m

ance

Facil

itate

sgr

eate

r t

rans

par-

ency

Prov

ides

enha

nced

acco

unt-

abili

ty

Perf

or-

man

cetak

es i

nto

acco

unt

the

need

sof cli

ents

By e

n-ab

ling

aca

usal

link

betw

een

reso

urce

sra

ised

and

serv

ices

prov

ided

,it

has

abu

ilt-in

polit

ical

acce

ptab

il-ity

The

sys-

tem d

idno

t pr

o-vi

de f

orth

is fea

-tu

re b

utca

n be

augm

ente

dto

inc

lude

this

fea-

ture

Type

s of

Syst

ems

(1)

Mac

ro-

econ

omic

Stab

ility

(2)

Effe

ctiv

eBu

dget

ing

(3)

Fina

ncia

lD

isci

plin

e(4

)

Effi

cien

cyG

ains

(5)

Prog

ram

and

Proj

ect

Man

age-

men

t(6

)

Fina

ncia

lD

iscl

osur

e(7

)

Tran

s-pa

renc

y(8

)

Acc

ount

-ab

ility

(9)

Clie

ntO

rien

ta-

tion

(10)

Polit

ical

Acc

ept-

abili

ty(1

1)

Citiz

enPa

rtic

ipa-

tion

(12)


Plan

ning

,Pr

ogra

m-

min

g Bu

d-ge

ting

Syst

ems

Plac

edgr

eater

emph

asis

on allo

cativ

eef

ficien

cyan

d ap

pli-

catio

n of

quan

tita-

tive

tech-

niqu

es o

fan

alys

is;no

t mu

chatt

entio

n to

stabi

lity

Plac

edem

phas

ison

me-

dium

-term

cont

ext

and

onge

tting

the

right

bal-

ance

of

mon

ey,

man

pow

er,

and

mate-

rials

As a

bove

The

gain

swe

re to

be

proc

ured

thro

ugh

the

appl

i-ca

tion

ofqu

antit

a-tiv

e tec

hni-

cal

anal

ysis

Mos

t us

e-fu

l in

en-

surin

gpr

oper

man

age-

men

t

No e

m-

phas

is on

this

aspe

ct

No p

ar-

ticul

ar e

m-ph

asis

onth

is as

pect

Acco

unt-

abili

ty w

asm

ore

inth

e rig

htse

lect

ion

of p

olice

s,pr

ogra

ms

and

proj

ects

Not

muc

hPr

ovid

edem

piric

alsu

ppor

t to

prop

osed

polic

ies

Very

litt

le

Type

s of

Syst

ems

(1)

Mac

ro-

econ

omic

Stab

ility

(2)

Effe

ctiv

eBu

dget

ing

(3)

Fina

ncia

lD

isci

plin

e(4

)

Effi

cien

cyG

ains

(5)

Prog

ram

and

Proj

ect

Man

age-

men

t(6

)

Fina

ncia

lD

iscl

osur

e(7

)

Tran

s-pa

renc

y(8

)

Acc

ount

-ab

ility

(9)

Clie

ntO

rien

ta-

tion

(10)

Polit

ical

Acc

ept-

abili

ty(1

1)

Citiz

enPa

rtic

ipa-

tion

(12)


Zero

-ba

sed

Budg

etin

g;Fu

nda-

men

tal

Revi

ew;

Targ

et-

Base

dBu

dget

ing;

Eval

uatio

n

Aim

ed a

tse

curin

g a

mod

era-

tion

in t

hera

te o

fgr

owth

of

expe

ndi-

ture

and

an i

m-

prov

edal

loca

tion

of re

-so

urce

s

This

fam-

ily o

f sys

-tem

s ca

nbe

use

d to

secu

re a

bala

nce

betw

een

reso

urce

san

d ou

t-lay

s; th

eaim

is to

live

with

inav

aila

ble

reso

urce

s

As a

bove

The

sys-

tem o

f-fer

ed a

mea

ns t

oel

imin

ate

unec

o-no

mic

pro-

gram

s an

dpr

ojec

ts

No m

ajor

emph

asis

on t

his

aspe

ct

Very

litt

leem

phas

isVe

ry l

ittle

It ind

icated

the

deter

mi-

natio

n of

the

gove

rnm

ent

to d

rop

the

unec

onom

icpr

ogra

m;

polit

ically

, it

mean

t a lo

ssof

sup

port

from

some

quart

ers a

ndga

inin

gsu

ppor

tfro

m th

ose

who

want

to be

seen

as an

effi-

cient

gov-

ernm

ent

One

of t

hecr

iteria

of

eval

uatio

nis

the

ex-

tent

towh

ich p

ro-

gram

sha

ve s

uc-

ceed

ed o

rfa

iled

inre

spon

ding

to c

lient

need

s

No s

uch

emph

asis

No p

ar-

ticul

ar e

m-ph

asis.

Thes

e ar

eus

edm

ostly

inte

rnal

lyin

the

prep

ara-

tion

of t

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In recent years, transparency and accountability havebecome, to use Weber’s term, “domain assumptions.” But thepreceding analysis shows that, while transparency and account-ability are essential and steps are needed to establish a mini-mum threshold, these approaches by themselves do not provideanswers to the several issues described so far.

Fiscal Instruments and Application Issues

Policy Instruments Factors Impeding Their Effectiveness/Flexibility

Taxes EarmarkingExemptionsEvasion

Nontax revenues Long collection lagsWrite-off amounts dueDeferral of repaymentsConversion of amounts due into grant/equityRetention of receipts by agencies

Foreign aid Tied borrowingDonor-specified proceduresReceipt of aid outside the budget process of the host governmentExtrabudgetary accountsLags in reimbursements

Expenditures Unpaid billsInformal IOUsLeasing rather than purchasingUnderestimation of costsEarmarking and extrabudgetary accountsUse of quasi-fiscal accountsExpenditure offsetsUnbundling approaches to avoid funding ceilingsGhost employeesChange of effective datesCarryoversNetting MisappropriationMisclassification

CommercialBuying Leasing

Unbunding approaches to avoid ceilingsUnderestimation of costsFailures in quality of goods bought

Selling Subsided salesNoncollection of duesAsset deterioration due to delayed sales

FinancialBorrowing Borrowing in kind from suppliers

Issue of guarantees to autonomous organizationsInformal IOUs

Lending Delinquent accountsSubsidized rates of interest and long grace periodsProvision of advances with no termsDeferral of repayment and reschedulingWrite-off of interest and principal


The Basics: Four-Pillar Approach toFinancial ManagementIt is obvious that efforts need to be made to address the prob-lem areas described earlier. Such an attempt may also be la-beled as an effort to get the basics right. But the determinationof “basics” itself is a formidable task for two reasons. First, whatis basic is itself a moving goalpost. Not too long ago, it wasconsidered that the submission of annual accounts itself wasthe last step in the chain of accountability. Now, however, ac-countability refers to the performance promised and actuallyachieved. Similarly, client orientation was not one of the sig-nificant dimensions of financial management. Now, it is prac-tically the core concern of public bodies. As such, the formulationof basics at this stage should take into account the expandedversion of some of the components of financial management.Second, the consideration of the contours of basics may beinfluenced by the experience of other countries, in particularthe Western democracies. But the basics have to reflect, in thefinal analysis, the capacity of the government, the needs, andthe areas where immediate improvements are needed.

Broadly speaking, four pillars of financial managementcan be identified. These are: (i) macroeconomic stability; (ii)increased efficiency in government operations, (iii) supportingtechnical infrastructure; and (iv) an effective accountabilityframework.

Macroeconomic stability

The pursuit of macroeconomic stability is now the dominantconcern of governments and financial management systems inpublic bodies have the primary purpose of serving the needsof policies aimed at securing that goal. This, in turn, requiresthat the machinery of financial management should have thefollowing elements (the objective here is to promote improvedpolicy planning and the formulation of an annual management


strategy that guides the various stages of operations of finan-cial management):

• Identification and assessment of the future financialimplications of current policies.

• Explicit recognition of the resource constraint. Theannual budget exercise is intended to facilitate theinternalization of this factor. As such, every step ofthe process should facilitate a collective consider-ation of needs and resources. Once resources areallocated, they should be viewed as a bindingconstraint.

• Maintenance of an extensive database on the expen-diture profile of all agencies. Efforts must also bemade to maintain cost data where services fundedby public agencies are provided by private and non-governmental sectors.

In the light of the above, public bodies should aim atformulating medium-term fiscal strategies that set the param-eters for the financial management machinery. As an integralpart of this approach, it may be useful to specify limits for someoperations, e.g., borrowing.

No strategy is self-fulfilling. If it lacks the capacity toreflect changing needs, then it becomes counterproductive. Tobe responsive to volatility, financial planning may include re-serves or may specify other options.

Achievement of efficiency

The way to restore confidence in government, which should beone of the primary aims of financial management, is to specifythe efforts being made to attain efficiency. To this end, any strat-egy aimed at improving financial management should have thefollowing:

• Measurement and publicizing of the costs of impor-tant activities. The factors and areas contributing to


expenditure increases should be identified andaddressed.

• Pursuit of alternative strategies for the delivery ofservices when costs tend to increase.

• Elimination of most labor-intensive operations inpublic bodies (e.g., the payment system) and theirreplacement by electronic technology. Some of theseoperations can be contracted out.

• Removal of existing perverse incentives in the system.• Publicizing of efficiency endeavors made by agen-

cies so that other agencies and the community mayemulate them in their own spheres.

Technical infrastructure

To strengthen the work in the first two phases, many organiza-tional improvements need to be made, including the following:

• Establishment of an information system whichmakes relevant operational data available to allpolicymakers and program managers, thus facilitat-ing their task of monitoring.

• Focus on core tasks by central agencies responsiblefor financial management. These tasks include poli-cies, costs, and the specification of desired perfor-mance levels.

• Managerial autonomy for spending agencies in the useof allotted resources. They should be encouraged totake risks.

• Selective conversion of accounting systems to anaccrual basis particularly in those agencies that havelarge inventories or those that charge for theirservices.

• Inclusion of depreciation and capital charge in thesystems. In what manner and how fast depends on thecircumstances of each country. Full funding of pensionliabilities depends on the type of the system.


• Pooling or centralization of common payments suchas payroll, pensions and public debt charges. Elec-tronic operations would speed up the compilationof accounts and reduce fraud.

• Reduction of layers of oversight.• Identification of the factors—systemic, technologi-

cal, and human— contributing to underachievementin countries where the elements of financial man-agement described here already exist but are notfunctioning effectively.

Accountability

This phase requires the provision of the necessary instrumentsfor securing accountability as well as a specific body withoversight responsibility. It is quite likely, however, as indicatedearlier, that even where such a body exists, it may not beperforming its tasks effectively, or performing them to suit apolitical agenda. The framework of accountability should there-fore provide for avenues that would enable bridges to be builtdirectly between governments and the society. The society hasto be provided with the requisite information, so that, it may,if it chooses, exercise a form of social control over and abovelegislative control. For this purpose, financial managementsystems should aim to provide the following:

• Specific costs and expected performance, as an in-tegrated part of the overall framework of account-ability. It is recognized that performance specificationmust inevitably be selective. In such cases, costswould serve the purpose.

• Avenues for the people to secure information on his-torical series such as government accounts, but moreimportantly, on policy decisions made during the year.

• Oversight bodies where none now exist.• Adequate efforts to disseminate information in vari-

ous forms.


Moving Forward

The efforts involved in the above stages differ between coun-tries in view of the diversity of their problems. In formulatingstrategies, which is primarily the task of member countries asthey are the best judge of their situation, the emphasis, in theimmediate short term, is likely to be on scratching where ititches.

It is also necessary to make arrangements for the tran-sition. The switchover where the changes are substantial maytake a long time and may prove expensive in the short term,and the rewards may not be immediately evident. Further,overcoming the barriers of tradition is far from easy. Apart fromsustained political commitment, this requires concerted actionon several fronts, all of which are in the realm of the govern-ments of member countries. The role of international financialinstitutions is primarily to provide the requisite stimulus andunbiased information on international experience, and to func-tion as catalysts and not as advocates of preselected agenda.

It should be noted that the four-pillar agenda describedabove does not have a label. It is an eclectic combination ofefforts needed to secure specified benefits. As Deng Xiao-pingsaid, the color of the cat is not important, so long as it catchesmice. Labels are often distracting. What matters most is whetherthe proposed approach yields the desired results.

Chapter 4

Information andCommunication Technology

for Public FinanceClay Wescott and Salvatore Schiavo-Campo

Introduction

It is impossible to provide a good overview of the context ofpublic finance management without some reference to theinformatics revolution. The monumental change wrought inevery field by the new information and communication tech-nology is still only in its initial phase. The subject of ICT is toovast to be adequately discussed in this chapter. But a few generalconsiderations should be raised here.1

First, ICT is a tool, immensely powerful yet essentiallyno different from a photocopier or a car, in the sense that userneeds and requirements must come first and dictate whetherand how the ICT tool should be used. For certain functions,pencil and paper, or a telephone, or a face-to-face meeting, ora visit to the library is far more effective than computers or theInternet. This obvious point must be stressed because there arefrequent instances when governments, consultants, or donoragencies encourage computerizing anything in sight. Indeed,many would argue that IT innovation is now largely supply-

1 This paper draws in part from Asian Development Bank, Managing Gov-ernment Expenditure, 1999, chapter 1. Grateful acknowledgement is alsogiven for permission to draw from a presentation prepared by the Deloitte& Touche Consulting Group, Singapore, for a March 1999 workshopsponsored by the Asia-Pacific Development Information Program, UNDP.


and marketing-driven rather than dictated by the needs andrequirements of the users. Thus, it is essential to assess realis-tically and compare the costs of a given ITC change with theactual benefits expected from it.

Second, the ICT “techie” and the “public financial man-ager” should not work in isolation from one another. As noted, im-provements in effectiveness stem largely from better rules andprocedures in the sector concerned. To apply advanced ICT toobsolete or inefficient rules and processes means in effect tocomputerize inefficiency. Doing the wrong thing faster is notprogress. On the other hand, the absence of relevant ITC knowl-edge risks either costly mistakes or missed opportunities fordramatic service improvements.

Third, ICT cannot substitute for good management andinternal controls. Indeed, the introduction of computers can givea false illusion of tighter expenditure control, in cases wherea large part of the expenditure cycle occurs in parallel and in“black boxes” outside the computerized system.

Fourth, faster and integrated public financial manage-ment information systems carry correspondingly greater poten-tial risks for the integrity of the data, and can even jeopardizethe financial management system in its entirety if developedcarelessly and without sufficient checks, controls, security, andvirus protection. Indeed, the first advice to a governmentmoving from a manual public accounting and recording sys-tem to a computerized one should be to keep the manual led-gers going alongside the new system until the new system isworking well, and is secure and free of risk.

Fifth, it is often argued that ICT reduces the corrup-tion. In fact, computer technology eliminates almost all oppor-tunities for corruption for those who do not understand fullythe new technology, but opens up new corruption vistas forthose who understand the new systems well enough to ma-nipulate them.

To sum up, organizations adopting more advanced ICTshould: (i) always fit the new technology to user requirements

Information and Communication Technology for Public Finance 9 1

and the real objectives of the activity; (ii) see to it that the newtechnology goes hand in hand with improved rules and pro-cesses; (iii) protect data and systems integrity; and (iv) aim atan integrated strategy and avoid a piecemeal approach (whichcan fit specific needs but adds up to a ramshackle and evendangerous system). Note, however, that an integrated approachrequires compatibility and coordination, but not necessarily asingle system.

That said, ICT offers wonderful potential for increas-ing government accountability, transparency, and participation;improving the efficiency and effectiveness of public-sectoroperations; widening access to public services; and dissemi-nating information to the public and getting feedback fromrelevant stakeholders and service users. With specific referenceto public financial management, among other things, informa-tion and communication technology can help solve the central-ization/decentralization dilemma by making relevant revenueand expenditure data easily available at all government levels;improves the reliability of avenue forecasts; vastly facilitatesbudget analysis and programming; and improves the timeli-ness of budget information.

During the 1960s, the public sector led many privateenterprises in the use of computers in support of basic admin-istrative functions, including management information systems,payroll processing, and accounting applications.2 Since then,the private sector has taken the lead in IT uses of electronicservice delivery systems that give direct access to informationand services, and integrated resource management.

The figure below shows the various IT systems used inthe private sector. These systems are important tools in the fourmajor business sectors: manufacturing, telecommunications/utilities, financial. and consumer business. In manufacturing,the most commonly used IT systems are online sales catalog,

2 See Schiavo-Campo and Tommasi, Managing Government Expenditure , ADB,1999.


electronic purchasing, Web-based order entry, auto replenish-ment, supply chain integration, enterprise resource planning(ERP), and electronic data interchange. In the telecommunica-tions/utilities sector, the following IT systems are used: billpresentment and payment, electronic messaging, corporate Website, ERP, and customer dynamics. The financial sector uses thefollowing IT systems: banking applications, corporate Web site,Web-enabled transactions, workflow and imaging, electronicfunds transfer, and customer dynamics. The consumer businesssector uses a combination of these systems in the productionand delivery of its services.


To illustrate how IT systems interact with the majorplayers in a business, a high-level view of a typical supply chainis shown in below.

The fast-expanding use of the Internet is helping somecompanies implement fully integrated value changes to createpartnerships with suppliers and customers, together with whomthey can find ways of cutting costs, improving quality, expand-ing markets, and sharing the benefits. This is changing the oldidea of a free-standing business. Internet-enabled companiesare bringing suppliers and customers much deeper into theirbusiness practices and systems, and need a similar understand-ing of those of their partners’. This in turn is forcing greateropenness and transparency among all partners than in the past.Customized services, products, and pricing are becoming morethe rule than the exception. Increasingly, business processes notconsidered core are contracted out to more efficient providers.


Just-in-time inventory systems are becoming common. Anunprecedented amount of collaboration is possible, wheremanagement skills are up to the task.

IT in the Public Sector

Public-sector institutions have not yet fully grasped the ben-efits of the IT revolution. The challenge of the informationrevolution has yet to be tapped by many governments tomodernize practices and procedures. This is evident in mostactivities of the government in delivering basic services to thepeople: problems in inter- and intra-agency record sharing;paper trail required for approval processing; paper form filingdone over the counter; difficult access to public information;difficulty for citizens in giving feedback to public officials andgetting timely responses; cumbersome document archiving;delays in getting public census results, etc.

The “paper-chase” legacy is still alive and well in mostpublic sectors. The telephone is used primarily to prompt action,and paper is still king. Several copies of a single document areusually required, even within a single department. The in-boxand out-box system still prevails. These practices use too manyresources to shuffle and screen paper.

The reasons for slower adoption of IT by public-sectorinstitutions are:

• higher costs due to the scale of public organizations;• existing legacy systems in place;• security concerns;• confidentiality of information;• existing regulations and laws;• lack of understanding and skills; and• the silo system.

Many public-sector institutions in developing countrieshave difficulty shifting from the traditional and “economical”


ways of doing things to the modern use of computers, theInternet, Web sites, and other IT systems because of budgetaryconstraints. These constraints can arise not only from the nor-mal costs of hardware, software, and systems integration butalso from country-specific factors. In Fiji, for example, a 64KInternet circuit from the publicly owned telephone companycosts US$10,000 per month, nine times the cost in Jamaica. Otherfactors besides cost hamper the use of IT in government. Inaddition to existing legacy systems in place, security concerns,and confidentiality of information, existing laws and regula-tions impede the modernization of existing government infor-mation systems. South Africa, which needs to remove the legalframework that entrenched racial discrimination before it canproceed with IT development, presents an archetypal example.3

IT capability has always been associated with depth ofunderstanding and skills, and most developing countries donot usually have access to sufficient training. Those that havethe needed skills often cannot be retained for long on standardgovernment salaries and benefits. These concerns have beenyet another set of factors hampering enthusiasm for the adop-tion of IT systems. To this end, an initiative developed andfunded by the United Nations Development Programme(UNDP) has started assisting the countries in the region byproviding training and other technical solutions for IT needs.4

An important step toward IT development is the de-velopment of a culture of information management to ensurethat information systems fit the task for which they are adopted.The figure below shows the change imperative for governmentsto embrace IT.

3 This is discussed fully in Khan and Swanborough, Information Manage-ment, IT and Government, IDPM, 1999.

4 See http://www.apdip.net.


Despite the constraints, the use of IT in the public sectorsof some countries is increasing. For example, electronic com-merce is seen as a feasible solution to: linking governmentagencies, suppliers, citizens, and employees via the Internet;promoting communication and information sharing; enablingself-service for more efficient use of resources; automating andstreamlining payment and disbursement; and generating newenterprises. Workflow systems are used to improve efficiencyand enterprise-wide systems are implemented to supportoperational and infrastructure processes.

Global Trends

IT opportunities for the public sector consist of the Internet,electronic commerce, workflow, enterprise systems, contract-ing out, and knowledge management.

Source: Deloitte Consulting’s ChiefInformation Executives Survey, 1998


The Internet

Public-sector use of the Internet will almost triple in the nexttwo years. As shown in the figure above, developed countriesnow use the Internet for an estimated 20 percent of publictransactions; in the next two years, and this is projected to climbto 59 percent. Meanwhile, the use of the Internet for marketingpurposes is already more than 50 percent, and will reach about65 percent in the next two years. This means that the use of theInternet for public transactions has just begun, and is projectedto escalate within the next two years as more public-sectorinstitutions seek to improve their IT systems.

Aside from the Internet, other emerging technologiesare beginning to be used by public-sector institutions, to achievehigher productivity and information access. Among these are:voice recognition, automated call centers, object-oriented tech-nology, groupware, workflow management, image/documentmanagement, hand-held computers, multimedia, and Intranet.

Several factors are propelling the Internet to the fore-front of popular demand. These factors are the following:

• increasing computer literacy and usage;• falling communication costs;• easy-to-use and “hot” interface multimedia web

browsers;• demand for “mass personalization” and instant

gratification;• telecommuting; and• the globalized economy.

The Internet did not cause these trends, but it is a catalystthat is bringing them together, accelerating their progress, andmaking the result greater than the sum of its parts.


The figures below show examples of Internet use in thepublic sector, and promoting self-help among citizens.


Electronic commerce

Electronic commerce is a general term applied to the buyingand selling of goods and services, and the transfer of funds,through digital communications. It can include buying andselling over the worldwide Web and the Internet, smart cards,digital cash, and all other ways of doing business over anydigital network. It also uses technologies such as electronic mail,electronic data interchange, electronic funds transfer, electroniccatalog, directory systems, file transfer, fax, video conferencing,and workflow.


Typical examples of electronic commerce are shownbelow.

Information and Communication Technology for Public Finance 101

Workflow

Workflow is a general term applied to the ability to moveimages, files, documents, etc., from workstation to workstation,using specific business rules for review, authorization, dataentry, data editing, and task assignment. Business processes thatare accomplished by moving paper can now be managed elec-tronically—from the very beginning to final disposition. Thedelays normally associated with hard-copy documents andmanual processing can be minimized with workflow systems.

A workflow system is fundamentally different from atraditional system. As shown in figure below, a workflow systemfocuses on what to do and how to do it, and is event-driven,process-oriented, and modeled after human workflow. In con-trast, a traditional system focuses on features and functional-ity, is organized by function, is “vertically” oriented, and servesa specific application need.


The major components of a workflow are procedures,tasks, events, and workers. A procedure is a series of interre-lated tasks required to complete an instance of work. An eventis an occurrence that triggers the start of a procedure or task.A task is a discrete element of work that can be assigned to anindividual worker. It can be defined in terms of the informa-tion required to complete it, the application used, the workerswho can perform the task, and the timeframe and priority thatshould be assigned to it.

Some promising IT applications in the public sector arethe following:

• integrated financial management (budget, accounts,treasury);

• tax management;• claims processing and management;• bid and proposal routing and tracking;• engineering change notice distribution;• handling of customer service and complaints;• college enrollment;• grant and scholarship award, approval, and process-

ing; and• human resource recruitment and hiring.

Enterprise resource planning

Enterprise resource planning (ERP) is an integrated businesssystem that ties all of the various functions of an enterprise(finance, human resource management, etc.) into a cohesivesystem on a common database. ERP systems are integrated withthe Internet (e-mail, messaging), electronic commerce, andworkflow. ERP presents opportunities to the public sector inthe areas of financial management, which includes treasury/cash management; human resource management, which in-cludes payroll, record management, and benefits administra-tion; and facilities/resource management, which includesprocurement, forecasting, and material management. Although


these were initially proprietary, client/server systems, the lat-est versions are increasingly Internet-based, allowing informa-tion to be accessed by anyone who needs it, and reducingtraining and other costs.

Contracting Out

Like the private sector, some governments are also using IT tofacilitate the contracting out of service provision. Contractingfor services can have the advantage of increasing efficiency andeffectiveness through increased competition, and getting aroundpublic-sector work rules which are oriented more toward con-trol and accountability rather than customer service. IT can helpgovernments monitor and measure performance under suchcontracts. On the other hand, contracting may entail greaterspecification, more complex negotiation, and higher litigation,negotiation, and bargaining costs than does the use of internalresources. Thus, the decision to contract out a given serviceneeds to be made carefully.5

Knowledge Management

Governments need to improve their knowledge of developmenttrends and policy outcomes. Global and regional changes intrade and aid flows, labor migration, technology, climate, andinvestment can have fast and profound changes on countriesin an interconnected world. Governments need to monitor thesechanges in order to determine appropriate responses. In par-ticular, governments need to measure the social impact of eco-nomic trends and policy responses, to ensure that the conditionsof disadvantaged groups are not made worse.5 For a full discussion, see Schiavo-Campo and Tommasi, Managing Gov-

ernment Expenditure, Chapter 15: Strengthening Performance in the PublicExpenditure Management.


IT can help in many ways, including gathering infor-mation on global trends through the Internet, conducting vir-tual conferences that bring together experts in differentlocations, and using IT systems to better organize and analyzenational economic and survey data. Governments can use thesame systems to facilitate the timely dissemination of these data,so that investors and other stakeholders have accurate infor-mation on the risks and opportunities.

Conclusions

The benefits of IT systems to the public sector are:• better service delivery to the public

– new payment channels,– additional avenue for public feedback,– self-help access to information and service, and– 24-hour, 7-days-a-week delivery of services;

• lower cost and increased efficiency– up-front checking of completeness/accuracy of

information,– simplified government procurement processes;– reduced data re-entry into systems.– automated workflow,– paperless office, and– document archiving and storage.

• increased workgroup productivity– inter- and intra-department/agency /ministry

collaboration,– progress and task-turnaround monitoring, and– business process reengineering.

Some current observations regarding IT use in the publicsector are:


• Only a small proportion of the public now have theirown computers or access to the Internet. However,the numbers are growing.

• Citizens and employees may lack the computer skillsneeded to fully appreciate IT.

• Some countries may need to develop first of all thebasic infrastructure to support IT use.

Making IT Happen

There are some important points to make about thesustainability of IT projects. An information technology project:

• is not only about information technology, and is notjust a project. It is a strategic initiative which shouldbe driven by senior government executives, anddesigned to deliver tangible benefits.

• is not about cost savings. Rather, it is an investmentfor the benefit of the public.

• is not factored according to time and budget. It isguided by a strategic plan to enhance value.

• is not easy or risk-free. It is complex, difficult, evenpainful, and will require change.

Change processes must be managed and led from thetop. If well done, the change can help governments attain someof the same benefits that private companies are already achiev-ing. They can deliver public services more effectively and ef-ficiently and thereby gain greater support from their citizens.

Chapter 5

Reform Priorities for PublicFinancial Management in

Developing CountriesSalvatore Schiavo-Campo and Daniel Tommasi*

Introduction

Improvements in the budgetary system are largely a functionof institutional change, in the contemporary sense of the basicrules that govern the behavior of organizations and individu-als.1 The distinction between “institution” and “organization”—and the interplay between the two—is key to understandingthe challenge of improving the management of public expen-diture in developing countries. Budgeting organizations can beimproved—sometimes even created ab nihilo—but economic,social and political behavior will not change unless the rulesand procedures change as well. For example, simply merginga Ministry of Finance with a Ministry of Planning will not, byitself, do much to integrate current and capital budgeting morethoroughly. However, the reverse is also true: rule modifica-tion is unlikely to produce results in an operationally meaningfultime frame unless organizational improvements proceed apace.Thus, to follow the same example, an improvement of thebudgetary rules for coordination and integration of current and

* This chapter is reprinted from Schiavo-Campo and Tommasi, ManagingGovernment Expenditure, ADB, April 1999, Manila.

1 See Schiavo-Campo, 1994, for a summary of the main issues. Section Aof this chapter is based on parts of that publication.


capital budgets can be frustrated if the organization of theMinistry of Planning is not improved as well. Clearly, then,improving public expenditure management requires both insti-tutional (regulatory and procedural) reform and organizationaldevelopment.

In the light of the above considerations, this chapter firstpresents some general strategic considerations; then outlinesthe key priorities and sequencing of reform in each of the variousaspects of public expenditure management discussed in thisvolume. Our standard warnings should be repeated once more:(i) budgetary improvements should be assessed not only interms of the benefits expected, but also of the probable costand of likely sustainability; (ii) “best practice” is a dangerousterm, when it is misinterpreted as importing budgetary mod-els developed elsewhere and without hard-nosed considerationof local realities—particularly administrative capacity, dataavailability, and the informal rules that determine much of thebehavior of local officials and their private sector counterpartsin the specific country.

Strategic Considerations

General reform choices

Aside from the extremes of a “quick and clean” reform strat-egy (optimal but entirely unrealistic) is optimal and a “slowand dirty” strategy (the worst possible approach), the practicalstrategic choice revolves around the intermediate options of a“slow and clean” reform strategy or a “quick and dirty” strat-egy. 2 As a general presumption, the former is preferable be-

2 This may be considered by some as an obvious choice, given that thereis no credible alternative to some sort of step-by-step process. In actualpractice, however, the attempts at "shock therapy" are all too frequentand have caused considerable problems.

Reform Priorities for Public Financial Management 109

cause it is more likely to be sustainable. Short-term efficiency ofpublic financial resources must be balanced against the needto improve financial accountability in the long-term. This balanc-ing act between flexibility and excessive discretion is probablythe most difficult dimension of improving public expendituremanagement. The extremes are easy to define and to reject. Thus,reform that eliminates ex-ante financial controls altogether inthe name of managerial flexibility, without paying any atten-tion to accountability regimes, is a recipe for widespread cor-ruption. At the other end, protecting the integrity of publicresources by introducing a list of micromanagement controls isbound to reduce efficiency sharply. The right middle groundbetween these two extremes is difficult to find and must becountry-, sector-, and time-specific.

The “torto-hare” approach toinstitutional changeStrategic attention should focus on identifying areas where itis feasible to move very fast (with only a slight cost in termsof “cleanliness” or deviations from the optimal long-term path),and areas where it is essential to build slowly and carefully thesolid institutional foundation required for sustainable reform.

Thus, to the question of what the “optimal” pace ofreform is, the reform-maximizing answer is “it depends”—unsatisfying and demanding as such an answer may be. Thisanswer is especially valid in the fluid and opaque circumstancesof the current transition. To use the metaphor of road traffic,optimal driving speed depends on traffic conditions—subjectto an overall speed limit and to the need to keep moving. “Torto-hare” was the slogan ( tarta-lepre in Italian, combining tortoise[tartaruga] and hare [lepre]) coined by the Italian highwayauthority in the 1960s to describe the optimal driver behavior:drive fast or slow depending on the circumstances. To com-plete the metaphor, the worst approach to driving in heavy and


erratic traffic and poor visibility is to go on cruise control,whether at high or at low speed.

In this perspective, there is an aura of unreality to thedebate between “big bang” and “gradualism”. The underlyingpremise of the big-bang approach is that, in the absence of simul-taneous rapid policy reforms in complementary areas, partial re-form measures will have no effect.3 The underlying premise ofthe gradualist approach is that there is only so much change andupheaval a society can stand at any one time, and the attemptto do too much may end up in a failure to accomplish anything.The difficulty is that stretching these valid premises to their logicalextremes leads to caricature and untenable prescriptions. Thus,the “fundamentalist” interpretation of the big bang is tantamountto advocating reform of everything at once. Aside from beingutterly unrealistic, especially for developing countries, such a pre-scription could also cause extreme damage in a plural societyriven by ethnic conflict. At the other extreme, the “fundamental-ist” interpretation of gradualism becomes a prescription for totalimmobility. Hence, the actual operational choice is never betweenthese two extremes, but between the specific policy areas wherea “big bang” is possible, and those where gradualism is moreeffective. The obvious alternative to ideological approaches isanalysis, on a case-to-case basis, of the benefits, costs, opportu-nities, and risk of specific budgetary reforms in a specific coun-try. A budgetary reform should be pushed very fast whereverand whenever the circumstances warrant, but may need to bepostponed in other areas or occasionally slowed down to allowaccountability to catch up, absorptive capacity to grow, or publictolerance to be rebuilt. Such an obvious point would not deserveto mention if it were not so often disregarded in practice.

3 A macroeconomic example of such a mistake would be an attempt toreduce the fiscal deficit by improving the tax effort without concomitantlystrengthening expenditure control mechanisms. A microeconomic examplewould be the liberalization of public enterprise pricing without the comple-mentary measures to place the enterprise on a commercial footing.


Some corollaries

The futility of “paper reforms”

A first corollary of the above considerations is that publicbudgeting improvements are hollow in the absence of effectivemonitoring and enforcement mechanisms. Organizational andhuman capacity is essential to administer and enforce the newframework. Administering, monitoring, and enforcing mecha-nisms take time, resources and genuine commitment at severallevels to become operational. Yet, two very different tenden-cies often converge in practice to sidestep these requirements.The first tendency is the temptation of politicians and foreigndonors alike to declare a problem solved and move on to thenext item on the agenda. Thus, the introduction of a newbudgetary nomenclature can be considered as an isolated outputwithout any attention to the other elements needed to improvethe budget process. The other tendency is the ingrained habitof control-minded elites in the Ministry of Finance to try to effectbehavioral change by decree. There is overwhelming evidencethat such change, if any, is purely transitory.

Adopt, adapt, or create?

A second corollary concerns the question of whether it is pos-sible to “import” foreign budgetary and/or accounting prac-tices. The answer to the question is often phrased indichotomous yes or no terms. The term “best practice” is itselfan example, in its implication that a given practice is “best” inall circumstances. However, as is generally true in other in-stances of transfer of technology, once again the better answeris: “it depends”. Formal rules can be imported fairly easily,informal ones much less so. It follows that importing foreigninstitutional practices is a practical proposition only when thesepractices have a high component of formal rules. This is thecase, for example, the more “technical” areas of public


expenditure management. However, even the most “technical”procedures require an open-minded assessment that countryconditions are amenable to the efficient introduction of the newprocedures.

By contrast, when the nature of the institution entailsa high component of informal rules, as in “social” and “gov-ernance” areas or personnel incentives, the institution willnormally need to be homegrown or, if imported, will requiresubstantial adaptation and changes over time. In such cases,process and form (“ownership”, “dissemination”, “consensus-building”, etc.) are as important as the eventual results. Indeed,it is sometimes true that ( pace Frederic Molnar) “the play’s thething”: the process is the reform.

Design of assistance for PEM improvement

The risks of giving the “wrong” advice (which, as noted, in-cludes “good” advice that is not suited to local realities) areheightened by the reality of “path dependence”, i.e., that insti-tutional reforms enacted today have inescapable but unpredict-able long-term implications—particularly in the more fluidcontext of developing countries and transition economies. Thepenalty for mistakes, of course, falls almost exclusively on thepeople of the developing countries themselves. Thus, the moralhazard inherent in all forms of intervention from the outside—however benevolent the intention—is especially severe in thearea of institutional change. Those who urge to “just do it” takeon a particularly heavy moral burden.

These considerations should not be taken as counsel-ing inaction or benign neglect—inaction, too, carries its ownbrand of moral hazard—but to stress the importance of iden-tifying the risks and minimizing them to the extent possible.The risks can be generally minimized by flexible mechanismsof assistance adjusted periodically, with attention to financialaccountability and governance implications, and by a focus onlocal capacity building. More concretely, the risks of interven-


ADB Loan of $250 million for the Gujarat PublicSector Resource Management Program

Project Objectives• The program supports the Government of Gujarat in improving

public finances and augmenting domestic resource mobilization,improving the allocation and efficiency of the public sector, andreducing the role of the Government of Gujarat in commercialactivities while promoting market-oriented policies to enhanceprivate sector participation in the infrastructure sectors.

Project Scope• The program focuses on (i) strengthening state public finances and

their prudent management; (ii) divesting and restructuring state-owned enterprises (SOEs) to allow the private sector to take thelead in commercial activities while reducing the burden that SOEsput on the budget and the economy at large; and (iii) strengtheningthe policy, regulatory, legal and institutional frameworks for pri-vate sector participation in critical infrastructure sectors (power,ports, and roads) and evolving an enabling environment.

Highlights of the Program• Reduction of overall fiscal deficit to sustainable levels.• Sales tax reforms, including the introduction of value-added tax

(VAT), the rationalization of key state taxes, and municipal taxreforms.

• Raising of user charges to improve cost recovery.• Expenditure rationalization and improved fiscal policy manage-

ment.• SOE reform planning and associated institutional mechanisms.• Privatization, partial divestment and restructuring, merger, leas-

ing, or closure of SOEs.• Social safety mechanism for the restructuring of SOEs.• Initial steps to start power sector reforms.• Revision of power tariffs to maintain a 3 percent rate of return on

the assets of the Gujarat Electricity Board.

tion can be reduced by interaction with a variety of local inter-locutors and optimum use of local expertise. (An example ofsuccessful intervention is the ADB loan of US$250 million to theIndian state of Gujarat for public sector reform—see box below).


Operational approaches

The search for operational approaches to improving publicexpenditure management in developing countries rests on theabove strategic considerations, as well as on four premises. First,the information problem is massive. Second, specific entry pointsmust be identified. On the one hand, it is evident that simul-taneous budget system reform across the board is not realistic;on the other hand, total inaction on the institutional front is arecipe for progressive deterioration of functions. Somewherebetween those two extremes, intermediate possibilities forconstructive action must be found. Third, path dependence isa reality. Institutional mistakes tend to become evident onlyyears down the line, when they have become irreversible andthe advisers or consultants are long gone, with potentially severeconsequences for accountable governance and effective publicresource allocation and use. Fourth, countries must, after all,work with what they have. The human resource endowment,the inertia of bureaucratic habits, the predictable resistance andbacklash of the losers from change, etc.—all these factors canbe altered, combated, utilized, perhaps even deliberately ne-glected, but cannot be ignored by those who would assist theinstitutional transformation. These four premises underpin twointerrelated approaches to constructive intervention: (i) strength-

• Improved investment planning in power and creation of a frame-work for promoting private sector investment in roads and portsand initiating private sector investment in roads and bridges by1997.

• Restructuring of the Gujarat Maritime Board.• Strengthening of the capabilities of the Roads and Bridges Depart-

ment to process private sector road projects.

Source: India’s Economic Survey , 1996-97.

ADB Loan (cont’d.)


ening intrasystem linkages; and (ii) fostering the creation of“efficient nuclei”.

Strengthening internal linkages:The essence of “capacity building”

In many developing countries, and in most transition econo-mies, the absence of systematic lines of interagency communi-cation and the lack of incentives to share information (whichis often viewed as a personal asset) result in fragmented policyformulation and atomized decision making. This presents amajor problem for the implementation of reforms. The chal-lenge is how to improve communications and reduce the costof information within the public sector.

It is difficult to decide whether to strengthen one par-ticular agency of government or another; the outcome of bu-reaucratic “turf” disputes is utterly uncertain, and the risks oflosing an organizational bet are potentially severe. The guid-ing operational criterion of technical assistance for sustainablePEM improvement should therefore be to strengthen the link-ages between the components of the overall budget formula-tion and execution system, not only among central ministries,but between them and subnational entities. Not enough isknown to pick winners and losers—and today’s winners maywell be tomorrow’s losers anyway. Strengthening the institu-tional and communication linkages within the system: (i) doesnot prejudice or preempt the appropriate transition path forthe system as a whole; (ii) entails a direct reduction in trans-action costs; and (iii) is most likely to have positive implica-tions for transparency and accountable financial management(except in countries with extreme and systemic governanceproblems). Even when supporting the reinforcement of one oranother specific budgetary procedure, it is essential to encour-age positive interaction with other government agencies. Suchencouragement must not be limited to rhetoric, but should entailincorporating in the assistance specific incentives for greater


information exchange, training and cooperation.4 This pointleads to the second approach suggested here.

Efficient nuclei

Action to strengthen linkages and communication channelsfacilitates but does not in itself generate the spread of new rulesand efficient organizational practices. There must also existdynamic agents of change that can generate the positive “messages” to be transmitted throughout the system by the im-proved communication channels. These agents, these “efficientnuclei”, must be deliberately created to perform a few keyselected public functions.

A guiding criterion for selecting these key functions (andthis is where the interrelation with the previous approachemerges) is their contribution to maximizing the linkages withinthe public sector. By analogy with Albert Hirschman’s “unbal-anced growth” approach of 30 years ago, efficient nuclei shouldbe created largely on the basis of their potential for spreading newinstitutions and organizational practices throughout the public fi-nancial management system.

Beyond the general criterion of linkage maximization,an efficient nucleus should meet the following practicalstandards:

• Be small;• Be fiercely meritocratic, in the initial selection and

in the evaluation of staff performance;• Have flexible and simple procedures;• Provide adequate compensation for staff (this may

require fixed-term contracts without fringe benefits,to permit adequate salaries without compromisingeventual decisions on a fiscally sustainable civilservice structure and compensation);

4 Furthermore, interdonor cooperation is important to prevent tunnel-visionactions by individual donors.


• Have adequate material and financial resources;• Use local talent, with external advisers only when

demonstrably necessary;• Be a transitional arrangement, with a clear sunset

clause and advance specification of the proceduresfor reassignment of its staff throughout the relevantgovernment agencies;

• Operate not only to perform specific tasks but alsoa teaching-by-doing function, in cooperation withother agencies.

An illustration can be given in the area of public in-vestment. Realistic and affordable public investment program-ming based on economic project evaluation and real-costfinancing, is key to efficient and effective allocation of bidresources. However, improving “core ministry” capacity (e.g.,in a Ministry of Planning, or of Finance) accomplishes littlewithout sufficient capacity at the sector level to screen outunsound ideas and formulate good projects. It will take a longtransition for the sector ministries to build up their own capac-ity in this respect. In the interim, a mechanism is needed toassure results and speed up the transition as well. By the ef-ficient-nucleus approach, such a mechanism could consist ofcreating a “visiting team” unit in the core ministry that ischarged with public investment responsibility. The unit wouldcomprise a small number of highly qualified, newly trained localanalysts and an experienced external adviser, all with excel-lent communication skills in addition to economic competence.The unit would provide ad hoc assistance to sector ministries,at the right points in the budget cycle, by sending a visitingteam “in residence” for a brief period of time. This wouldcombine their technical knowledge with the sectoral familiar-ity of the ministries’ staff. The team would visit each sectorministry in turn, and interact with its staff to produce better-quality decisions as well as some “teaching by doing”. Therelationship would be one of cooperation and mutual


assistance—because decisions on actual approval of projects forfunding would be entrusted to an entirely different core entity.Such a relationship would therefore encourage informal ex-changes of information and advice as and when needed. When,helped by this mechanism (and, of course, their own specifictraining programs), sector ministries have acquired sufficientproject preparation capacity, the visiting team unit would dis-band, and its personnel would be reassigned to take care of PIPmatters within the core ministry or to lead the work in sectorministries.

Reform Priorities and Sequencingof ReformsThe convenience to the reader of having a self-contained PEMreform and sequencing agenda justifies this duplication.

The budget and its preparation

Budget coverage

Priority actions should consist of laying the foundations requiredfor any sound budgeting and policy formulation system, whichinclude:

• A reasonably comprehensive coverage of the budget;• Assessment, disclosure, and review of all policy

decisions that have an immediate or future fiscalimpact, such as contingent liabilities, lending, taxexpenditures, and quasi-fiscal expenditures;

• An expenditure classification system that fits theneeds of both policy analysis and management, andcovers all government expenditures.

These actions should be carried out jointly with thepriority actions listed below to improve budget preparation,


execution, and accounting procedures. They are a prerequisitefor further improvements in the budget system.

Among these further improvements, the following canbe considered:

• Developing instruments for better assessment of li-abilities, contingent liabilities, and policy commit-ments. These instruments can include a modifiedaccrual accounting system or multi-year expendi-ture programming.

• Developing special management arrangements forsome expenditure programs (e.g., user charges,service delivery agencies) that can improve theiroperational efficiency without reducing the compre-hensiveness of the budget or weakening expendi-ture control and accountability to the legislature.

• Setting up a classification of expenditure by activ-ity and program, to allow defining the right perfor-mance indicators at an appropriate level.

Budget systems and expenditure

The main considerations here relate to the absolute need to takeinto account the lessons of experience and the specific countrycircumstances. Introducing sophisticated and demanding per-formance budgeting systems (and particularly their culmina-tion in detailed output budgeting) has been shown by theexperience of the last 50 years to be badly counterproductivewhen local capacity and “ownership” are not conducive to theirintroduction. In developing countries, this oversight has led towasted resources and, in some cases, loss of fiscal discipline.The reform lessons are that: (i) line-item budgeting and expen-diture control must be firmly established before moving beyond;and (ii) complex reforms in a limited-capacity environmentsucceed only in disempowering the limited local capacity itselfand reinforcing dependence on external advisory. It should berecalled, however, that there are various ways to strengthen


the performance orientation of the budget system short ofintroducing formal variants of performance budgeting.

Budget preparation

As noted, weaknesses in budgeting depend in large part onpolitical factors and on the organization of the government. Lackof coordination within the Cabinet, unclear lines of account-ability, or overlaps in the distribution of responsibility favorquestionable approaches to budgeting. Improving budgetpreparation is not sufficient to address all problems, of course,but it is necessary. Processes and mechanisms for budgetingand policy formulation should be explicitly designed to rein-force coordination and cohesion in decision making. Generally,strengthening the budget preparation process requires (inaddition to the scrutiny of all decisions with a fiscal impact)improvements in the following:

• Financial constraints must be built into the start ofthe budget formulation process, deriving from thepreparation of a macroeconomic framework andadequate expenditure programming (see below).Spending agencies need predictability and shouldhave clear indications of the resources available asearly as possible in the budget formulation process.

• Policy coordination mechanisms that fit the coun-try context are needed, with particular attention tothe policy-budget link.

• It is necessary to develop appropriate policy coor-dination mechanisms that fit the institutional,constitutional, and political context. Participation ofcivil society through consultation mechanismsshould be sought.

• Operational efficiency requires making line minis-tries accountable for the implementation of their pro-grams. However, they can be held accountable onlyif they have sufficient authority to design these


programs. This requires, in a number of countries,reviewing the distribution of responsibilities inbudget preparation.

• Aid-dependent countries need to pay more atten-tion to the programming of expenditures financedwith external aid and should scrutinize their bud-get as a whole (despite the fact that the projectapproach adopted by donors may favor fragmenta-tion in budgeting).

Moving to a multi-year perspective

Every country should prepare its budget within a medium-termmacroeconomic framework, covering three to five years, to beable to assess fiscal sustainability. The degree of sophisticationof projections depends on technical capacities within the coun-try, and could be progressively improved by the developmentof econometric models. However, the development of these toolsshould not be a prerequisite for preparing a macroeconomicframework. The macroeconomic framework should be supple-mented by projections of aggregate expenditures by functionand broad economic category, to assess its realism and to iden-tify policy requirements and constraints in achieving the fiscalobjectives.

To improve budget preparation, the first priority is toset sectoral spending limits and announce them early in thebudget preparation calendar. Also, close coordination in thepreparation of the different components of the budget (revenue,current and capital expenditures, expenditures from funds, etc;)is required, whatever the government organizational arrange-ments. In countries where responsibilities for the capital bud-get are separated from responsibilities for the current budget,the priority measure is to require joint reviews of the twocomponents of the budget at each stage of budget preparationand at each administrative level.


Budget preparation should systematically adopt into amulti-year perspective. This requires:

• At least, preparing aggregate expenditures estimatesby function and broad economic category, and es-timating and reviewing the forward costs of pro-grams when preparing the budget;

• At a further stage, preparing multi-year expenditureprograms, within a macroeconomic framework,linked with the budget preparation, and includingonly programs/projects for which financing is cer-tain (multi-year programs should focus only onongoing policies, and new policies should be decidedonly during the preparation of the annual budget);

• As a final stage, preparing a formal medium-termexpenditure framework with the same coverage andin the same degree of detail as the budget. To achievethis objective effectively a progressive approach canbe considered. As a first step, aid-dependent coun-tries should prepare a strong PIP and detail theforward costs of investment projects financed byexternal sources. Other countries could focus on themore costly items, e.g. entitlements, large investmentprojects/programs, or major specific sectors). It isalso possible to gain experience by preparing a fullsector expenditure program for one of two key sec-tors. These partial programs, as noted, must besupported by projections of aggregate expenditures,by function and broad economic category.

Organizational issues and the budgetapproval process

The legislature is the appropriate locus of overall financialaccountability:

• The obvious first step is to give adequate means tothe legislature to review policies and the budget;


• The budget should be presented to the legislature ontime, to allow its proper scrutiny and budgetary de-bates to be completed before the start of the fiscal year;

• Aggregate revenue, expenditures, and fiscal targetsshould be reviewed together.

To contain pressures to increase expenditures, limitsmay have to be set on the powers of the legislature to amendthe budget (e.g., any amendment that increases expendituresor decreases revenues should be accompanied by a counterbal-ancing measure to maintain the initial deficit target). The legalframework should stipulate that laws that have a fiscal impacttake effect only if the fiscal measures are authorized in thebudget or its supplementary acts.

Budget execution

Budget execution generally needs to be improved along twolines: enhancing expenditure control, and creating the condi-tions for increased efficiency in public spending. An adequatebalance between these two different requirements should befound. In addition, certain priorities for improving cash man-agement can be suggested.

First stage: Ensuring basic expenditure control

In a number of countries, the first stage should be both toreinforce expenditure control and to ensure better conformityin budget execution with budget policies. In this respect, spe-cial attention needs to be paid to the following:

• Timely release of funds;.• Cash planning in conformity with budget authori-

zation and taking into account ongoing commit-ments (of course, a sound budget is a prerequisiteto begin with).


• Effective controls at each stage of expenditure (what-ever the organization of controls, internal to thespending ministry or ex ante/external);

• Adequate monitoring at each stage of the expendi-ture cycle (commitment, verification, and payment);

• Clearly defined procedures for registering transac-tions (notably for commitments).

• Adequate cash management;• Transparent procedures for procurement.

Second stage: Improving the efficiency of the system

For more efficient public spending, the following actions aregenerally needed:

• Flexible rules for virement and regulated carry-overprovision, especially for capital expenditure;

• Progressive decentralization of controls ( in parallelwith a reinforcement of procedures for auditing andreporting); and eventually;

• Development of market testing and considerationof possibilities for contracting out.

Cash management and the Treasury function

In most countries priority actions should concern the follow-ing areas:

• The centralization of cash balances should be ensured(together with a centralization of the monitoring oftransactions). In countries where the payments sys-tem has broken down, this may call for implement-ing a centralized Treasury system from scratch. Inother countries, banking arrangements and proce-dures for transferring funds should be reviewed tobetter control cash and avoid idle balances. Factorsto be taken into account include: (i) constraints dueto the localization of local agencies and the infrastruc-


ture of the country; and (ii) the possibilities offeredby modern information technologies.

• Sound cash planning should be established, togetherwith other measures such as improving revenue fore-casts and commitment accounting.

• Debt management, especially the timely tracking ofborrowings and repayments, should be strengthened.

Once the centralization of cash flows is ensured, incen-tives for managing and forecasting cash flows more efficientlycould be considered, but in practice this concerns only a lim-ited number of developing countries.

Management control, audit and evaluation

The several elements that can contribute to the integrity, effi-ciency and effectiveness of government organizations andprograms, must be instituted by government. They do not comeinto existence because one wishes them to. Some of the keyconsiderations involved in developing effective managementcontrols, auditing and program evaluation are as follows.

A government that is convinced of the need to build orstrengthen its control and analysis capabilities needs to definea strategy for accomplishing these goals and establish respon-sibility for doing so. In most countries, there are two institu-tions that should play critical roles in this process, the Ministryof Finance and the Supreme Audit Institution. Ideally, the strat-egy should be the outgrowth of consultation and cooperationbetween these two institutions. Implementation of the strategy,involving the actions that must be taken by the line ministries,should be the responsibility of the ministers and senior civilservants in the line ministries, under the leadership of the MOFand external oversight by the SAI.

It is not possible to develop all the needed institutionsand procedures at one time. In almost all countries, and espe-cially in developing and transition states, the highest priority


should be placed on assuring the reliability of the financialsystems and the integrity and security of the controls overtransactions. This translates into placing first emphasis onbuilding reliable management control structures and effectiveinternal audit units in the ministries and on assuring the effec-tiveness of the SAI as the external auditor. Only when these arein reasonably satisfactory condition is it worthwhile to focuson the efficiency and effectiveness of operations.

Countries need not depend exclusively on their ownknowledge and experience in developing effective managementcontrols, auditing and program evaluation. Technical assistanceis available in all these areas from multilateral institutions, donornations and professional organizations. SAIs and MOFs indeveloped countries are often willing to provide technical adviceand assistance to their counterparts in developing and transi-tion countries because of their professional commitment tosound financial management in all countries.

The technical infrastructure

Accounting and reporting

In a majority of developing countries, it is necessary first tofocus on the following:

• In countries that monitor only payments, a commit-ment register and an ancillary book for outstandingpayments should be implemented. More generally,a comprehensive budgetary accounting system andregister expenditure should be implemented at eachstage of the expenditure cycle. Budget executionreports must show expenditures at each stage of theexpenditure cycle.

• Develop a debt accrual accounting system shouldbe developed if none exists, and comprehensive re-ports on debt should be prepared.


• Operations of extrabudgetary funds (if any), shouldbe consolidated, and all government entities shouldbe made to follow the same classification in theirreporting.

• Contingent liabilities should be recorded and state-ments of these liabilities must be prepared andpublished.

• Publication of financial statements.

Further steps should include:• Implementing modified accrual accounting to pro-

vide a comprehensive framework for reporting onliabilities, and systematic registration of contingentliabilities;

• Implementing asset registers, at least for the categoriesof assets that need to be carefully monitored.

When (and only when) the previous actions have beenimplemented, and are on a solid basis, can a move toward fullaccrual accounting and the accompanying financial reportingbe considered.5 Taking into account the heavy implementationrequirements, accrual accounting could be implemented gradu-ally, beginning with agencies with a more urgent need to as-sess full costs.

Public investment programming and aid management

The broad goals of public investment programming are to:(i) raise investment efficiency by improving project quality;(ii) bring investment allocation in line with country policiesand priorities; (iii) assure consistency between investment

5 Because almost all developing countries still need to complete the im-provements listed above, full accrual accounting is a realistic option onlyfor developed countries, although many of these have not even begun tointroduce it.


6 Because aid is fungible, if the government would implement a particularproject in any case, aid earmarked for it releases governmental resourcesto finance a "marginal" project of which the donor knows nothing. Theaid in effect finances the latter project, and the earmarking is an illusion.Hence, if the quality of governance or of public management is seriouslydeficient, donor control over the investment program as a whole may bethe only way for aid moneys to have a positive development impact. (Afar stronger impact, however, would result from assistance or insistenceto improve governance in the first place.) In most developing countries,instead, donor financing for a project which the government does notconsider a priority can distort resource allocation and create other ad-verse incentive problems and moral hazards which more than offset thedirect positive impact of the assistance itself. Hence, strong coordinationand direction by the recipient country's government are essential to thedevelopment impact of the assistance. The implications of aid fungibilityfor the investment program under different assumptions have been ex-amined long ago (see Schiavo-Campo and Singer, 1970) and have beenrecently rediscovered.

programs and available financing at favorable terms; and(iv) lead in time to a more comprehensive multi-year expen-diture framework.

All these goals require sufficient control by the re-cipient government over project selection and strategicallocation of aid moneys—assuming a reasonable degree ofintegrity and efficiency in the country’s governance andpublic management.6 Conversely, a good public investmentprogramming process is most often the best practical way inwhich the recipient country’s government can get into thedriver’s seat and stay there.

The directions and sequencing of reforms in publicinvestment programming and aid management stem directlyfrom those four goals. For better project quality and investmentefficiency:

• The first priority is to design ironclad proceduresagainst the birth of “white elephant” projects. Oncea project of large size is on the drawing board, thebureaucratic dynamics from both donor and recipi-ent sides make it very difficult to stop it. Among


these procedures, involvement of high-level policymakers (and, for very large projects, the Cabinet)must be built in at a very early stage.

• Also essential is the capability for economic appraisalof projects. Because of the need to economize onscarce capacity (and to minimize reliance on expa-triate expertise), in developing countries simple ap-praisal methods are preferable, and selectivity isneeded. Only projects of significant size should beanalyzed in detail, with smaller projects “bundled”and the bundle evaluated only for its general cor-respondence with sectoral policies and commonsense.

• Third, an agile procurement process that minimizesthe opportunities for corruption, and effective physi-cal monitoring of project implementation andcompletion are a must. Strengthening the auditfunction and obtaining systematic feedback fromlocal entities can be extremely useful.

For the other three objectives of public investmentprogramming:

• It is important to have a procedure for early deci-sion of whether the investment allocation corre-sponds to aggregate and sectoral policies, and theensuing preliminary definition of the sectoral expen-diture envelopes.

• Also, through good aid management and coordina-tion among donors, regulations are needed for as-sessment of the probability of financing for variousprojects, and strong regulation should be in place toassure that only projects with certain financing areincluded in the investment program.

• Finally, a realistic procedure and minimum capac-ity for estimating the total cost of investment projectsand their recurrent costs is a must. This is always


preached but rarely done. The absence of theseestimates, however, is sufficient in itself to cast acloud on the usefulness and integrity of the publicinvestment programming process. Conversely, theexperience gained through these forward estimatescan be invaluable for the eventual move to a com-prehensive multi-year expenditure approach.

Performance orientation and contracting out

Injecting new formal performance-related elements into thebudget process requires extreme care, both because betterperformance orientation is critical for improving public expen-diture management and because there are many wrong waysof pushing it and only a few ways of doing it right. The lessonsof international experience for the reform process in this areaare thus essentially the following:

• Never confuse the objective of better performanceorientation with any one of the specific instrumentsfor achieving it. There are many ways to foster per-formance, short of making formal changes in thebudgeting system;

• If the public expenditure management system isperforming reasonably well, be particularly mind-ful of the risk that changes may actually make thesituation worse. (Symmetrically, if the budget pro-cess is extremely weak and corrupt, radical changesmay be the only way to improve it.)

• Consider carefully the probable impact on individu-als’ behavior, especially in multi-ethnic societies orvery small economies.

• Understand clearly the different uses and limitationsof input, output, outcome and process indicators,and tailor the use of each to the specific sector andissue in question. Whenever possible, avoid usingany single indicator to assess performance.


• Assure robust monitoring of performance, with swiftand predictable consequences.

• Build-in provisions for the systematic assessment ofperformance of the performance system itself. It is inher-ent in the logic of the system that it, too, must besubject to a reality test, and to periodic proof thatits concrete benefits have outweighed the cost.

• Beyond these caveats, it is important to continuouslylook for any possibility to expand the “service aware-ness” of government administration; raise the re-wards for good performance (not necessarilymonetary) and the sanctions for unsatisfactory per-formance; and keep under constant review thepossibility of introducing the various tools formeasuring and monitoring performance. In all thesetasks, systematic feedback from the service users andthe public at large is invaluable, and so is an in-formed and aggressive free media.

• The process of introducing performance indicators canconsist of first picking one or two government depart-ments that provide services directly to the public;introduce simple performance measures at an accept-able cost (including transactions cost); monitor closelythe functioning and impact of the measures; debug themeasures and adjust as needed; gradually expand theapplication of performance measures to other govern-mental areas as and when appropriate; and stop whenreaching the point of diminishing returns. The perfor-mance indicators can be used right away in the dialogueduring the budget preparation, but direct and mechani-cal links to budgetary appropriations should bepostponed to a later stage.


A Concluding Word

The approach of this book has been resolutely pragmatic, pro-viding a menu of options rather than single “best-practice”models, and highlighting the need to consider carefully thespecific country context. However, pragmatism degenerates intoad-hockery and shortsightedness if it isn’t guided by coherentand universal principles. Among these, the following arefundamental and applicable everywhere:

• Strengthening the “four pillars” of governance (ac-countability, transparency, predictability, and partici-pation).

• Reinforcing their foundation in civil society, throughsuch means as efficient and responsible fiscal decen-tralization, and encouragement of citizens’ “voice”.

• Using improvements in public expenditure manage-ment partly to reduce opportunities for corruption,both home-grown and imported.

• Following the beacon provided by the PEM objec-tives—fiscal discipline, strategic resource allocation,good operational management and due process.

• Stretching the horizon of budgeting beyond the im-mediate future—through a concrete multi-year ap-proach, when feasible, but at a minimum at the levelof systematic reflection and dialogue.

In addition to these universal principles, we suggestfrom experience four practical rules for assessing the merits ofrecommendations to improve expenditure management in thespecific country context:

• Put first things first. “Getting the basics right” is amust for the process of spending the people’s money,especially in poor countries where the people canleast afford costly experiments. Other areas of eco-nomics and technology may offer realistic opportu-nities for “leapfrogging” over the immediate


problems into a more advanced state of affairs. Inpublic expenditure management, such opportuni-ties are very limited, the costs of mistakes are veryhigh, and these are rarely borne by the advocates ofthe experiment. In the words of the Press Commu-nique of the Conference on Fiscal Policy and Reform(February 2-4, 1999, Apia, Samoa): “…fundamentalelements of budgeting preparation; implementation;and monitoring that permit effective control, pro-mote transparency, foster accountability, and ensurelegitimacy need to be firmly in place before highlysophisticated concepts of budget management…[are] introduced.”

• Don’t make the same mistakes. Mistakes are inevitable;but repeating the mistakes of others can be avoided,by a realistic assessment of the concrete experienceof a variety of other countries with the same mecha-nism or process.

• Put the right driver in the driver’s seat. Any measureto improve public expenditure management in de-veloping countries must raise the country’s own ca-pacity to manage its public expenditure. An“improvement” in public expenditure managementdesigned and implemented primarily by expatriatespecialists is no improvement at all, quite the con-trary. Nor can improvements last if they are imposedtop-down by the central agency with little involve-ment or implementation capacity of the sectorministries.

• Finally, be open-minded but questioning. The historyof development assistance is littered with the bonesof imported institutional failures. If the recommen-dation is sound, it will withstand critical challenges;if it is not, only critical challenge will reveal that fact.

Chapter 6

Beyond the Basics:The Philippine Case

Benjamin Diokno

Introduction

Going through any public-sector reform process is difficult giventhe various contending forces which push and pull at the publicsector. Yet, fiscal and budget reforms are essential because thequality of public financial management determines, to a largeextent, the country’s macroeconomic stability and the qualityof its governance. There is no question about this, especiallysince the quality of program delivery by government is nowconsidered as one of the determinants of growth.

It is indeed important for countries undergoing reformsto learn from the successes and failures of others. The litera-ture on reforms undertaken in other countries provides lessonsto those who are still in the process of formulating a reformagenda. But one should always keep in mind the importanceof a contextual perspective, the diversity of country problems,and the responsibility of the countries themselves, which arebest placed to do so, to decide where to place their emphasis.

The manner of reform implementation and sequencingof the reforms are key issues. In the Philippines, the differentoversight agencies in government are at different stages of theirown reform agenda. However, these “reform silos” point tocommon objectives, that is, enhancing aggregate fiscal disci-pline, ensuring strategic allocation of resources, and encourag-ing better operating efficiency in agencies. There is an ongoingeffort in the Philippines to coordinate these objectives for a


holistic and more strategic approach which would build on thesynergies and capitalize on the reinforcing effect of the differ-ent components of public management reform. Budgeting isbeing linked to the development planning exercise. Budgeting,cash management, accounting and auditing functions both atthe oversight and agency levels are now being integrated. Weconsider interdepartmental coordination very important as away to build support, and avoid inconsistencies and bottlenecksin the implementation process.

Where Are We Going?

The Department of Budget and Management of the Philippines(DBM) has embarked on an ambitious and mutually reinforc-ing package of public-sector reforms that includes the strength-ening of public expenditure management systems and therestructuring or reengineering of the core government.

Because of the interdependence and reinforcing effectof these two reforms and the extent of studied dysfunctions inthe structure of government and weaknesses in the budgetingsystem, the government decided to integrate the implementa-tion processes of these two reforms so as to facilitate theirimplementation. But more importantly, the Asian financial crisisand the election into power of a new administration offer thewindow of opportunity for the implementation of these politi-cally sensitive reforms.

For the medium term, the DBM is changing the way itformulates and allocates the budget through the installation ofa Medium-Term Expenditure Framework (MTEF), the strength-ening of performance monitoring, and the gradual simplifica-tion of budgeting rules to enable government managers tomanage their resources to attain better performance. This ef-fort is being supported by an institutional development grantfrom the World Bank. The components of this project includethe installation of an MTEF, which is a three-year rolling ex-

Beyond the Basics: The Philippine Case 137

penditure framework that will allow the tracking of fundingrequirements of ongoing agency programs and projects for thenext three years. This framework will link annual budgetingdecisions to medium-term spending constraints indicated by themacroeconomic framework and the resulting fiscal plan. Thus,it will ensure that future financial implications of new spendingand savings decisions in any given year’s budget are consistentwith medium-term fiscal policy targets. Moreover, with thespecification of multi-year sectoral ceilings which will be ap-proved by multi-sectoral Planning Committees and serve as thebasis for the annual budget ceilings of agencies, the frameworkwill pave the way for the restructuring of the budget toward thepriority programs of the administration and introduce greatertransparency in budget formulation. Unlike in past years, re-sources under this framework will be projected conservatively.

Another component of the expenditure managementimprovement project is increasing accountability for perfor-mance. This involves the development of effective and accept-able indicators of performance for line agencies. Performancemeasurement will improve public-sector performance throughbetter accountability mechanisms and systems that give feed-back to the budget process. Specifically, we hope that perfor-mance measurement will rationalize the accountability of publicofficers and employees; promote allocative and operating ef-ficiency; and promote client orientation, as the performanceculture becomes pervasive.

Together with this last component is the gradual del-egation to agencies of some of the present high-level controlsover agency spending, in return for increased control over themedium-term profile of total budget spending and increasedinformation on the magnitude and quality of agency expendi-tures. Here, we take special notice of the sequencing issue.Sequencing for each of the components of the improvementprogram is being given utmost consideration.

Started in October 1997, this expenditure managementimprovement effort counts as part of its accomplishments the


initial integration of the planning and budgeting exercises forthe year 2000 budget, and the conceptualization of a perfor-mance management system for the national government.

Central to the public-sector reform of the Philippinegovernment is the Reengineering of the Bureaucracy for BetterGovernance Program. This program offers a new paradigm ofgovernance that will determine the scope, level, quality, andfocus of government intervention in society. It will rationalizethe distribution of functions between the government and theprivate sector, between the national and local governments andamong government agencies in the context of the government’sthrusts toward globalization, liberalization, and decentraliza-tion. This reform effort was triggered by the existing observeddysfunctions in the bureaucracy and the seeming lack of philo-sophical foundation of governance.

At the request of President Estrada, a bill has been filedin Congress that will grant to the President full authority toreorganize the executive branch. Pending the enactment of thebill, the DBM has been encouraging agencies to review theirprograms and projects to be able to refocus them toward newpriorities of government. A few departments and agencies suchas the Bureau of the Treasury, Department of Health, andDepartment of Social Welfare and Development have initiateddepartment reorganization processes.

How Do We Get There?

Public-sector management reform is in the Ten-Point Agendaof the Estrada presidency. Hence, from day one of the admin-istration, we have been setting in place the proper environmentfor the reform. First, the DBM has been working toward get-ting the support from the important stakeholders: Congress,the private sector, and the national agencies. We have drafteda Budget Accord in recognition of the important role of theCongress in supporting budgeting and expenditure manage-


ment innovations. Intended to be passed as a joint resolutionby both houses of Congress, the Accord aims to promote bettercoordination with Congress in the different phases of budgetimplementation. The Accord will set in place the fiscal targetsof the MTEF including the policies and parameters for programimplementation and reporting mechanisms that will be adheredto by both the Executive and Congress for the medium term.

A Budget Dialogue Group was also formed consistingof the private-sector business, basic and NGO, secretaries of keydepartments, and heads of leagues of provinces, cities, andmunicipalities. The creation of this group is envisaged to generatesupport for the medium-term reforms and the identification ofneeded budget systems reforms. Support for the reforms fromthe oversight and implementing agencies is also being solicitedthrough various budget dialogue forums, and interagency andcommittee arrangements. This effort will be strengthened as thecapacity building and change-management component of theexpenditure management improvement project takes off. Webelieve that strengthening financial management capacities inthe implementing agencies and not only at the oversight levelwill be the key toward the internalization of fiscal discipline,technical efficiency, and performance focus in government.

Second, because providing resource predictability isneeded to reap the benefits of an MTEF, starting this year re-lease procedures are being streamlined. We have instituted the“what-you-see-is-what-you-get” (WYSIWYG) policy. Under thispolicy all appropriations for ongoing and specific agency pro-grams for which funds were appropriated by Congress aredeemed released at the beginning of the year with the GeneralAppropriations Act (GAA) serving as the spending authority.Thus for 1999, the first year of this new arrangement’s imple-mentation, some 80 percent of the budget was deemed releasedat the start of the year and agencies were able to obligate for theimplementation of agency programs and projects. This was madepossible with the abolition of Congressional “pork barrel” fundsin the agency budgets.


We are moving away from the highly disruptive impo-sition of across-the-board expenditure cuts and reserve impo-sitions. We intend to deal with changes in the fiscal scenariothrough the well-measured release of lump-sum budgetaryfunds and the undertaking of a mid-year assessment of finan-cial and physical accomplishments of agencies.

Third, settling expenditure arrears, which resulted fromthe squeezing of expenditures as a result of the Asian economiccrisis, is also one of the immediate priorities of the governmentfor this year. Some P60 billion or 40 percent more than in theprevious year, was set aside from the 1999 disbursement pro-gram to enable the early settlement of arrears. A direct pay-ment system to external creditors has been installed throughthe government banks, and the list of creditors paid is postedon the DBM Web site for increased transparency and stream-lining of release procedures.

The Philippine government is committed to maintain-ing macroeconomic stability and fiscal consolidation as a fun-damental component of sustained growth. However, to nurtureearly economic recovery, it is disposed to incur a higher fiscaldeficit from the original target of P17.9 billion to P68.4 billionin 1999, compared with the 1998 deficit of P50 billion. It is ourintention to progressively reduce the budget deficit and attaina balanced budget by the year 2002.

The DBM, together with the Department of Finance andthe Commission on Audit, is also strengthening the financialmanagement systems in government both at the oversight andagency levels. The effort involves several components:

• simplification and refinement of accounting systemsto yield additional information useful for budgetmanagement;

• review of financial management capacities at theagency level to address weaknesses which may haveresulted from decentralization and the retention ofmanual systems;


• development of an integrated financial managementinformation system (IFMIS) to promote data shar-ing and streamline the external reporting system ingovernment; and finally

• strengthening of the procurement and bidding pro-cedures in government.

At the DBM, the initial phase of the development of anIFMIS has begun with the development of a Budget Executionand Tracking (BEAT) system. Initially, the system will allowthe tracking of releases to agencies and the monitoring of ac-tual expenditures from agencies. DBM will be working toimprove agency financial management systems by enhancingthe agency module of the BEAT system. This will set the plat-form for the devolution of financial management to the agen-cies. A strong interagency effort should therefore be emphasizedfor the success of reform in this area. There is an ongoing effortwith the World Bank to assess and strengthen the financialmanagement systems of agencies through systemsreengineering and capacity building.

With regards to procurement reform, we are closelycoordinating with the Commission on Audit toward the instal-lation of an electronic bid board which will greatly enhance thetransparency and reduce the cost of bidding processes forsupplies and equipment. The government now spends someP16 billion yearly for the purchase of supplies and materials,including medicines and textbooks, and another P7–P10 bil-lion for furniture and equipment including IT equipment.

To enable the DBM to better serve its client-agencies,the public, and the donor community, we have sought author-ity from the President to reorganize the Department. We pro-pose to set up one-stop shops in our operating bureaus whichwill allow the integration of the results of performance moni-toring, financial analysis, and organizational review to providefeedback for decisions concerning the approval and release offunds. We are also setting up a bureau specifically to handle


all matters related to foreign-assisted projects (FAPs) in orderto strengthen the DBM’s interface in the review and approvalof projects in the Investment Coordinating Committee and tofacilitate budgetary actions related to FAPs. We are streamlin-ing our release procedures to lessen the number of documentsand signatures required for the release of funds.

Conclusion

In conclusion, the four-pillar approach suggested by A.Premchand in chapter 3 is a matter of particular relevance toour country. In fact, most of the components of this approachare being addressed in the reforms being instituted in the Phil-ippines. The Philippines has still a long way to go to improvepublic-sector management. The task ahead of us is formidable.We have no illusion that problems will not be encountered alongthe way. But with the assistance of the private sector and theagency stakeholders, as well as the donor countries and insti-tutions like the ADB, the World Bank, IMF, AusAID, and CIDA,we are confident that we can carry out the reforms necessary tomeet the challenges of the new millennium.

Chapter 7

Public FinancialAccountability

Arigapudi Premchand

Introduction

What is accountability? What is it that the community is inter-ested in? Answers to these questions have never been easy. Nota great deal has been said about the components of account-ability or the means through which it may be achieved, althoughroutine incantation of the need for accountability has becomea notable feature of national and international debate. In somequarters, it is being offered as an instant aspirin that helpminimize fiscal problems. There is, however, a need to gobeyond slogans and discussion of general propositions, into thedetails, and to delineate the contours, contents, and potentialfault lines of accountability in general and, more particularly,financial accountability. In addition to the two important is-sues raised above, it is imperative that answers be provided toa variety of questions that arise in this context. How did ac-countability evolve? Why the current emphasis on financialaccountability? What are the features and instruments of finan-cial accountability? Are the instruments adequate for the pur-pose? If they are underachieving, what are the contributoryfactors? What constructive agenda may be followed hereafter?

The need to provide answers to the above and a mul-titude of related questions has assumed greater importance inthe context of the impact of four factors. First, two decades offiscal turbulence have contributed to a substantial erosion ofthe credibility of governmental fiscal machinery, and to a


growing distrust of governments. Second, the gradual spreadof globalism has put policymakers in many countries in a re-active, rather than a proactive, mold; external developmentsthat do not always lend themselves to precise identificationwould appear to have a greater role, indeed a dominating one,on fiscal policies. Information asymmetries have made the al-ready formidable tasks of policymakers even more complex andintractable. In the absence of crucial information, the risks facedby the policymakers have increased significantly. Third, thechange in the nature of government and its gradual withdrawalfrom production activities has made it take an active role in regu-lation, which adds to the complexity of financial accountability.Fourth, there has been a major change in the composition ofexpenditures of central and federal governments. Apart fromthe sizeable outlays on the servicing of public debt, expendi-tures at the central-government level are increasingly devotedto transfers to the private sector, entitlement payments, andtransfers to regional and local governments. This has contrib-uted to a separation of funding from the actual provision ofservices and has affected the pattern of financial accountability.

This paper is devoted to a consideration of the aboveissues. Such a consideration requires a comprehensive perspec-tive on the evolution of accountability. Only in the light of thatperspective can financial accountability be distinguished fromgeneral accountability.

In order to provide a comprehensive background thatwould facilitate an appraisal of the current issues, the evolutionand practice of the idea of accountability is discussed first. Thisis followed by a discussion of the anatomy of financial account-ability and its inherent aspect of underachievement of goals. Thepaper concludes with a constructive agenda for the future.

It will be argued in this paper that, notwithstandingthe fact that the idea of accountability is inherent in the actionsof an institution and its employees, the means of achieving ithave varied over the years and have moved from a simple tocomplex, if frequently expensive, machinery. Despite the com-

Public Financial Accountability 147

plexity, however, the capacity to achieve full accountability hasbeen and continues to be inadequate, partly because of thedesign of accountability itself and partly because of the wid-ening range of objectives and associated expectations attachedto accountability. It is further argued that if accountability is tobe achieved in full, including its constructive aspects, then itmust be designed with care. The objectives of accountability,it is argued here, should go beyond the naming and shamingof officials, or the pursuit of sleaze, to a search for durableimprovements in economic management to reduce the incidenceof institutional recidivism. The future of accountability consistsin covering the macro aspects of economic and financialsustainability, as well as the micro aspects of service delivery,including specific attention to public/private partnerships. Itshould envisage a three-tier structure of accountability: that ofofficials (both political and regular civil employees), that ofintragovernmental relationships, and that between governmentsand their respective legislatures. Further, it is argued that theexistence of numerous institutions and established proceduresfor financial accountability does not necessarily contribute tothe realization of the goal of full accountability, and that thefulfillment of financial accountability does not necessarily meanimproved fiscal status for a country. Improvements in theexisting systems, which are undoubtedly needed, should beenvisaged with due regard to cost-effectiveness and possibleparadoxical results.

Evolution and Practice of theIdea of AccountabilityAccountability has been viewed since time immemorial as achannel for ascertaining the use of power by an individual oran organization that has been entrusted with the task of per-forming prescribed tasks. The means through which account-ability has been achieved, however, has varied over the years.


The concerns of financial accountability, whether in a kingdom,which was the more common form of government, or that ofa democracy in the pre-Christian era, was the same, viz., thepreservation of the wealth of the king or the society. Writingnearly three hundred years before the beginning of the Chris-tian era, Kautilya, in what is easily recognized as the first manualon bureaucracy, observed that human nature was disposed toacquire public money for private gain. He wrote: “Just as it isimpossible not to taste honey or poison that one may find atthe tip of one’s tongue, so it is impossible for one dealing withgovernment funds not to taste, at least a little bit, of the king’swealth.” He added: “Just as it is impossible to know when afish moving in water is drinking it, so it is impossible to findout when government servants in charge of undertakingsmisappropriate money.”1 In recognition of this human procliv-ity, Kautilya went on to formulate a series of checks and bal-ances in the administrative system. He wrote that “in all cases(where) an official has caused loss of revenue to the state…hisproperty shall be confiscated.”2 A similar set of practices wasobserved in contemporary China.3

In the Athenian state, the hallmark was “its concern forthe accountability of its officials.” For them, “to have officialsaccountable was the key to responsible government, unaccount-ability meant lawlessness.”4 To this end, officials were requiredto report on their conduct ten times a year to the Assembly ofthe Citizens. If the explanations did not meet with theAssembly’s approval, officials were subjected to a trial, andindeed, where necessary, to impeachment. It was noted byhistorians that the prospect of being sentenced to death by thejudicial system was often greater than the risk of dying in battle.

1 Kautilya, p 281.2 Ibid, p 294. This principle is now included in the financial rules and regu-

lations of many countries. In practice, however, the application of thisprinciple has been relatively rare.

3 For an illustration of the experience of China, see Premchand (1995a).4 Quoted in Day and Klein (1987), p. 6.


Aristotle wrote: “Some officials handle large sums of money:it is therefore necessary to have other officials to receive andexamine the accounts. These inspectors must administer nofunds themselves. Different cities call them examiners, audi-tors, scrutinees and public advocates.”5 From that time, account-ability went through six stylized stages described in box 7.1.More important is the fact that during this period of evolution,attention turned from estate preservation and management toaccountability for actions and results. Estate preservation,however, has not been neglected. In fact, the idea behind theintroduction of accrual accounting in recent years is to ascer-tain the trends in the net worth of a country, a concept similarto that of estate management.

Meanwhile, however, the growing public administra-tion and management sciences have explored in some detailthe functions of a modern executive. Barnard has devoted aconsiderable part of his attention to these aspects. In Barnard’sview, an individual’s actions are guided by an informal codeof ethics (drawn from his moral environment), and more ex-plicit and formal codes of organizations. He noted that “mor-als are personal forces or propensities of a general and stablecharacter in individuals which tend to inhibit, control or modifyinconsistent immediate specific decisions, impulses or interestsand to intensify those which are consistent with such propen-sities.”6 He added that the responsibility was that of the indi-vidual: “The point is that responsibility is the property of anindividual by which whatever morality exists in him becomeseffective in conduct.”7 This concept of individual responsibilityis partly included in Simon’s system of values that have a promi-nent part in decision making.8 These points of view indicate thedistinctive beginning of managerialism as a school of thought,with its own impact on the concept of accountability.

5 Cited in Day and Klein (1987), p. 9.6 Barnard (1968), p 261.7 Ibid., p 267.8 See Simon (1997).


Box 7.1Conventional and Enhanced Financial Accountability

Over the years, events and ideas have forged some conven-tions of financial accountability. While it is difficult to be pre-cise in enumerating the historical phases of financialaccountability, some stylized stages can be construed from thepages of world history. Broadly, six stages have contributed tothe expansion of the scope of financial accountability and thusto changing conventions. First, there were the practices of trea-sury management associated with kings and royal rule. AsKautilya wrote more than two millennia ago, “all state activi-ties depend first on the treasury. Therefore a king shall devotebest attention to it” (p 253). All revenues and expenditures wereto be recorded in prescribed forms; these were then subjectedto audit (inspection). Kautilya added: “Accounts officers shallpresent themselves for audit at the appointed time” (p 275).The king, advised Kautilya, should devote the “first 1½ hoursafter sunrise—to reports on defense, revenue and expenditure.”Similar practices later were found in contemporary China andGreece (the latter was not a monarchy). The endeavor in thisphase was to devise machinery for the preservation and en-hancement of royal wealth, or estate management. The abovepractices continued for more than a millennium and wereenshrined in the principles of accounting devised by the roy-alty in England, and later in the approaches of cameralists inEurope. The second stage refers to the developments in Englandduring the seventeenth century when, in response to the steadyand growing demands of members of parliament, committeeswere appointed to review the “wisdom, faithfulness andeconomy” with which parliamentary grants were spent. Thisstage represented the assertion of the rights of legislators andendeavors, as a part of the procedures of the control of purse,to ensure financial accountability. The continuation of theseendeavors contributed to the appointment of a commission onaccounts (a predecessor of audit as practiced now) as well asa Commissioner of Accounts. During the third stage (nineteenthcentury), as a part of the Gladstonian reform of exchequer


management and its oversight by legislative committees, anindependent audit agency was set up to review the regularityand economy of expenditures. The annual audit report was tobe reviewed by a committee of the legislature representing thefinal stamp of approval or qualified approval of the financialtransactions of government. The fourth stage refers to the de-velopments during the twentieth century, in particular, afterthe second world war. The emergence and the gradual consoli-dation of the welfare state enabled the diversion of both gov-ernments and people from economy in expenditure (althoughit continues to be an important principle) to greater participa-tion by the people and to greater public scrutiny of public trans-actions, as well as to delivery of services. The latter, in turn,contributed to more emphasis on performance or outputs. Theresponse to these developments was in the form of economicdevelopment plans that reflected the people’s needs, and to per-formance budgeting in government, as well as performance con-tracts. Later developments contributed to refined systems ofbudgeting that emphasized economy (in the use of resources),efficiency (in achieving greater results within allotted resources)and effectiveness (in achieving program objectives). In theprocess, the scope of financial accountability came to be ex-panded rapidly and significantly. During the fifth stage, inaddition to the above dimensions, emphasis was laid on pru-dent macroeconomic management. Governments were expectedto be prudent (in using resources and in considering what couldbe achieved at what cost) and to take explicitly into account theassessment of the linkages between the budget and the economy.As a result, a kind of three-dimensional financial accountabil-ity emerged. The three dimensions are: (I) expenditure choices(to ascertain the degree of prudence); (ii) program management(propriety, economic management, adequate delivery systems);and (iii) regular dissemination of information (showing mate-rial matching, i.e., a process by which outputs and income arerelated in a time frame to cost of services). The sixth stage, whichis yet to emerge in final form and is meanwhile groping forclarity and acceptance, envisages enhanced financial account-ability. In addition to conventional financial accountability, nowgovernments may be accountable for ensuring that there are


Available history shows that the concept of accountabil-ity which was always inherent in the tasks, responsibilities, andbroad administrative behavior of governments, has changedin terms of the clientele group to which it was addressed. Frompersonal accountability to the king (for king and country a civilservant was expected to give his life when necessary) there wasa shift to a responsibility to the elected representatives of thepeople and now, in addition, to the people themselves. (Thevarious stages in the evolution of the concept of accountabilityare shown in the figure below). Accountability, now a multi-faceted phenomenon, involves, three distinct segments relat-ing to general accountability, fiscal accountability and tomanagerial accountability (as shown in the next figure). Finan-cial management systems in most of these development stagesremained rooted in the principle that no individual official wasto be trusted. For this reason, in a greater part of financialmanagement, time and process was devoted to the verificationof payment claims and arrangements for the custody of money.The managerial approach, in contrast to the traditional belief,is based on the idea that an individual official, in order to be acreative and innovative manager, should be trusted and endowed

adequate systems to secure and improve results and to main-tain the financial condition of the state (economic sustainability,flexibility in the use of resources, and reduced financial vul-nerability). Furthermore, governments are expected to demon-strate that the selected programs are a part of the legitimatefunctions of a government and that the community can affordthem. Financial accountability has thus expanded, reflectingchanging tasks and expectations, and now people expectenhanced financial accountability to be fulfilled while comply-ing with the requirements that constituted accountability in thepreceding stages.

Box 7.1 (cont’d.)


with commensurate autonomy. But autonomy is not equivalentto independence. Rather, the official should be subjected toaccountability for results. The orientation to results is a signifi-cant departure from the previous practice and is intended to bea vast improvement over process-oriented behavior, and

?From Conventional to Enhanced Accountability

Estate Management.

Observance of economy in expenditure.

Observance of economy and regularity inexpenditures and institutionalized forms of oversight.

Delivery of services and emphasis onperformance, observance of economy, efficiency

and effectiveness of expenditures.

Prudence in economic management.

Emphasis on ensuring financial condition thatpromotes economic sustainability, expanded

forms of oversight and program tests to ascertainwhether they should continue to be a part of

government operations.


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subjection to continuous second-guessing at various levels inthe hierarchy.9 It is in this context that the specific aspects offinancial accountability need to be considered.

Financial Accountability

Financial accountability, too, has grown within the range ofparameters described above. In the process, it has developedits own chain of operations and institutions. The broad finan-cial accountability chain, common to many governments isshown in box 7.3. In considering the relative roles of the insti-tutions indicated in the chart, it has to be recognized that therole of donors and international financial institutions may bedifferent from one country to another, as is the role of nongov-ernmental organizations and others (the latter category includesa wide range of contractors and other providers of servicesfunded by different levels of governments), and of legislaturesand clientele groups. In former centrally planned economies,client groups are represented, in principle, by the party repre-sentatives. In other countries, clients may form significantpressure groups having pervasive, if frequently subtle, influ-ences on policymaking and the allocation of resources.

The main instruments of financial accountability aregovernment budgets, periodically published data on public

9 A civil society needs freedom to think and act and to function effectively.Such freedom implies a substantial degree of trust on the part of eachindividual regarding the actions of his fellow members of society. Thequestion arises as to how one can get on with his life in the absence of thatbasic trust. Financial management systems were designed without takingthis factor into account. Management philosophy, however, embodies thisprinciple in its operational approaches; indeed, it has made it a cornerstone.Breach of the implicit trust is to be addressed as a part of the accountabilityframework. Government operations have grown so enormously that it isdifficult to live without endowing every administrator with that degree oftrust that every citizen shows to his fellow citizens. Continued dependenceon misanthropy is likely to be counterproductive.


finances, annual accounts, and the investigative and othergeneral reports prepared by independent agencies. The maincomponents of these groups of instruments, their features

General Fiscal Status

Annual FiscalManagement

• Medium term fiscal strategy.

• Development plan

• Medium term budgets

• Annual balance sheets

• Intergenerational accounts

• Annual budget

Instruments of Financial Accountability:Features and Limitations

Functional Area Instruments


and limitations, and the way in which they contribute to thefulfillment of financial accountability are illustrated in thetable below.

• Shows the current statusof the economy and thefuture directions.

• Lays out the plans forfuture investments,maintenance outlays andfinancing patterns.

• Show the future finan-cial implications of cur-rent and future policies.

• Show the changing pic-ture of assets and liabili-ties as a result ofgovernment fiscaloperations.

• Show the burdens onfuture generations aris-ing from current opera-tions and their patternsof financing.

• Contains revenues, ex-penditures and debtestimates.

• Often too broad to constitute a strategy.

• These plans concentrate on investmentsand new programs; quantitative aspectsare specified.

• This is mostly intended for purposes ofinformation of the legislature and are notgenerally binding on governments.

• These have yet to gain currency in manycountries. Also, the preparation of bal-ance sheets involves several technical is-sues that remain to be resolved.

• The methodology of these accounts, aswell as their usefulness are subjects of in-tense debate. Developing countries havenot, as yet, shown any appetite for this.

• Many countries have yet to have legisla-tures endowed with powers to approve orreject proposals. In some countries, theseare viewed more as debating forumsrather than legislative bodies. Somecountries have well established legisla-tures patterned on the U.K. or U.S. model.

Features Limitations


• Approval of policies underlying annualbudgets.

• Estimates of revenue and new tax proposals.

• Estimates of expenditure.



• In some countries, me-dium-term strategies andpolicies are sought to bediscussed with the legis-lature prior to submis-sion of annual budgets.

• Show the expected rev-enues from current poli-cies and new policyinitiatives.

• Show the outlays on pro-grams and projects andserve as the basis for leg-islative appropriations.

• In some countries, multi-year appropria-tions are in vogue for developmentalprojects. In a few countries, extra bud-getary accounts are substantial and maynot require legislative approval.

• In some countries, legislatures have es-tablished consultative committees tochannel constructive and crucial policyinputs before final decisions are made.The contribution of these committees re-mains to be assessed.

• These estimates, often considered to beneedlessly optimistic, are now being re-viewed in some countries by the Auditagency (eg. Britain). The added value ofthis review remains to be proven. Legis-latures have their own means, wherethey are empowered, to assess the rea-sonability of estimates and to alter them.In British type systems, legislatures canreject government proposals only at therisk of resignation by the party in power.

• Legislatures, where empowered, autho-rize outlays on programs and projects.These appropriations, which provide thelegal authority for spending, may not al-ways assure full funding. Funding maybe subject to the discretion of the Execu-tive. In practice, there may be extensive

• (continued) underfunding impairing theimplementation of projects and pro-grams. In some cases, there may be le-gal earmarking and as such programsmay not require annual legislation andmay not suffer underfunding.

• Benefits from expenditure programs maynot be fully shown and in any eventmay not reflect binding contracts exceptin the context of performance contracts.



Overall objectives andpolicies.

• Public debt estimates.

• Donors and foreign aid.

• Described above.



• Some segments of expenditures, eg. pub-lic debt, may not require, in most cases,annual legislative approval.

• In most cases, these estimates do not re-quire legislative approval. New loans tobe raised, including those raised exter-nally, may not need legislative approval.

• Fiscal deficit targets do not lend themselvesto legislation in several countries. As such,they may not be enforceable. Failure tofulfill target may entail legislative criticismbut not sanctions or penalties.

• In most countries, foreign aid budgetingand accounting continues to be weak.

• Project loans and externally raised loansdo not, in most countries, require legisla-tive approval.

• Agreements with international financialinstitutions may not be submitted inmost cases to the legislature, as no legis-lative approval is required.

• International financial institutions havemany means to ensure full complianceand accountability through extensive ringfencing, regular monitoring, and imposi-tion of sanctions in the event of non-compliance.

• The nonachievement of objectives such asmacroeconomic stability, income distribu-tion, service provision, patterns of financ-ing, may receive general attention in thelegislatures and other bodies but entail nosanctions or penalties except through theballot box. The leeway available to theexecutive is considerable, while account-ability is limited. Furthermore, the aboveinstruments except for entitlements, arenot justiciable in any court of law.

• Show the servicing costsand the amounts of debtto be raised.

• Estimates where pro-vided, show the likelyamounts to be receivedfrom donors and inter-national financialinstitutions.

• Described above.



Budget implementation. • Release of funds spending agencies.

• Cash management.

• Award of contracts.

• Carryover of funds.

• Outlays on transfers to other levels ofgovernment and on entitlements.

• Personnel limits, reappropriations.



• Plans for time-sliced re-leases of funds.

• Intended to facilitate the mo-bilization of domestic debtand ensure a smooth inflowand outflow of resources.

• Specification of work tobe done.

• Funds may be allowedto be carried forwardinto the next fiscal year.

• Reveal the portfolioof governmentexpenditures.

• These are areas onwhich limits may be im-posed by the legislature.

• In some countries that have a system of ex-chequer control, release of funds may requireapproval of the Controller or Auditor Gen-eral, on behalf of the legislature. In a few oth-ers, legislation may specify the periodicity ofreleases from approved appropriations.

• This is a function of the executive.Experience shows that this could lead to pa-tronage and to a form of crony capitalism.

• Contracts are not required to receive legisla-tive approval. Details of contracts are notrequired to be reported to the legislature.

• At the level of local governments, how-ever, committees entrusted with theaward of contracts may include the rep-resentatives of the community.

• With a view to avoiding year-end rushof expenditure, some governments arenow allowing select carryovers of funds.

• This procedure constitutes a violation ofthe contract between the legislature andthe government. Despite this, these trans-actions are not reported to the legislature.

• Most transfers are determined, as are en-titlements, by previous legislation and assuch, do not require specific approval bythe legislature.

• Governments have considerable leeway towork within limits. Frequently, limits may becircumvented, for example, temporary em-ployees, leases rather than purchases, unbun-dling to escape limits, through legal means.

• Reappropriation may be selectively un-dertaken by the Executive within theframework of delegated powers.



Accounts

• Performance contracts and measures.

• Supplementary budgets: Recessions.

• Excess expenditures.

• Appropriation accounts.



• These contracts are rela-tively of recent originand provide a legal basisfor services. Measuresreflect quantitativeaspects aimed to en-hance the quality ofaccountability.

• Addictions and restric-tions on allotted funds.

• Expenditures over speci-fied limits.

• Show the disposition ofthe funds approved bythe legislature and theextent to which the bud-getary intent has beenfulfilled.

• Many governments rely on regular civilservice and performance contracts haveyet to gain extensive acceptance. Thesecontracts do not require approval by thelegislature, although they may besubmitted for the information of thelegislature.

• Performance measures are mostly givenfor projects and selected programs. Thesemeasures are devised by the executiveand are neither binding nor are requiredby the legislature. As such failure toachieve may entail, at best, a justification.

• Supplementary budgets require legisla-tive approval. Although there is a pre-scribed time table, legislation may beenacted when needed. Selectively, ex-penditures may be undertaken in antici-pation of legislative approval.

• Rescissions or reductions in allottedfunds may be undertaken by the execu-tive and may not even be reported to thelegislature.

• In British type systems, excess expendi-tures are required to be approved on anex-post basis. In the U.S. type systems,excess may be collected from the officialresponsible for that act.

• Limits are often circumvented throughhidden debt including arrears in pay-ment which need not be reported to thelegislature.

• Audited accounts are required to be sub-mitted to the legislature for its reviewand approval.

• The structure of accounts varies amongcountries, but are mostly too aggregativein nature. The accessibility to the publicis limited.



• Periodic reports.

• Periodic reports.

• An annual audit report.

• Periodic investigative reports.

• Efficiency audit.

Evaluation

Audit



• Show the intra-yearstatus of governmentfinances.

• Show the results of pro-grams and the cost-effec-tiveness with which theyhave been carried out.

• This shows the failuresof the executive in thefinancial area.

• Shows the misuse orfraud in selected areas.

• Shows the efficiency inthe process of resourceutilization.

• Until recently, these were not either sub-mitted to legislatures or published in themedia. Now, however, in response tothe demands of financial markets, gov-ernments are slowly engaged in the peri-odic publication of fiscal data.

• In countries where the fiscal performanceis subject to credit rating, financial dataare now regularly published.

• Evaluation is primarily a technique usedby the executive. The application of thisapproach is still limited. The reports,when published, may be made availableto the public and the legislature.

• In some countries legislative committeesmay undertake evaluation with the assis-tance of the audit, or on its own.

• In either case, there may be no sanctionsfor failure. Justification may beprovided.

• Audit reports are frequently delayed.Most of them concentrate on financialand regularity audit.

• The purview of audit, does not includepolicy aspects. It is dependent for itssuccess, on the legislative support itreceives.

• The application of this technique is stilllimited; when applied, however, it hasthe potential of resulting in sanctions.

• As with investigative audit, the applica-bility of this technique has been limitedlargely for the reason that governmentbudgets have not yet adopted, in severalcases, performance approaches in opera-tionally binding terms.



Some specific features that have a significant impacton the financial accountability debate may be noted here. First,although the instrumentation may be wide-ranging, it needsto be recognized that not all of them are to be found in allcountries. Some countries have minimal instruments such asan annual budget and a set of annual accounts. The otherinstruments have yet to find acceptance and practice in manycountries. Second, it appears that in most countries where theinstruments may be basic and not too sophisticated there maystill be an effective machinery in regard to the financial rela-tionships with donors and international financial institutions.This is largely due to the extensive range of techniques usedby the donors and others. Aid provided by donors also comeswith stiff and far-reaching conditionalities. Donors and inter-national financial institutions have regular and systematicapproaches to monitoring actual progress in the field. In somecases, they may also supervise the projects and programs theyfinance. Moreover, fear of losing financial support makes therecipient countries pay particular attention to foreign-aidedprojects and agreements with international financial institutions.Furthermore, the violation of agreements could have a signifi-cant and quick adverse impact on the credit ratings of a coun-try. These aspects also suggest that where oversight bodies arekeen to be effective, there are improved chances for the fulfill-ment of financial accountability. The regrettable aspect of thefinancial transactions with donors and international financialinstitutions is that most of these may not require explicit ap-proval by the legislature and information on them may not beavailable to the public, although this weakness is being ad-dressed through the opening of Web sites by international fi-nancial institutions. But in countries where access tocybertechnology is limited, information about this importantarea may not be available to the public. The dissemination ofinformation in this regard depends, to a very large extent, onthe approaches of recipient governments. They may be lessinclined to share information with the public if that informa-


tion shows that government has pursued policies that have notbeen conducive to improved economic welfare and, on the otherhand, have increased the burdens and further diminished thebenefits to the community. This also illustrates how publicscrutiny, an important component of accountability, is adverselyaffected.

Third, many of the dimensions of accountability stillhave to be fulfilled. In many countries, performance aspects ofprograms and projects, and their linkages to the financial re-sources, are not specified. A consequence is that while govern-ments are generally responsible for providing a service, thecommunity has very scant information for assessing the effi-ciency with which the service has been provided. In most cases,cost information is not available even to governmental agen-cies. Thus, where no quantitative targets are available, therecan be little accountability. Moreover, the services may beprovided by nongovernmental organizations with funding fromgovernments; the accountability of such providers to the leg-islatures is somewhat distant and often weak. To that extent,it may not be easy to locate responsibility for failures in theprovision of services, and even if it is located, sanctions maynot be feasible. These aspects illustrate that the machinery forproviding fiscal accountability has over the years lagged be-hind the pace of growing demands on accountability as shownin the figure below. Many financial management systems haveyet to achieve the capability to secure economies in expendi-ture and efficiency in operations. The preponderance of softconstraints and perverse incentives (such as the rush to spendas a fiscal year draws to a close) effectively preclude econo-mies. The same may be said about prudence in economicmanagement and achievement of improved performance.Where quantitative targets are not available, the effective ex-ercise of oversight becomes difficult.


Don

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Factors Hindering Financial Accountability

Experience shows that several factors have hindered the effec-tiveness of institutions that are responsible for ensuring finan-cial accountability. These include the following:

• Certain expenditures are excluded from the purviewof oversight bodies. Some expenditures are incurredoutside the budget. These transactions may be car-ried out through extrabudgetary accounts or throughexecutive decree. Further, defense expenditurescontinue to be shrouded in secrecy for reasons ofnational security.10 Although it is generally difficultto evolve suitable measures of performance in re-gard to defense operations, selective costing couldbe computed for some programs. Several industrialcountries have made considerable progress in com-puting the costs of selected operations. Progress inthis area remains to be made in most developingcountries. Similarly, public debt operations, whichcontinue to dominate government budgets, havereceived little scrutiny. Experience with privatizationalso shows that the realm of accountability has beenrelatively small in comparison to the totality oftransactions.

• Established systems of oversight such as audit andlegislative control have many limitations. Specificfactors contributing to this underachieving machin-ery are described in detail in box 7.2.

10 Defense opaqueness reflects a cruel irony. Outlays on protecting the com-mon man are not fully revealed to the public with the result that anindividual has no idea as to how he is protected or the full costs of pro-tection, not to mention the effectiveness of that protection.


Box 7.2Financial Accountability:

Factors Contributing to Underachievement

In many countries, there are institutions and procedures established toachieve financial accountability. The two most important institutionsin this regard are independent audit and the legislature. Both of theseexperience shows have been less than effective in fulfilling their char-ters, let alone the expectations of the public. The underachievement ismostly due to the limitations that these institutions encounter in theprocess of fulfilling their mandate. These are described below.

Audit

In a number of countries, audit agencies still have developfully and become fully independent. Even in those countrieswhere audit has existed for several years, its contribution hasnot been effective in ensuring financial accountability. This islargely due to the following factors:

• In most cases, audit is not empowered to review policymatters. Audit agencies do not have as yet full authorityin most countries to follow the trail of the budget peso orrupee to the last stage where it is spent. Thus, local gov-ernments, nongovernmental bodies, private contractorswho perform agency functions on behalf of the central orfederal government are not within the orbit of primaryaudit. In most cases, the audit conducted by the auditagency is limited to financial compliance audit (regular-ity and compliance of laws), and efficiency audit re-mains to be fully developed.

• In a large number of cases, audit agencies have yet to de-velop expertise in areas such as public debt (which rep-resents a significant block of government outlays) andforeign exchange management.

• Audit agencies in many cases follow the track of accoun-tancy and appropriation audit and lay very little empha-sis on investigative audit into special areas. Even in


countries where investigative audit is undertaken, ajudicious combination of regular audit and investigativeaudit remains to be achieved.

• The effectiveness of audit, even in its own chosen areas,is dependent on the support it receives from legislativeinstitutions. These institutions may often be governedby party politics or by issues of the day, rather than byconsiderations of institutional development.

Legislative Institutions

The practices in this regard vary considerably from beingforceful and decisive to being complaisant or without delibera-tive and legislative powers in regard to budgets. Moreover, thefollowing limitations stand in the way of the realization of thefull potential of financial accountability:

• In several countries, particularly those that have practicesmodeled on Whitehall’s, legislatures can only reject gov-ernment policies (which run the risk of a change of theparty in government), but cannot modify them. In recentyears, consultative committees have been set up in somecountries to provide opportunities for legislative inputsinto policymaking. Experience in this regard is limited anddoes not justify optimism. Elsewhere, experience showsthat legislators may be more interested, where party dis-cipline permits, in pork barrel politics rather than on themajor premises of macroeconomic policies.

• In many cases, major portions of public outlays are coveredby existing legislation, thus limiting the scope of legislativecontrol. In some cases, e.g., public debt, governmentaloperations may not require legislation. Until recently,agreements with international financial institutions werenot submitted for legislative approval or information.

• Legislatures rarely have opportunities to discuss macro-economic policy issues. Also, discussion is largelyhandicapped by lack of expertise in this area.


• The portfolio of expenditures of central govern-ments, as noted earlier, has been changing in recentyears. Central governments are increasingly becom-ing cash counters transferring funds to autonomousagencies, nongovernmental organizations, and stateand local governments. Services provided by thestreet-level bureaucracy are mostly within the realmof state and local governments, while funding re-sponsibilities reside with the central government. Insome cases, such as in the European Community,disbursing power has moved from national to su-pranational governments. This growing distancebetween funding and delivery of services has exac-erbated the problem of financial accountability and,as yet, a satisfactory solution has to be evolved toreduce the gap between the two. In some cases, itis argued that state and local governments have theirown audit agencies and legislatures and, therefore,the composite picture of accountability is complete.In practice, however, oversight bodies at the stateand local levels differ in their approaches, and theexpected complementarity among the various lev-els still has to be achieved. Financial relationshipsbetween governments and nongovernmental orga-nizations continue to be a black box. More often thannot, nongovernmental organizations lack the exper-tise, and an adequate regulatory framework formonitoring the activities of nongovernmental orga-nizations still has to evolve.

• It is generally agreed that, as in corporate gover-nance, public organizations, too, should endeavorto hold managers accountable for their actions. Theimplementation of this simple (at least in appear-ance) requirement in public organizations has be-come a complex and frequently intractable matter.


Two factors would appear to have contributed to thecomplexity. First, most public organizations arehierarchical in nature. Even where tasks and respon-sibilities have been decentralized, in practice powermay be concentrated in a few hands. Hierarchicalorganizations such as those found in the civil ser-vice, defense management, and police administra-tion have contributed to a thick fog of diffusedresponsibility, in turn making it extremely difficultto pinpoint the person or the authority responsiblefor poor performance. To tackle this problem, per-formance contracts with chief executives have beendrawn up, and task-oriented agencies that are pri-marily concerned with policy implementation havebeen created. But the application of these ap-proaches, it is argued, has been carried out in “toocrude and simplified a fashion.”11 In most cases, theagencies have yet to form a consensus on the typeof accountability they should have. Experienceshows that the local bodies or the policymakingdepartments (ministries) tend to view accountabil-ity as a form of control. Consequently, the paradoxi-cal result has been that ministers and chief executivesbecome more powerful through direction and arm-twisting. Performance contracts, too, cannot be allencompassing and there are gray areas where re-sponsibility for actions is difficult to locate. Mean-while, the monitoring of performance contracts andtheir enforcement have brought added costs, at thesame time that the distinct cost advantages of chiefexecutives over the traditional civil service remainsto be proven.

11 Foster and Plowden (1996), p. x.


• The formulation of performance indicators throughthe establishment of direct and explicit relationshipsbetween the inputs of money and manpower andthe tasks of an agency has been and continues to bea formidable task. Several problems are being en-countered in this regard. First, a one-size-fits-allapproach is apparently being taken such as throughthe formulation of workload data for categories like“policy formulation.” Government departmentstend to have a distinct personality of their own whichis not always captured through these general, am-biguous, and frequently nonempirical categories.Second, the formulation of agency tasks tends to bebroad and general, notwithstanding exhortations tothe contrary. At one stage, the task of the HealthAuthorities in Britain was to “carry out the priori-ties of the government of the day.”12 This type ofapproach has the effect of redefining the problemrather than solving it. Third, the formulation ofperformance indicators has been and continues tobe a unilateral exercise undertaken by the executivewing of governments, which is somewhat akin tothe defendant in a legal dispute determining theparameters and the course of the judicial process.

• The overall framework of financial accountabilitygives access to the public by providing informationon the actions of the executive. Such access may not,however, enable detailed scrutiny for several rea-sons. First, the annual accounts and related docu-ments show the overall results of actions takenduring a year but are less helpful in illuminatingthe factors contributing to a specific action. Second,

12 Day and Klein (1987), p. 84.


in several cases there may be full compliance withthe budget estimates, and all laws and regulationsmay be fully adhered to. But this compliance by itselfdoes not mean that the objectives of budgetary policyhave been achieved or that the delivery of serviceshas been performed well. The audit, too, is concen-trated in several cases on the financial control pro-cess rather than achieving value-for-money orefficiency audit. Third, government, which has themonopoly on the information needed for account-ability, has not been above managing the informa-tion to its advantage. Being economical with truthhas become, it is frequently suggested, an ingrainedhabit of the bureaucracy.

As a result of all of the above factors, citizens often feelthat their access to information does not necessarily translateinto full-fledged scrutiny and accountability. The other meansavailable to them (box 7.3) may be expensive and incapable ofyielding immediate results. The opportunity to use the ballotbox, as a means to revoke the policies is limited as it has itsown schedule and therefore may not be exercisable with theprospect of immediate results.


Box 7.3Citizens and Financial Accountability

The overarching purpose of financial accountability is to keepthe citizen informed of the progress made in the mobilizationof financial resources and in their use to meet the needs of thecommunity.

Citizens have a variety of instruments at their disposal tomake financial accountability a reality. In principle, citizens havethe power to revoke the divisions made by the executive andthe legislature; they have the capacity to move the judiciarywhen they find policies and decisions to be discriminatory orto have an adverse impact on the community; they can under-take public scrutiny of government policies through their ac-cess to the information available in the public domain. In someinstances, they may participate in making financial decisions,in monitoring the progress made by various programs, and inevaluating the results of policies. Selectively, public opinion mayalso play a significant role in the imposition of sanctions andpenalties against delinquent officials.

In practice, however, in each of the above areas, the citizenremains somewhat distant from the focus of financial account-ability. This aloofness stems from the nature of the instrumentschosen for the purpose of financial accountability. In mostcountries, revoking the decisions made by governments tendsto be difficult except in the tax area. In several countries, fullbudget documentation is not available to the public. Althoughprogress has been made in recent years in publicizing the natureand magnitudes of fiscal deficits, the issue remains confusingto many in view of the existence of many extrabudgetary ac-counts and numerous transactions between these and the gen-eral account, and the constitutional imperatives of a balanced


budget. There have been many instances, however, where thetax proposals have been altered or withdrawn in the light ofpopular opposition and potential political consequences. De-tails of expenditure programs are rarely provided, and whereprovided, are highly aggregated and sketchy. Thus, publicscrutiny, which is the basis for financial accountability, is rarelyfulfilled. An associated feature is that periodic financial data,which have been published selectively in recent years, aredirected more to the financial markets than to ordinary citizens.Audit reports are primarily intended to serve the needs oflegislatures and their committees and are not structured toaddress the concerns of citizens. The voice of citizens in regardto the delivery of services tends to be muted in view of thegrowing distance between those responsible for funding andthose who deliver services.

Citizens can take recourse to the judiciary, but only in thosecases where there are inequities in the existing legislation.Although general issues may be taken up in public-interestlitigation, judicial intervention has been more in the tax areathan in expenditure matters.

At the local levels, citizens in many Western democracieshave gained a voice in determining contract awards, in moni-toring progress, and in evaluating completed programs. But inmost developing countries, the executive continues to have adominant role and the options of citizens are limited to discus-sions within party caucuses, or organized protests where theycan air their grievances. In these countries, citizens have littlerole in the imposition of penalties and sanctions.

Thus, the language and structure of financial documenta-tion limits the scope of public debate and scrutiny. A good dealof progress still has to be made in taking financial accountabil-ity closer to the public.


Box 7.4New Impetus for Financial Accountability

Although accountability has always been inherent in the re-sponsibilities of an official or an institution, it has acquired anew impetus and many dimensions in recent years as effortsto strengthen fragile democracies and the links between the civilsociety and forms of government continue. The new impetusand the growing demands for stronger accountability in gen-eral and financial accountability in particular have their ori-gins in the following factors:

• In recent years, notwithstanding a steady increase in thesize of the bureaucracy, there has been a perception ofcontinuing sizeable waste in government operations.The socialization of inefficiency has contributed to dis-trust of governments. Opinion polls conducted in West-ern democracies since the second world war reveal thatthis distrust has been growing.

• As an integral part of the above perception, there is alsothe generally shared view that bureaucracies tend to beself-serving with scant regard for their clients’ needs.Moreover, it is also believed that bureaucracies lackaccountability.

• While in normal circumstances legislatures would havebeen expected to perform a major role in ensuring finan-cial accountability, they tended to be ineffective as bu-reaucracies acquired additional powers in day-to-dayeconomic decision making. Legislatures may discuss thepolicies of governments or may approve or reject them.In reality, however, policies reach legislatures at too latea stage—in aerodynamics terms, when the plane is al-ready about to take off, when aborting the plan couldmean unpleasant consequences. Opportunities for cru-cial inputs into policymaking are few, and major chunks


of expenditures are either already committed or beyondthe scope of legislative intervention. Year-end scrutinytends to be spotty, with major attention devoted to issuesof sleaze or those that damage the political prospects ofthe ruling party. · There is also a perception that the ma-chinery for accountability, where it already exists andoperates, is often slow and parochial, contributing to adiscord between the rapid pace in the advancement ofexpectations and the scope of response of the institu-tional machinery. Experience also shows, as in the caseof the European Community, that where the institutionalmachinery has been designed during recent periods, in-sufficient attention has been paid to ensuring adequatefinancial accountability.

• Recent efforts to install or strengthen management capa-bilities (prompted by the new public management phi-losophy) envisage greater roles for managers. They areexpected, within the limits of financial resources and en-dowed autonomy, to deliver services at the specified costand quality and within the given time frame. Such addi-tional delegation of financial powers and autonomy un-dertaken as a part of the new public managementapproach may further weaken the accountability ma-chinery with its hollow core.

• There is an overall gap between the intent and perfor-mance of governments. The reality, as perceived by thepeople, is that services are deteriorating even as the debtburden increases, and the community’s suffering has in-creased even as governments traditionally consideredstrong and fiscally viable have become weak because ofother internal and external developments.

These factors accentuate the need for appropriate financialaccountability to stop the erosion of confidence in governmentand restore credibility.


It is in this context of a sense of disenchantment withthe existing systems of accountability and the lack of theireffectiveness that there has been a growing demand for im-proved and, more importantly, effective systems of financialaccountability. This additional stimulus for achieving financialaccountability (box 7.4) is being addressed in different ways.

Moving Ahead: Recent Developments

In recent years, particularly in the early 1990s, there has beena growing recognition of some of the above problem areas. Asa result, there have been more efforts to consolidate the progressmade toward financial accountability. More specifically, theseefforts involved further strengthening financial managementin government agencies, imparting a set of moral values inpublic service, and, on the part of international financial insti-tutions, formulating a fiscal transparency framework.

In the area of financial management, accounting sys-tems are being organized on an accrual basis and corporateapproaches are being applied. Four advanced countries havealready moved to accrual accounting or are scheduled to com-plete this transformation in the next few months.13 As an in-tegral part of this effort, accounting standards with specificapplicability to government operations are being developed.In some cases, budgets, too, are being prepared on an accrualbasis. Once these innovations are fully implemented, there isa distinct prospect that activity-based costing will emerge asthe anchor for expenditure management and financial account-ability. In a number of cases, performance contracts are beingdeveloped as concordats between agency heads and the gov-ernment. Although many of the difficulties relating to perfor-

13 For an account of these developments in Australia, New Zealand, UnitedKingdom, and the United States, see Premchand (1999c).


mance measurement continue, the hope is that, with moreexperience, improved indicators with the potential to enhanceaccountability can be developed. Moreover, it is likely that theshift of emphasis from inputs to performance and results willtransform the culture of government organizations into amanagement-oriented one. Audit agencies, too, have beendeveloping agendas combining traditional financial audit withinvestigative audit and oriented to ascertaining value for money(e.g., in European countries). In the United States, since 1998,investigative audit has been combined with the financial auditof all the operations of the government, as required under law.While none of these instruments is entirely new, the emphasisand, in some cases, the revival of some ideas merit recognition.

Moral values, as Barnard envisaged them, were essen-tially a part of the informal and, to some extent, private aspectsof an official. In recent years, however, there has been a view(e.g., in the United Kingdom) that in order to restore publicconfidence in the system of public administration, standardsof public life are needed. Accordingly, there has been an em-phasis on the need for selflessness, integrity, objectivity, account-ability, openness, honesty, and leadership. 14 These qualities,which have always been essential, would undoubtedly increasepublic confidence in governments. At the same time, it mustbe noted that if at least six of these qualities were firmly en-trenched in public administration, then accountability wouldbe automatic and even self-enforcing. Experience suggests that

14 See Premchand (1999b). The exhortation for standards in public life maybe inherent in human condition in view of what Montaigne called a longtime ago, the ‘ordinary vices’ associated with human behavior. Includedin these vices were treachery, disloyalty, cruelty, and tyranny. Judith Skhlarsuggested that ‘dishonesty’ be added to the list. Despite these periodicreminders, and admonitions from the religious establishments that someof these sins might invoke divine wrath, ordinary vices continue todominate day to day to economic life. Indeed, some of the public stan-dards, e.g., selflessness, may be contrary to the spirit of economic ratio-nality that emphasizes the virtue of maximizing profit.


mere exhortation of the need for these values would not haveany major impact particularly since the laws aimed at penal-izing corruption in public life have had so little enduring effect.

Meanwhile, international financial institutions, whichhave seen their developmental policies jeopardized by the levelsof corruption and the consequent losses suffered by society, havealso initiated efforts to strengthen institutional development.They have begun to formulate a framework to promote finan-cial transparency and accountability. The framework they pro-pose is more in the nature of a minimum agenda (box 7.5). Manycountries already have the features of the proposed framework.The problem, as noted earlier, is not the lack of institutions andinstruments but the lag between the intent and the practice,and other factors contributing to underachievement and, in afew cases, to failure of the prescribed machinery. It would appearby implication, that the suggested framework is applicable moreto those former centrally planned economies that have yet tomake the complete transformation to democratic forms ofgovernment. Even in these countries, there is a good deal ofvertical accountability (within the hierarchical system of orga-nization) and often quick and severe penalties for violations.In terms of horizontal accountability, the party congress, par-ticularly at the provincial and local levels, plays a crucial rolein the allocation of resources, their utilization, and accountabil-ity. What needs to be recognized is that these countries havetheir own form of accountability even though that form maynot be similar to those found in some democracies.


Box 7.5Financial Accountability:

Minimal Agenda Not Adequate

Recently several international financial institutions have takeninitiatives to issue guidelines on the ways in which financial(the term used by the international agencies is ‘fiscal’) trans-parency and accountability may be achieved by countries. Beinginternational guidelines that seek universal applicability, theyare more concerned with the general rather than the specificfeatures of a particular country. The guidelines envisages (a) amedium term fiscal strategy; (b) a comprehensive annual bud-get; (c.) periodic data to be published on the status of govern-ment finances, and annual accounts to be submitted to thelegislature, and (d) identification and publication of govern-ment liabilities including contingent liabilities. The guidelinesenvisage the functioning of a legislature endowed with pow-ers to review the budget and annual accounts.

Many of the features described above are found in most de-mocracies, in one form or another. The role of the legislature as adeliberative body and engaged in the enactment of legislation isyet to be established in some of the former centrally planned econo-mies (most former centrally planned economies in Europe havealready made this transition). Meanwhile, the party congresses havebeen taking an active role in the consideration of the annual reporton the economy and the budget. They have also made a beginningin the establishment of an audit agency. Here again, the formercentrally planned economies in Eastern Europe have made rapidprogress (with the help of European organization of Systems AuditAuthorities and the Audit agencies of some industrial countries)in the establishment of independent agencies endowed withpowers to undertake financial and investigative audit.

The experience of many countries in regard to the featuresenumerated by international financial institutions shows thatthey provide, at best, a modest beginning in the process ofachieving financial accountability, largely because the systemsand operational techniques utilized by the relevant governmen-tal institutions leaves a good deal to be desired.


Toward a Constructive Agenda

A paradoxical feature of the current situation is that the expec-tations and demands of the public are growing faster than theexisting machinery for accountability can handle. The solutiondoes not lie in reducing the scope of accountability but inproducing more viable and responsive accountability machin-ery. In evolving such machinery, the following aspects meritspecific attention.

Several countries have medium term fiscal strategies, eitherin the form of development plans, or global visions, or in thestrategies formulated in the wake of economic crisis experi-enced, during recent years, by some Asian countries. Thesestrategies are too general and are more indicative of the likelygoals to be reached and are scarce in the specification of themeans (as required by a strategy) to achieve those goals.Moreover, insufficient attention is paid to uncertainty, high-riskareas and associated vulnerabilities. The strategies also lackenforceability and the imposition of sanctions, in the event offailure, as needed by financial accountability).

The budget, even on a comprehensive basis — a goal thatremains to be achieved by some Asian countries, is far fromaccessible to the general public. Budgets tend to have a uniquelanguage of its own, and some mysteries that defy probing bythe public. Details on expenditure programs and the likelybenefits are scant and in many cases doctored.

The periodic reports, which are being published by manycountries, are too aggregative in nature and are intended forthe benefit of domestic and external financial markets. Annualaccounts, which in most countries are required to be audited,

Box 7.5 (cont’d.)


is not of recent origin. Indeed, it has been a part of the frame-work of legal accountability for a long time. These accounts aremere records of transactions and do not offer any benchmarksfor performance assessment. They remain inaccessible to thegeneral public.

The effort at revealing liabilities, particularly in a cash basedbudget and accounting systems, is a welcome one. The mostsignificant part of liabilities is external and internal debt. Dataon debt are regularly published by many countries, although,on occasion, some countries have attempted to doctor them too.Several countries also publish data on contingent liabilitiesstemming from guarantees (although the coverage is far fromuniform or comprehensive). No attempts are made to publishdata on liabilities relating to arrears in wage payments, repay-ment of debt and settlement of claims by contractors. Hiddenor informal debt remains an area of darkness for the public.

Thus, the framework of accountability offers a hollow corerather than an effective one. Provision of information is equatedwith public scrutiny; the existence of an audit agency of a leg-islature is viewed in this oversimplified model of accountabil-ity, as fulfillment of financial accountability. The important needis to look into the working of the institutions and ascertain asto why their full potential is not being realized.

• Financial accountability is no longer limited to en-suring that the budgeted amounts have been spentand that the specified annual objectives of an orga-nization have been met. While these elements willcontinue to be important, it appears essential thataccountability be enlarged to include the successachieved in ensuring economic sustainability. Theinterest of the community is in satisfying itself thatthe policies pursued enhance the strengths of theeconomy and that the financial balance of thecommunity is not jeopardized. This enhanced


accountability should be the cornerstone of everyeffort. Accountability for economic performanceshould go hand in hand with financial performanceand the provision of services.

• Accountability will not be achieved unless it be-comes an integral part of service delivery, and ofpolitical agenda at the national level.15 To achievethe former, it may be necessary to arrange for moreformal participation of the client groups. At thenational level, legislatures may not be very inter-ested, depending on the political climate, in pursu-ing limited accountability. There is thus a need tostrengthen the role of the legislature in the manage-ment of the economy through more opportunitiesto review and approve government policies. Catego-ries of expenditure that are now exempt from leg-islative approval should be reviewed and reduced.In addition, the society should have more opportu-nities to review policies and program results and,where necessary, to impose sanctions.

• The measurement of economic and program perfor-mance should form an integral part of financial ac-countability. The formulation of performancemeasures should not be left to the executive butshould form part of tripartite deliberations compris-ing client groups, the executive, and the legislature.The formulation of performance measures is a com-

15 Accountability is not a mere technical process and therefore cannot beentirely apolitical, even when fully objective. A distinction needs to bemade, however, between proper political use and abuse of the account-ability process. The former seeks to enrich the level of political discourseso that the community’s understanding may be illuminated; the latter isa tactical weapon in an adversarial process.


plex task and the pursuit of a one-size-fits-all ap-proach is bound to be counterproductive. Rather, thediversified nature of government transactions needsto be explicitly recognized. To this end, organiza-tions may be divided, as a first step, into those thatare (i) production-oriented (where outputs andoutcomes are observable) (ii) procedural in nature(where internal activity, but not the outcome, can bemonitored) (iii) craft-oriented (those engaged inensuring compliance of rules and regulations), and(iv) those that are responsible for coping with dif-ficult situations (outputs and outcomes may beuncertain).16 The performance measures shouldfacilitate risk taking and should be flexible.

• Accountability should not be limited to the impo-sition of sanctions. If this were the primary objec-tive, then there would be a good deal of defensivepolicymaking and the bureaucracy may be inhibitedfrom taking risks. Accountability should thereforeaim at investing resources to secure lasting improve-ments in the administrative machinery that wouldalso prevent or minimize institutional recidivism(box 7.6).

• The accountability framework should reflect, in thelight of the preceding observations, vertical aspectswithin a hierarchy and among supranational, na-tional, and subnational governments, and horizon-tal aspects reflecting the relationships with thelegislature, client groups, and the society itself.

In evolving the above type of framework, it should benoted that care should be taken to avoid having too many laws,

16 This approach is adopted from Wilson (1989), pp. 160–171.


Box 7.6Beyond Financial Accountability

Financial accountability involves the identification of the lossessuffered by the community. Inevitably, the identification con-tributes to the “naming and shaming” of individuals, organi-zations, and institutions whose actions have contributed to suchlosses. This is frequently viewed as an integral part of the auditsystem. The identification of guilty individuals and organiza-tions is expected to lead to the imposition of penalties andsanctions on them. This represents the concluding stage of ac-countability.

The “naming and shaming” and the imposition of penal-ties can lead to tension, hostilities, or adversarial relationshipsbetween those that are in governmental agencies and thoseoutside. The continuation of such adversarial relationships couldalso harden obsession but not necessarily lead to improvedsystems. While human failures should be punished, it must alsobe recognized that many of the lapses may be systemic. Ad-dressing individual crimes and misdemeanors without look-ing into the underlying contributory factors could lead, andindeed has led, to institutional recidivism.

Just as a judicial system looks beyond the incarceration ofthe criminal to the correction and reform of the individual toreduce potential crimes, so also governments and the commu-nity have the need, indeed the obligation, to reform the systemof financial management, to strengthen it so that the hopes ofthe community can be fulfilled with minimum friction. The

rules, and regulations, and too many layers of officialdom (craftorganizations). Otherwise, accountability could become anoversight mechanism that is too invasive and that stifles ini-tiative and imaginative handling of public affairs. The shift inthe concern from the process to results and performance wouldbe difficult to achieve if management is not endowed with theneeded freedom to act. Maintaining a balance between delega-tion of autonomy and direct oversight is indeed a difficult task


experience of many countries shows that, apart from greedyindividuals who seek to exploit situations for personal gain(which translate in this zero-sum game into losses for the com-munity), the financial management system that has structuraland procedural flaws needs to be improved. This positive aspectof investing in improved financial management systems shouldform an integral part of a constructive agenda.

Recent developments in technology are such that theirgradual deployment is likely to give a strong boost to partici-patory decision making. In the not too distant future, electronictechnology my make possible a kind of town-hall meeting,where each individual in the comfort of his home may indicatehis or her personal preferences in regard to a proposed action.Such participatory decision making, which is a significant steptoward linking the democratic tradition with a civic society,could lead to yet another phase in financial accountability.Financial accountability envisages the promotion of a manage-ment culture in public organizations so that performance maybe specified and evaluated. The increasing provision of publicservices by the corporate world has widened the choice ofbenchmarks. Here again, an agenda that envisages a greaterinvolvement of the community in the promotion of a manage-ment culture is likely to contribute to improved financial ac-countability. In sum, the emphasis on punishing the guiltyshould be tempered by an explicit recognition of the need forimproved systems of financial management and the promotionof a management culture of accountability.

but the success of accountability is dependent, in the finalanalysis, on the ingenuity shown in this respect.

Conclusions

It is important that the framework for financial accountabilitybe formulated with care and caution, so as to inspire public


confidence and restore the credibility of government. Account-ability narrowly defined and aiming only at financial processcontrols is no longer adequate. The scope of accountability needsto be expanded to include overall economic management aswell as delivery of services both by governmental and nongov-ernmental agencies. The objectives should not be limited to thepursuit of sleaze, but should include a more constructive agendaaimed at strengthening operational systems of public admin-istration. The dimensions of accountability have grown overthe years, and access to information on government operations,while facilitating public understanding, does not by itself com-plete the process of public scrutiny. Many of the initiatives takenin recent years still have to be fully implemented or taken totheir logical conclusion. A framework of financial accountabil-ity encompassing all these aspects remains to be formulatedand that by itself constitutes a major agenda for the future. Thisneed for enhanced accountability has to be tempered by arecognition of the extensive preparatory work implied in thiseffort. Accountability can be fulfilled only when organizationsare given specific goals and, more importantly, are endowedwith additional capacity to achieve these goals. Countries havea good deal to do on both these fronts. Emphasis on one goalwithout corresponding effort devoted to the strengthening ofadministrative infrastructure could contribute to underachieve-ment of goals and yet further erosion of the credibility ofgovernments.

Chapter 8

Transparency andAccountability for Public

Financial IntegrityNihal Jayawickrama

Introduction

The overwhelming majority of people, in all countries acrossthe globe, are not economists or accountants, nor are theyactively involved in the government of their countries. Neitherthe intricacies of financial management, nor the relative meritsof different systems and the philosophies underlying them, areever likely to be the focus of their attention. But it must as-tound and appall them when they discover, usually long afterthe event, that those who had taken upon themselves the re-sponsibility of governance had actually robbed them, and thatthe management system had not been able either to detect orto prevent such pillage. I do not refer to “speed money” or“grease payments” with which the people of this region areonly too familiar. I refer instead to the “grand corruption” which,we are told, had been indulged in by both elected and appointedofficials from Pakistan to the Philippines, through India,Bangladesh, Sri Lanka, Thailand, Indonesia, Malaysia, China,South Korea, and Japan. Ordinary people in these countries mustnaturally ask what it is that is wrong with a financial manage-ment system within which officials can defraud the nationaltreasury and not be detected or held accountable until after theyor their regimes have ceased to exist.


A Flawed System

There must be something fundamentally wrong with the sys-tem if decision makers at the highest levels of government areable to “sell” their discretion in privatization exercises, in publicprocurement, and in respect of major civil engineering contracts,and not be detected. For example, in respect of the privatizationof the water authority of the city of Jakarta, it was only afterhe was ousted from office that it was publicly revealed thatPresident Suharto had instructed his Minister of Public Worksto divide the city into two geographical units and to award twoconcessions to two of the many foreign companies interestedin the project. One was French, the Lyonnaise des Eaux, andthe other was British, Thames Water International. The localpartner of the former was a longtime business associate of thePresident, and the local partner of the latter was the President’seldest son. According to the Asian Development Bank,1 overthe last twenty years, one East Asian country is estimated tohave lost US$48 billion on account of corruption, surpassingits entire foreign debt of US$40.6 billion. In another Asian coun-try, over the past decade, state assets fell by more than US$50billion, primarily on account of deliberate undervaluing bycorrupt officials responsible for a privatization program. In aSouth Asian country, US$50 million was misappropriated dailyon account of mismanagement and corruption. At the same time,studies of corruption in government procurement in severalAsian countries revealed that 20–100 percent more had beenpaid for goods and services. How is it possible for a privatecompany dealing with the government to pay to be includedin a list of prequalified bidders or to restrict the size of the list,to pay for inside information, to pay to have the bidding speci-fications structured so that the corrupt firm is the only quali-fied supplier, to pay to be selected as the winning contractor,

1 Asian Development Bank, “Anticorruption Policy,” Strategy and PolicyOffice, June 1998.

Transparency and Accountability for Public Financial Integrity 195

and then to pay to set inflated prices or to skimp on quality—and yet not be detected at any stage of that crooked and tor-tuous journey?

There must be something fundamentally wrong withthe system when even officials of lesser rank are able to de-mand money with impunity for doing acts that they are requiredby law to do or to provide services that they are prohibited bylaw from providing. A recent national household survey oncorruption in Bangladesh, conducted by the national chapterof Transparency International in that country, revealed that:

• 41 percent of households had paid a “donation” tohave their children admitted into schools;

• 36 percent had made payments to or through hos-pital staff to secure admission into hospitals;

• 65 percent had bribed land registrars to record a falsesale price for a land transaction;

• 54 percent had bribed either employees or “otherinfluential persons” to secure bank loans;

• 33 percent had paid money to obtain electricityconnections;

• 37 percent had paid less for water “by arrangementwith the meter reader”;

• 47 percent had been able to reduce the holding taxassessment on house and property “by arrangementwith municipal staff on payment of money”; and

• 63 percent of those involved in litigation had paidbribes to either court staff or the opponents’ lawyers.

Eighty-nine percent of those surveyed were convinced thatjudges were corrupt; and 97 percent thought the police service wascorrupt. A survey in Bangalore revealed that in a governmentmaternity hospital in that city one had to pay even to see one’sown baby, the price for a baby boy being higher than for a babygirl. Some assistance in diagnosing the flaws in the system mayperhaps be forthcoming if one were to shift the focus to thosesystems that do in fact function, and function very well.


A Diagnosis

In each of the past four years, Transparency International (TI)has published a Corruption Perception Index (CPI). It is not anassessment of the corruption level within a country. Instead, itis an attempt to assess the level at which corruption is perceivedto affect commercial life, in the view of several thousand busi-nessmen, risk analysts, and business journalists. In an area ascomplex and controversial as corruption, no single source orpolling method has yet been developed that would combine aperfect sampling frame, a large enough country coverage, anda fully convincing methodology. TI therefore chose the optionof a composite index. The CPI is a “poll of polls.” The 1998index is based on seven credible surveys conducted by reputedorganizations using different sampling frames and varyingmethodologies. The strength of the CPI is based on the conceptthat a combination of sources into a single index increases thereliability of each individual figure. The probability of misrep-resenting a country has been lowered by including only thosethat have been the subject of at least three surveys, the premisebeing that the imperfections of one may be balanced by thoseof at least two others. The perceptions reflected in the CPI maynot necessarily be a fair assessment of the actual extent ofcorruption within a country, but they are a reality. If those ina unique position to observe the behavior of public officials andpoliticians wrongly believe that they are corrupt, the reasonsfor that mistaken belief need to be identified and remedied.

In the TI Corruption Perception Indices for 1995–1998,ten countries achieved consistently high scores for integrity,remaining throughout among the twelve least corrupt coun-tries in the world. They are Australia, Canada, Denmark, Fin-land, New Zealand, Netherlands, Norway, Singapore, Sweden,and Switzerland. Also at the top end of the scale in the CPI for1998 are the United Kingdom, Ireland, Germany, and HongKong. At the other end of the scale, among the countries per-ceived to be among the most corrupt in the world, are Indonesia,


India, Nigeria, Pakistan, Russia, and Venezuela. Another Asiancountry at the bottom end in 1998 is Vietnam. It is not sug-gested that corruption is wholly absent in the first group ofcountries, or that corruption is peculiar to the developing worldor to societies in transition. Indeed, among those found guiltyrecently of corruption were the Auditor-General of New Zealandand ministers in Canada and Australia. The significant differ-ence is that corrupt acts were detected and punished in thesecountries without the need for a revolution or even a changeof government. In contrast, the long and tedious criminal in-vestigations in India into alleged massive corruption amongthe highest in the land, which were set in motion by an activistSupreme Court, have not produced any tangible results. There-fore, if the first group is compared with the second, it is notdifficult to identify what the former possesses which the latterdo not: legal and institutional mechanisms that work, a featurethat is conspicuously absent in the latter. In the one case, gov-ernance is not only participatory but also transparent andaccountable; in the other, it is not. The majority of the countriesin Asia and the Pacific probably swing within this spectrum.Assuming that a government is participatory, this comparisonsuggests that even the most sophisticated financial managementsystem cannot curb or contain corruption in the absence of bothtransparency and accountability. These are different, yet inter-related and interdependent, concepts.

Transparency in Public FinancialManagementIn the field of public financial management, transparencyimplies that the procedures and methods of decision makingand the disbursement of public funds are open and visible to all.There are at least three methods by which such transparencycan be achieved:


Access-to-information law

The British colonial administration bequeathed to its coloniesand dependent territories a tradition of secret government. Theubiquitous Official Secrets Act enabled governments to clas-sify all its documents as top secret—secret, confidential, orrestricted. The trend toward open government, which began inthe United States in the mid-1960s, percolated to Canada,Australia, and New Zealand nearly two decades later. Therecognition by these countries of a statutory right to informa-tion, and a decade and a half of its implementation, has notborne out any of the fears originally entertained and expressedby their respective governments as they grudgingly or with littleenthusiasm conceded to the community the right to know. Publicadministration has not collapsed under the burden of an ac-cess-to-information law, nor has the cost proved overwhelm-ing. On the contrary, studies indicate that most governmentdepartments have come to terms with the innovation withoutundue difficulty, and the cost has continued to be but a fractionof each government’s total information budget.

About seven years ago, I drafted an access-to-information law for a group of legislators and a coalition ofnongovernmental organizations in Hong Kong. For manyyears, the Hong Kong community had been denied official in-formation relating to matters such as dangerous slopes, envi-ronmental pollution, and town planning. Insinuations hadbeen made about the refusal to release telecommunicationconsultancy reports funded with public money, and dissatis-faction on the failure of the government to involve the commu-nity in the decision-making process on high-cost projects suchas the new airport at Chek Lap Kok and the new University ofScience and Technology had reached the proportions of a pub-lic outcry. In 1996, on the eve of the transfer of sovereignty,presumably on instructions from London, the Governor exer-cised his constitutional veto and introduced instead a nonen-forceable code of practice.


The draft Hong Kong law adopted four methods toachieve its objective. First, every government agency was re-quired to publish annually a statement of its operations. Thisstatement included a description of its structure and functions,as well as a register of all categories of documents in its pos-session, in sufficient detail to facilitate access. Also required tobe published were its policy documents. These included inter-pretations, rules and guidelines, any statements of policy, prac-tice, or precedents issued to its officers, and, of course, itsprocurement rules. Second, a legally enforceable right of ac-cess to information in documentary form held by the govern-ment was recognized, subject only to such exceptions as werereasonably necessary to protect public interests and the privateand business affairs of other persons. Access was to be pro-vided by giving the applicant a reasonable opportunity toinspect the document or by supplying him with a copy. Third,recognition was granted to the right of a person to apply toamend any record containing information relating to him which,in his opinion, was incomplete, incorrect, out of date, or mis-leading. Fourth, a two-tier appeal system to bodies indepen-dent of the government was provided against any refusal toprovide access. A substantial portion of the draft law dealt withexempt documents. Among the subjects generally excludedfrom scrutiny were executive council discussions, judicial func-tions, law enforcement and public safety, intergovernmentalrelations, and internal working documents.

Access to information is a powerful mechanism ofaccountability. To the extent that shrouds are lifted off govern-ment, and the decision-making process made visible, to thatextent are opportunities for corruption minimized and the abuseof power lessened. In a small and impoverished village in thestate of Rajasthan in India, a local grassroots NGO recentlydemonstrated the potential of an access-to-information law afterit secured the enactment of such a law through a 53-day hun-ger strike. It immediately invoked the new law and revealedto the community the massive and systematic abuse of


development funds by local politicians and government func-tionaries. In its own quaint fashion, through a six-hour puppetshow, it publicized by reference to muster rolls the amounts ofmoney said to have been paid to workers long since dead ormigrated or nonexistent, and by reference to bills and receiptsthe hundreds of bags of cement claimed to have been purchasedand used to repair a small primary-school building. Withinweeks, much of the looted money was recovered.

Demystification of the budget

The annual budget is invariably couched in language andpresented in a format that is unintelligible to all but the initi-ated. Comments on it are invited and obtained only from thoseat the commanding heights of the economy or in the ivorytowers of academia. Public response is usually sought only onsuch prosaic and plebeian issues such as the increase in the dutyon cigarettes or the reduction in respect of alcohol. But no singleact in the legislature has such a profound impact on the livesof people throughout the country as the annual budget and itsrelated legislation. If it is presented in a form that is easilyaccessible to, and understood by, ordinary people, and thendisseminated in cooperation with the free media, not only willthe budget be subjected to greater scrutiny and more widespreadcomment, but a process would begin which would involve thepublic in open consultation on choices and preferences in theutilization of national resources. At the micro level, it wouldenable, for example, parents armed with the knowledge of howmuch money has been allocated to the schools that their chil-dren attend to demand to know how and where that moneyhas been spent. The public audit of the government’s financialmanagement, thereby secured, is potentially a potent weaponin the struggle against corruption. It is capable of being achieved,and will certainly be more productive, if donors conditionedtheir aid not by specifying policies to be followed but by un-dertaking a “transparency audit” in recipient countries.


Annual reports of government departments

Once upon a time, in what was then Ceylon, govern-ment departments published annual reports. These were notglossy promotional material or fancy performance indicators.They were each an authoritative, matter-of-fact narrative,whether by the Director of Public Works, the Director of Ag-riculture, the Director of Education, or the Director of MedicalServices, of the performance of their respective departments.These reports ceased publication shortly after independence,as did the annual Civil List which rendered the civil servicetransparent by providing the public with detailed informationon the qualifications and movement of its members. Today, thesearchival documents serve the needs only of historians andresearch students. However, such annual reports (which areinsisted upon by law in respect of every publicly quoted com-pany), even if confined to a simple narrative of how financialresources allocated in the annual budget have been utilized bythe relevant department, will be a valuable instrument in thequest for transparency.

Accountability in Public FinancialManagementAccountability requires that those who hold positions of pub-lic trust should account for their performance to the public ortheir duly elected representatives. Accountability, therefore,implies that decision makers are monitored by, and are respon-sible to, others, each of whom is, in turn, responsible to thepeople of the country. In respect of public financial manage-ment, there are at least three independent and essential mecha-nisms through which accountability is enforced.


The Auditor-General

The Auditor-General stands at the pinnacle of the financialaccountability pyramid. As the officer responsible for auditinggovernment income and expenditure, he acts as a watchdogover financial integrity and the credibility of reported informa-tion. His responsibilities include ensuring that the executivecomplies with the will of the legislature as expressed throughparliamentary appropriations; promoting efficiency and cost-effectiveness; and preventing corruption through the develop-ment of financial and auditing procedures designed toeffectively reduce the incidence of corruption and increase thelikelihood of its detection. In the United Kingdom, where theAuditor-General is by law designated as an officer of the Houseof Commons, the elected house of Parliament, his functions havebeen described thus:

The [Auditor-General] audits the AppropriationAccounts on behalf of the House of Commons. Heis the external auditor of Government, acting on be-half of the taxpayer, through Parliament, and it ison his investigations that Parliament has to rely forassurances about the accuracy and regularity ofGovernment accounts.2

To be effective, the Auditor-General must be indepen-dent of the institutions being audited. His independence willbe compromised if, for instance, the executive branch of gov-ernment were to be responsible for overall financial manage-ment of his office, and were to determine staffing levels andclassifications and the allocation of resources. Equally unaccept-able are an appointment process and a removal procedure which

2 House of Commons, First Special Report from the Committee of Public Accounts,Session 1980–81, The Role of the Comptroller and Auditor-General, vol. 1,HMSO, 4 February 1981.


are exclusively within the control of the executive. The natureof his duties requires that the independence and tenure of officeof the Auditor-General be constitutionally protected, and thathis office be accountable only to the legislature.

It appears to be the practice in certain countries to con-tract out to private-sector accountancy and auditing firms someof the responsibilities of the Auditor-General. This appears toundermine both the independence and the effectiveness of theaudit. Apart from the inherent danger of a conflict of interestarising in such situations, private-sector firms are unlikely toshare the considerable expertise of the Auditor-General’s officein public-sector audit. While the Auditor-General should havethe freedom to diversify the skill base of his office by recruitingon contract competent persons from the private sector, consti-tutional propriety demands that his office be strengthened ratherthan that his legitimate functions be farmed out to others,whether subject to his overall control or not.

Public Accounts Committee

The Public Accounts Committee of the legislature receives theAuditor-General’s report, and enables a representative commit-tee of legislators, usually under the chairmanship of an oppo-sition member, to hold the executive to account. The effectivedischarge of this responsibility presupposes that the legislatureis elected at genuine periodic elections, by universal and equalsuffrage and by secret ballot, in conditions that guarantee thefree expression of the will of the electors. An example worthyof emulation is that of South Africa where the entire parlia-mentary process has now been rendered as open as possible tothe public and the press. All select committees, including thePublic Accounts Committee, are required to meet in public, andif they wish to go into closed session, the reasons for doing somust be debated in public.


The Ombudsman

An Ombudsman who receives and investigates allegations ofmaladministration is an important instrument of accountabil-ity. The complaints may range from neglect, inattention, delay,incompetence, inefficiency, and ineptitude in the administra-tion or discharge of duties and responsibilities, to bribery, fa-voritism, nepotism, and administrative excesses. TheOmbudsman examines procedures, practices, and processes, butis usually not vested with power to make binding orders. Onthe basis of his findings, he makes recommendations in theexpectation that, if maladministration or corruption has beenidentified, the relevant public officials will undertake remedialaction. The Ombudsman is an independent officer to whomcitizens have direct access, and whose independence and se-curity of tenure are constitutionally protected.

While the office is Scandinavian in origin, two of themost effective Ombudsmen are in the Pacific states of PapuaNew Guinea and Vanuatu. In the latter, the Ombudsman, Marie-Noelle Ferrieux Patterson, is also mandated to investigate andreport on breaches of the constitutionally entrenched leader-ship code. In over 40 reports issued in the past four years, shehas revealed, among others:

• “compensation payments” to several members ofparliament and ministers;

• a bloated public service, in part due to politiciansand in particular the prime minister appointingpolitical allies, family members, and friends to of-fices for which they were not qualified;

• the purchase by politicians, with money borrowedfrom the state superannuation fund, at grossly un-dervalued prices, of houses belonging to the gov-ernment; and

• the construction at a cost of US$4 million of a rarelyused sports stadium named after the then primeminister.


National Integrity System

The mechanisms referred to above cannot, of course, functionin a vacuum. They are elements of a comprehensive nationalintegrity system whose other “pillars” include an independentjudiciary, a freely elected legislature, a meritocratic civil ser-vice, an independent anticorruption agency, a free press, theprivate sector, and civil society; and whose other “tools” in-clude a declaration-of-assets law, conflict of interest rules, readilyaccessible and transparent procurement rules, a constitutionallyentrenched bill of rights, protection for whistleblowers, admin-istrative reform, and the judicial review of administrative ac-tion. These collectively sustain and support a country’s integrity.

Conventional wisdom dictates that a country shouldalso enact legislation to criminalize corruption, in whatever formit surfaces. The significance of such legislation is often overes-timated. In many countries, notwithstanding laws that prescribecriminal sanctions, corruption continues to flourish. While suchlegislation is necessary, and may eventually help to establisha value system that could contribute to the creation of ananticorruption culture in the country, containing corruption isnot simply a matter of enacting criminal laws. When laws doexist, they are usually not applied at all, or when they are, theytend to be directed at “small fish” rather than “big fish,” orselectively at political opponents no longer holding public office.The emphasis of an anticorruption strategy should thereforebe on reforming systems, not scouring the murky waters forthe elusive “big fish.” Another reason not to go “fishing” at allis that any serious attempt to reform systems requires the activeparticipation of the government. Even a relatively corruptgovernment may be persuaded to initiate and support a reformprogram that would eventually strengthen the national integ-rity system if such a program is not perceived as being a threatto its own survival until the next general election. Indeed, apreoccupation with prosecutions and inquiries into the presentor the past will detract from the urgency of an anticorruption


strategy that involves legal and institutional change. It oftenmakes sense to wipe the slate clean and look forward to thefuture rather than remain focused on the past.

Chapter 9

Some Observations on PublicFinancial Accountability

and Integrity in PacificIsland Countries

Savenaca Siwatibau

Impetus for Improvement in PublicFinancial ManagementThere is a groundswell of frustration in the Pacific Island coun-tries (PICs). Economic growth has, on the average, barely keptup with population growth in most PICs, despite high aid-to-GDP and investment-to-GDP ratios. Unemployment,particularly among the young, is very high. Social problemsassociated with high unemployment have emerged, and are ofincreasing concern.

Unsustainable budget deficits resulting in internal andexternal financial instability are now common. Most PICs havewitnessed and are witnessing unsustainable balance-of-pay-ments deficits, dwindling external reserves, escalating govern-ment debt, crowding out of the private sector, loss of consumerand investor confidence, declining public- and private-sectorinvestments, and slow growth.

Accordingly, there is a growing feeling among thepeople that national resources have been wasted or have cer-tainly not been used efficiently. Public confidence in thegovernment’s ability to engage in sound, decisive fiscal man-agement to address the poor economic performance and


associated social ills is rapidly eroding. Demand for efficiency,transparency, and accountability in government and in publicfinancial management in particular is on the rise.

Almost all PICs are in the midst of difficult stabiliza-tion, adjustment, and reform exercises. Most of these are aidedand supported by the ADB. Central to these exercises is theoverhaul and improvement of the public financial managementsystems in these countries.

Economic and Social Impact of Corruption

Corrupt practices are likely to have the following effects:• selection of unsuitable and more expensive equip-

ment and projects;• substantial increase in the contract price during

implementation if a favored contractor is involved;• shoddy work, leading to expensive repairs and high

maintenance costs, which are borne by the recurrentbudget;

• forgone future revenue streams; and• diversion of government services away from those

in need to those who can afford to make the illegalpayments demanded by corrupt officials.

In small, open, fragile economies, the economic andsocial impact can be very serious. Budget deficits are likely towiden with direct negative impact on the balance of payments,external reserves, liquidity in the banking system, and ulti-mately on confidence, investment, and growth in the economy.Unsuitable or unnecessary expenditures at inflated prices onequipment and projects result in much reduced returns in termsof GDP generated for each dollar of public-sector investment,i.e., in very high average ICOR for the government’s PublicSector Investment Program. To the extent that those who ben-efit from corrupt practices are likely to be economically better

Observations on Public Financial Accountability 209

off and powerful, corruption is likely to worsen economic andsocial inequity within the country. Even more seriously, cor-ruption saps and erodes the moral authority of the politicalleaders and renders them impotent and ineffective in marshal-ing the energies of all sectors of society in the pursuit of na-tional development.

Improving Transparency, Accountability,and PerformanceFiscal transparency and accountability requires, among otherthings, ready access by legislators, the media, and the publicto complete information about fiscal targets, objectives, fore-casts, and fiscal sustainability and vulnerability assessments.Detailed budget documents and audited financial statementsshould be made available to them, as should statements con-firming compliance by the authorities with statutes and rulesgoverning open procurement and contracting, employment,access to services, tax expenditures, and taxpayer treatment bythe income-tax and customs administrations.

In a parliamentary system, the organization of theopposition party should be strengthened and given technicalsupport to enable it to analyze the budget and policies ef-fectively. The finance secretary and the governor of the centralbank should hold briefing sessions on the budget for alllegislators, including members of the opposition, before thebudget debate.

Budget Formulation

As mentioned in other chapters, a carefully prepared macro-economic framework is critically important for budget formu-lation. This framework should be prepared by an economicpolicy group or macroeconomic committee made up of the heads


of the central bank, the treasury, and the national planning andstatistics bureau.

In the case of the PICs, a simple approach would do tostart with. A simple model should be used as follows:

M3 = NFA + Cg + Cp + OIC

where M3 = money supplyNFA = net foreign assets

Cg = claims on governmentCp = claims on the private sector

OIC = other items, net

Working committees, composed of officials of the fourgovernment departments mentioned earlier plus outside ex-perts, would project the major macroeconomic variables: GDP,balance of payments, revenue, government expenditures, ex-ternal reserves, and price movements. Demand for money couldbe calculated simply as the sum of nominal GDP growth anda modest estimate of growth in monetization. Within the limitsof the targeted M3, iteration would be done to protect a reason-able growth in bank credit to the private sector, and an opti-mum level of overall deficit and government borrowingrequirement would finally be arrived at.

Projections of government expenditures and revenueswould take into account existing and proposed policies,programs, and measures. The proposed fiscal, monetary, in-come, and exchange-rate policies that underpin the budgetwould be formulated as part of the exercise. The macroeco-nomic framework to be approved by the cabinet and ulti-mately the legislature would clearly show targets,assumptions, statistics, and projections; policy proposals andobjectives; assessments of fiscal sustainability, debt-to-GDPratio, revenue-to-GDP ratio, and fiscal vulnerability; maturityschedule of government debt; and usable reserves. The recom-mendations of the macroeconomic committee would help


determine the overall size of the current and capital budgetsand the budget financing program.

After the macroeconomic framework is approved by thecabinet, the budget committee, made up possibly of the headsof treasury, planning, and public service, should set the sectoralceilings within the overall budget ceiling. But the formulationof sectoral policies, projects, and programs and the determina-tion of expenditure priorities are the responsibility of the spend-ing ministries, departments, and agencies. Spending agenciesmust undertake micro analysis, questioning the merits of ongo-ing programs and targeting the reduction of expenditures thatbenefit narrow groups of richer people, as well as expenditureswith only a slight impact on large sectors of the population.

More sophisticated techniques for economic projectionscould be progressively adopted as the economic policy groupgains technical capacity.

Multi-year Expenditure Programs (MYEPs)

MYEPs consistent with the macroeconomic framework need tobe adopted and/or strengthened. Public-sector investmentprograms (PSIPs) should be well thought out and priorityshould be determined by the assessed social and economicreturns of projects. The responsibility for the formulation andexecution of sectoral PSIPs belongs to the relevant ministries.

PSIP or medium-term capital expenditures and multi-year recurrent expenditures should cover three-year periodsand be rolled at the end of each year. The multi-year recurrentexpenditures should incorporate current expenditures associ-ated with the PSIP and the consequences of current and ongo-ing policies. The planning office should assist the ministries inproject preparation and help ensure consistency between se-lected projects and sectoral and national policies.

Aid should be treated as a financing item. The carefulpreparation of forward programs would help reduce the


possible distortion of priorities by donors and strengthen thegovernment’s effective control over aid allocation.

The macroeconomic framework, the annual budget, andmulti-year expenditure programs should be examined, dis-cussed, and endorsed by a subcommittee of civil-service headsof ministries before being submitted to the cabinet. This en-sures that the ministers will be better briefed, agreements easierto arrive at, and decisions made more rationally.

Oversight and Control

The constitutions of most PICs require all monies com-ing to the government to be paid into the consolidated fund,from which releases can be made only through legislativeappropriation. This provision should be strictly observed as itforbids the establishment of extrabudgetary funds, such as thosethat could come from aid receipts.

All proposed sectoral policies or draft legislation withfinancial implications must be analyzed by the finance minis-try before they can be discussed by the cabinet. A provision tothis effect could be embedded in the cabinet procedure hand-book or in the finance act itself.

The power to negotiate government loans should bevested exclusively in the minister of finance. Governmentborrowing, which must be tied to the financing of the approvedbudget expenditures, should require a legislative act or at leasta legislative resolution, and foreign loans entered into by gov-ernment statutory bodies and other entities must be subject tocentral-bank oversight. Government guarantees or lendingshould require similar parliamentary authorization.

Limitation transfers, or “virements,” between person-nel expenditures and other current expenditures need to becontrolled, and the number of staff members by broad catego-ries should be shown in the budget. Transfers within budgetcategories may be approved by the minister concerned but


transfers between budget categories should require higherapproval or supplementary appropriations.

Expenditures by spending ministries and agencies haveto be authorized through warrants issued by the minister offinance. Such warrants should be based on the projected cash-flow position of the government to optimize its borrowingprogram and minimize the overall costs of borrowing.

The head of the treasury should be empowered to levysurcharges. Under this provision, accounting officers who donot collect revenue due, overspend appropriated amounts,neglect tendering procedures, or violate any other financialregulations could be made to pay a surcharge up to the totalsum lost, which would be deducted from future salary payments.

Financial Statements to the Legislature

The minister of finance, on behalf of the government, shouldreport to the legislature on changes in the budget resulting fromchanging economic circumstances, and also on progress inbudget execution (i.e., budget outcomes against objectives). Thetreasury should complete the following financial statementswithin three months from the end of the fiscal year:

• financial position on the balance date;• statement of revenue and expenditures, covering the

annual appropriation and supplementaryappropriations;

• statement of borrowings, accumulated debt, debtservice, and contingent liabilities;

• statement of emergency expenditures during theyear; and

• comparative actual figures for the previous fiscalyear.


Auditor General/Commission of Audit

This is a constitutional post, responsible to the legislature. Itshould be endowed with wide investigative and reportingauthority over government and the operations of governmententities. In consultation with the treasury, the auditor generalshould establish accepted accounting practices for the prepa-ration of government financial statements. The auditor generalmust have right of access to all information held by ministers,departments, and government entities and the right to copyinformation, to require explanations, and to enter premises.

The auditor general should have the power to directofficers or employees to:

• provide information;• appear before the auditor general; and• grant access to anyone authorized by the auditor

general.

I would recommend a provision, similar to that in thePhilippine Constitution, which gives the Commission of Auditdiscretion and authority to disapprove any disbursement of publicmonies if deemed unwise or unreasonable by the Commission.This is a considerable extension of power beyond that of merelyascertaining the correctness and legality of expenditures orsimply bringing to the attention of officers expenditures thatwere irregular, unnecessary, or extravagant in the opinion ofthe auditors.

International Financial Scams

International scams are promoted aggressively in the PICs. Thesepresent enormous risk as the amounts involved are generallymultiples of a country’s annual budget or external reserves. Theyhave worked, in a number of cases, mainly through the activeinvolvement of corrupt leaders within a country.


The approach is standard. The promoters of a scam insiston secrecy and on negotiating only with political leaders andministers, keeping out central bank and treasury officials, law-yers, and accountants, who tend to ask searching and awkwardquestions. Typically, the scams promise much but ask for cer-tain payments upfront. Scams so far attempted and over whichsubstantial sums have been lost include:

• the promise of substantial external loans on ridicu-lously soft terms, with promoters demanding andreceiving upfront fees for “services to be rendered”;

• the promise to build a multimillion-dollar powerplant as a gift with the issuance of promissory notesby the central bank to the promoters when theagreement is executed; and

• the issuance of letters of guarantee by the govern-ment and the central bank to enable the promotersto raise hundreds of millions of dollars and investthe proceeds in highly lucrative investments, theincome from which will be shared with thegovernment.

Measures for countering these scams which have beenrecommended to governments in the PICs include:

• the establishment of a committee of officials withtechnical expertise to vet and negotiate with the pro-moters of such schemes;

• instructions from the cabinet to all ministers to re-frain from dealing with such promoters and to referthem instead to the committee of officials.

• the vetting of promoters by international companiesthat provide such services for a fee; and

• cooperation among central banks and between cen-tral banks and other relevant bodies in establishingand regularly updating a databank of relevant in-formation to assist in vetting promoters of scamswho come into the region.


The Ombudsman

A number of constitutions in the PICs provide for the estab-lishment of the constitutional post of Ombudsman. To allowindependence for the post, the appointment is made by the headof state in consultation with the government and selected lead-ers. The powers vested in the post vary considerably fromcountry to country.

The case of Vanuatu presents a useful model which othercountries could adapt for their own use. A comprehensiveLeadership Code spells out in some detail the standards ofbehavior for leaders. The powers of the Ombudsman are pro-vided in the Constitution and in a separate legislation, theOmbudsman Act. The Ombudsman administers and polices theLeadership Code, and investigates leaders, including ministers,politicians, public officers, directors, and executives of statu-tory bodies and public-sector enterprises. Investigations can beinitiated either upon the receipt of complaints from the public,or at the Ombudsman’s own initiative. The Ombudsman’sreports are submitted to the Prime Minister and the Directorof Public Prosecution. Sanctions imposed as a result of thesereports include:

• loss of position;• criminal proceedings; and• civil action by the state, members of the public, or

other entities.

As elsewhere in public financial management, havingcomprehensive legislation is certainly important, but the effec-tiveness of the post of Ombudsman depends critically on theperson who occupies it and the strength and integrity of thepolice, the office of the Director of Public Prosecution, and thejudiciary. This leads us to the next part.


Other Issues

A well-thought-out legislative framework is a necessary con-dition but is not sufficient for sound public financial manage-ment. Legislative provisions are not always complied with,either because of ignorance or because of simple lack of en-forcement by the political leaders and public servants.

Public officers, particularly heads of ministries anddepartments, are required to know the financial rules and toadminister them firmly and strictly. They have the duty to tell theministers what they can or cannot do under the law. This brings tothe fore the need for constitutional provisions that entrench theindependence of the public service from political interventions.

Training of legislators, and particularly the membersof the legislative committee on audit, is critically important.

The treasury and the auditor general’s officers need tohave terms and conditions that recognize the urgent need foracquiring qualified and experienced accountants. Trainingprograms also need to be emphasized not only in these depart-ments but also in the budget and accounting sections of thespending ministries and agencies.

The accounting and treasury operations of the govern-ment should be progressively computerized. And the bureauof statistics needs to be strengthened to assist in the formula-tion and ongoing review of the macroeconomic framework andthe formulation of sound economic, financial, and social poli-cies for the government.

These are only some of the many possible measures tostrengthen public financial accountability and reduce the opportu-nities for corruption, particularly for small, open island economiessuch as in the Pacific. It is quite clear in any event that problemsneed to be diagnosed openly and realistically, and a range ofactions taken to address those problems that are particularly im-portant in the country concerned. Many countries now recognizethis, and it is hoped that this recognition will expand with theassistance and encouragement of the international community.

Chapter 10

Public FinancialAccountability for

Integrity and Results:The Case of the Philippine

Bureau of the TreasuryLeonor Briones*

Introduction

This paper describes the formal mechanism in the Philippinesfor ensuring public financial accountability, and examines indetail an agency that plays a crucial role in public financialaccountability, the Bureau of the Treasury. At the same time, itgoes beyond the formal system and places great importance onthe role of media and civil society, as well as informationtechnology.

The first section of the paper examines the concept ofaccountability in public finance as developed in the Philippineexperience, starting with the constitutional provisions on ac-countability. As in other countries, the Constitution is the basisfor all laws, rules, and regulations that govern the conduct ofthe government and the rights of citizens in the Philippines.The second section explains how accountability promotes

* The invaluable research and administrative assistance of Catherine Bool-Nuñez, fiscal analyst of the Bureau of the Treasury, and Janet Carandangare gratefully acknowledged.


aggregate fiscal discipline in the Philippines and describes vari-ous institutional mechanisms to ensure fiscal discipline. We nextdeal with accountability and the strategic allocation of budget-ary resources, the link between planning and budgeting, thena discussion of the crucial role of leadership in promoting fi-nancial accountability. To make the general discussion moreconcrete, the paper then looks at the Philippine Bureau ofTreasury (BTr) as an illustration of how financial accountabil-ity works in practice. Two specific components of the BTr sys-tem are noted: the electronic auction of Treasury bills and bonds,and the Registry of Scripless Securities. The last section pre-sents some conclusions.

Accountability in Public Finance

In the words of Francisco S. Tantuico Jr., former chairman ofthe Commission on Audit of the Philippines: “Public account-ability is the foundation of integrity. It cuts to the soul of gov-ernment. It unmasks the government of the day of whateverfaçade it wears.” The Constitution of the Philippines describespublic accountability thus:

Public Office is a public trust. Public Officers andemployees must at all times be accountable to thepeople, serve them with utmost responsibility, in-tegrity, loyalty and efficiency, act with patriotism andjustice and lead modest lives.

And Ledivina V. Cariño, dean of the National Collegeof Public Administration and Governance of the University ofthe Philippines, defines accountability as:

Public Financial Accountability for Integrity and Results 221

…the evolution of the actions of appointed careerofficials in terms of whether their actions are withinor outside the bounds of their authority. It may bepromoted through the imposition of external con-trols and through the inculcation of self-regulatingvalues.1

Dean Cariño identifies the different levels of adminis-trative accountability as: (i) traditional accountability, whichfocuses on the regularity of fiscal transaction and faithful com-pliance as well as the adherence to legal requirements andadministrative policies; (ii) managerial accountability, which isconcerned with efficiency and economy in the use of funds,property, manpower, and other resources; (iii) program account-ability, which pays attention to the results of government op-erations; and (iv) process accountability, which emphasizesprocedures and methods of operations.

Public financial accountability and audits

Public financial accountability is promoted primarily throughthe conduct of regular audits. Traditional audits include legaland compliance audit. These are generally limited to audits thatexamine the legality of financial transactions as well as com-pliance with established rules, regulations, and procedures.Performance audits look into actual outputs of agencies inrelation to programmed goals. Concepts of performance audithave been further developed into program results audit andvalue-for-money audits.

1 Cariño, Ledivina V. “Administrative Accountability: A Review of theEvolution, Meaning and Operationalization of a Key Concept in PublicAdministration,” Philippine Journal of Public Administration, April 1983.


Financial accountability and reporting

Reporting to oversight entities, the President, the legislature,and the public is an important and indispensable componentof financial accountability. In the Philippines, specific lawsrequire all heads of offices and agents of government to submitreports on the status of their accomplishments. This or may ornot always happen.

R.A. No. 6713, the Code of Conduct for Civil Servantsin the Philippines, which was issued on 20 February 1989,requires all heads of offices and agencies of the governmentand government-owned or -controlled corporations (GOCCs)to submit and render their annual performance reports.

Section 62 of Presidential Decree No. 1177, a law thathas become a part of the Philippine Administrative Code of1997, also requires all heads of agencies and offices of thegovernment to submit a semiannual report of their accomplish-ments, both work and financial results, to monitor the efficiencyand effectiveness with which budgeted funds are being utilized.

Furthermore, individual audits of all government agen-cies and instrumentalities are consolidated into three mainreports: the consolidated audit reports on national governmentagencies, GOCCs, and local government units. These auditreports are submitted to both houses of Congress (the Houseof Representatives and the Senate), as well as to the Presidentof the Philippines. These are also open to the public.

Strengthening financial accountability: The role ofthe media and of civil society

Reports that are regularly submitted to the different oversightagencies of the government as well as to the legislature and theexecutive compose the formal reporting system. It is assumedthat these reports eventually reach the public.

However, increased participation of civil society ingovernance has resulted in greater public concern for financial


accountability. Thus, the public expects and demands that it beinformed regularly and promptly on the financial status of thegovernment, as well as the performance of financial agencies.

The media—radio, television, and print media as wellas electronic media—serve as an essential conduit for inform-ing the public. Because of their reach and access to differentsectors of society, the media are frequently utilized as a mecha-nism for speedy and timely reporting to the public on govern-ment operations.

Thus, reports that are regularly submitted to differentoversight institutions promptly reach the public. Examples arethe regular cash operations report on revenues, expenditures,and the cash deficit in relation to programmed goals; the re-port on the state of the public debt; and the quarterly reportson economic performance.

Since these important reports reach the public at thesame time that oversight officials receive them, public reactionis instantaneous. Oftentimes, public debates ensue, impellingofficials to explain to the citizens the meaning and implicationsof developments in the financial system. There have beenoccasions when policies have been modified in response topublic reaction.

The impact of increased public participation in financethrough the media is twofold. First, the public is kept up-to-date on financial policies, programs, and accomplishments. Itis able to react and even debate with policymakers. Secondly,public officials now recognize that their ultimate accountabil-ity is not only to oversight institutions but to the public itself.They learn to consult affected sectors of society and to commu-nicate with them.

As noted earlier, civil society is now increasingly con-cerned with governance, particularly accountability. Crises ofglobal proportions, e.g., global environmental concerns as wellas regional economic crises, have mobilized civil society intopushing for national, regional, and even international action.In the Philippines, the impact of the Asian financial crisis on


the Philippines has sensitized Filipinos to the risks of overbor-rowing and lack of accountability. The state of the economy andits financial status have become the subject of intense publicinterest. Public officials are often called to account for theirperformance or the lack of it.

In recent years, the Philippines has had one of the mostdynamic civil societies. Nongovernment organizations, privatevoluntary organizations, and political movements have beeninstrumental in bringing to public attention issues of publicfinance and accountability. Very often, because of theirgrassroots orientation, they have the capacity to translate com-plex economic and financial issues in terms that are understand-able to the man or woman on the street. These macro issues arethe everyday concerns of ordinary citizens.

The heightened role of media and civil societies has ledagencies to report directly and immediately to the public, thuseliciting immediate public response. While the law does notexplicitly require this, it has broadened concepts of publicaccountability far beyond formal requirements, and enables civilsociety to exact accountability directly from officials respon-sible for maintaining the financial system of the country.

How Accountability PromotesAggregate Fiscal DisciplineIn the Philippines as well as in other countries, formal mecha-nisms ensure accountability and promote fiscal discipline. TheDevelopment Budget Coordination Committee is one suchmechanism. It is composed of the Department of Budget and Man-agement (DBM), the National Economic and Development Au-thority, the Department of Finance (DOF), the Bangko Sentral ngPilipinas, and the Bureau of the Treasury. It provides the linkagebetween planning and bugeting and establishes the aggregate tar-gets for the annual government expenditure program and ceilingsof government spending for the various sectors.


Another mechanism that promotes financial account-ability in the Philippines is the Cash Programming and Moni-toring Committee (CPMC), created in accordance with theDOF-DBM Circular No. 1-90A on 19 November 1990. It is headedby the Treasurer of the Philippines. The CPMC was created toprovide closer coordination between DOF and DBM in therelease of funds based on the short-term calculation of cash avail-ability. It is directly responsible for controlling the release ofthe Notices of Cash Allocation vis-à-vis the inflow of revenues,as well as ensuring that the deficit target is not exceeded. TheCPMC also facilitates the management of cash balances by theBureau of the Treasury and rationalizes the flotation of govern-ment securities while encouraging agencies to optimize cashutilization in the implementation of priority programs andactivities of the government.

At the level of the Bureau of the Treasury, the Cash FlowCommittee is a formal mechanism to ensure fiscal discipline,by monitoring cash operations and the level of debts on a day-to-day basis.

An effective public accountability system promotesaggregate fiscal discipline. Two features of such a system makethis possible. First is efficient and effective monitoring andreporting as required by law, rules, and regulations. In thePhilippines, two crucial reports on fiscal performance are sub-mitted monthly. These are the cash operations report and thereport on the public debt.

The cash operations report is submitted by the Trea-surer of the Philippines to the Secretary of Finance. It containsinformation on levels of revenue, expenditure, and borrowingon a monthly basis, thus allowing fiscal performance to be moni-tored on a monthly basis. Shortfalls in revenue, as well asexcesses in expenditure, are immediately pinpointed and cor-rective action is undertaken. The report also enablespolicymakers to identify well-performing as well asunderperforming agencies, leading to corrective action or toagency commendation, thus exercising fiscal discipline on a


timely basis and dealing with problems before they get out ofhand.

Second, fiscal discipline is enhanced by regular moni-toring done by media and civil society. Mention was earliermade of two reports that are submitted monthly by the Bureauof the Treasury: the cash operations report and the report onthe public debt. Days before these reports come out, membersof the media bombard the BTr and the Department of Financewith calls, to get the numbers first and come out with scoops.Once the reports are out, the results are avidly discussed onradio, TV, and print media. Civil society organizations then takeover and put pressure on policymakers if performance has beenless than satisfactory.

At present, the Bureau of the Treasury prepares pre-liminary reports every two weeks to keep the Secretary ofFinance update. This enables him to take immediate action ifthere are danger signs.

Because timeliness is very important in fiscal perfor-mance, and again because these two reports are regularlyexpected by the media and civil society, the Treasurer person-ally oversees the preparation of these reports and constantlythinks of ways to improve them and make sure they are sub-mitted on time.

Constant watching by media and civil society makesfiscal agencies more sensitive to public reaction and enhancesdiscipline. As a result, both the Bureau of the Treasury and theDepartment of Finance keep an eagle eye on fiscal performance,knowing that the size of the monthly cash deficit is consideredby the public as an indicator of good performance as well asfiscal discipline.


Leadership and Public FinancialAccountabilityIn addition to formal mechanisms, media, and civil society,leadership plays a crucial role in promoting financialaccountability.

The National College of Public Administration andGovernance pioneered studies on graft and corruption in thePhilippines, which further led to a wide array of research onthe topic. The role of leadership in bringing about public finan-cial accountability was a common finding of these studies.Agencies identified as “flagships” of accountability were knownto be headed by people who themselves actively initiated strat-egies and tactics to bring about accountability.

The Philippine Bureau of the Treasury (BTr)

The functioning of the BTr illustrates how the combination offormal mechanisms, media, civil society, and leadership canbring about financial accountability in the Philippines. The BTris a member of the cluster of agencies within the Departmentof Finance. It is known as the custodian of all government funds.But the functions of the Bureau are not limited to this. The BTris also very active in national policy formulation, particularlyin financial management, public borrowing, and capital mar-ket development. On the operations side, the Bureau is respon-sible for the management of the assets and liabilities of thenational government, as well as the fidelity bonding of allaccountable government officers and/or personnel. The Bureaualso prepares the annual financing program of the nationalgovernment.


The BTr information system and its role inpromoting accountability

Timeliness is of the essence in promoting accountability. Op-portunities for graft and corruption usually abound where thereis inefficiency and delay. Appropriate information technologycan reduce and even eliminate these opportunities becausechances for negotiation and bargaining are reduced. Decisionsare made faster and are more transparent.

The role of information technology is illustrated in twomajor features of the BTr information system wherein opportu-nities for misbehavior have been reduced to zero. These are theelectronic auction of T-bills and -bonds, and the Registry ofScripless Securities. When the information technology systemof the Bureau was not yet in place, auctions of Treasury billstook two days. The process was laborious and cumbersome asbids were all written down on boards by at least 30 personneland required computations using simple calculating machines.Bidders were informed of the results of the auctions only a dayafter the bidding. With the setting up of the Automated DebtAuction Processing System (ADAPS) and the Registry ofScripless Securities (ROSS) in the Bureau, the new auction pro-cess minimizes the risk of loss as a result of delays in the sub-mission of bids and facilitates the process of decision making.

At present, the electronic auction of T-bills and -bondsis done primarily through the Automated Debt Auction Pro-cessing System. ADAPS was developed with the assistance ofthe Policy Training and Technical Assistance Facility. Consid-ered to be among the most advanced systems in Asia, ADAPSfacilitates the much faster processing of auctions in T-bills and-bonds in the Philippines. Largely because of ADAPS, delayscaused by floods, traffic, and force majeure in the auction pro-cess are eliminated. Most importantly, ADAPS promotes greatertransparency in the auction operations as it enables fasterdecision making in the rejection or acceptance of bids and lessensthe opportunities for consultations among bidders. The whole


auction process takes only about five minutes. Through ADAPS,all bids on Treasury bills and bonds are submitted promptly,enabling the Auction Committee to decide whether or not toaccept the bids. In another ten minutes, bidders are informedof the results of the auction.

The Registry of Scripless Securities maintains the reg-istry of all securities transactions. As the term implies, it is asystem designed to facilitate the scripless trading of govern-ment securities. Like ADAPS, ROSS provides greater transpar-ency in all transactions involving government securities andminimizes the risk of loss from accidents and theft.

Conclusion

Fiscal and financial outturns depend on a variety of factors otherthan the financial accountability systems. However, the accom-plishments in the Philippines in recent years owe much to theworking system of financial accountability. To conclude withjust one concrete example, the typical government agency isusually clogged with pending cases involving discipline andaccountability. However, when the current Treasurer of the Phil-ippines assumed office, she was delighted to learn that therewas only one pending case in the Bureau. This case involvedthe breaking of the plastic cover of the finger-scanning machineand an amount of P1,000. Considering the fact that Treasuryoperations include the entire national budget of over P565billion, only one pending case of administrative disciplinewould seem like a near miracle.

The Philippine experience, specifically the Bureau ofthe Treasury, has shown that public financial accountability canbe achieved through a combination of the following factors:

• strong legal basis, organizational structure, rules,regulations, and procedures;

• regular monitoring and reporting to the publicthrough the media and civil society organizations;


• appropriate information technology system andtimely processing of reliable information; and

• strong leadership committed to ensuring public fi-nancial accountability—a leadership committed topromoting good governance.

References

Bureau of the Treasury, Annual Report for 1998.

Cariño, Ledivina V. 1983. “Administrative Accountability: AReview of the Evolution, Meaning andOperationalization of a Key Concept in Public Admin-istration.” Philippine Journal of Public Administration.Manila, Philippines.

Presidential Decree No. 1177. Manila, Philippines.

Republic Act No. 6713: The Code of Conduct for Civil Servants.20 February 1989.

Tantuico, Francisco S., Jr. 1994. Performance and Accountability.Manila, Philippines: Fiscal Administration Foundation,Inc.

Annex IAN ANTI-CORRUPTION POLICY FOR

ASIA AND THE PACIFIC1

The problem of corruption, here defined as the misuse of publicor private office for personal gain, is an ancient one that canbe found in every government. It can also be found in the privatesector, and in the interactions between the public and privatesectors. A balanced approach to combating corruption mustaddress both sides of the equation, and make it more difficultand risky for those who would give bribes as well as those whowould receive them.

Recently, a powerful combination of factors has emergedin donor and recipient countries that is providing momentumto the global anticorruption effort. At the same time, the latestempirical analysis is demonstrating that although the effects ofcorruption are complex and varied, it clearly exerts a negativeimpact upon development. As a result, the environment inwhich multilateral development banks (MDBs) operate haschanged. Pressure for more active measures against bribery andgraft is no longer likely to be isolated and sporadic, but willremain an important element of the broader debate over goodgovernance and sound development management.

As a major multilateral development institution and oneof the leading sources of development funding in the Asian andPacific Region, the Asian Development Bank (ADB) welcomesthis emphasis on anticorruption initiatives as part of its broaderwork on governance issues. The Bank’s Board paper, “Gover-nance: Sound Development Management”, recognizes theimportance of accountability for public officials, and

1 ADB, R89-98: “Anticorruption Policy”, July 1998 (Executive Summary).


transparency and predictability in government operations—critical principles in the fight against corruption.2

At the broadest level, the Bank’s anticorruption policyis intended to reduce the burden that widespread, systemiccorruption imposes upon the governments and economies ofthe region. More specifically, the Bank’s policy is centered uponthree objectives:

• Supporting competitive markets, and efficient, ef-fective, accountable, and transparent public ad-ministration as part of the Bank’s broader work ingovernance and capacity building;

• Supporting promising anticorruption efforts on acase-to-case basis and improving the quality of theBank’s dialogue with its developing member coun-tries (DMCs) on a range of governance issues, in-cluding corruption; and

• Ensuring that the Bank’s projects and staff adhereto the highest ethical standards.

The bulk of the Bank’s effort will be directed towardbroader measures to improve the quality of governance in theDMCs. This effort will have two components. The first will seekto reduce the scope of direct government intervention in theeconomy, in the belief that markets should be efficient and com-petitive, and have as few barriers to entry and exit as possible.This will reduce the opportunity for firms or officials to takeadvantage of artificially restricted markets or suboptimal pric-ing to demand monopoly rents.

The second component will focus upon supportingimprovements in public administration and public sectormanagement. Efforts to strengthen management informationsystems, for example, should enhance transparency and ac-

2 ADB, R151-95: “Governance: Sound Development Management”, 17August 1995.

Annex I 235

countability, and strengthen the capacity of governments tomonitor their expenditures. Measures to strengthen audit func-tions or to ensure adequate control over disbursements can playthe dual role of helping to improve performance while makingtheft and embezzlement more easily detected. Procurement re-form, which the Bank is already pursuing in a number of theDMCs, can reduce costs while making fraud and abuse moredifficult to perpetrate. Steps to strengthen civil service estab-lishment management will help to eliminate “ghost employ-ees”, and efforts to decompress pay scales and improveemployment conditions will lower the incentive for illicit be-havior. Measures to improve procedures for recruitment andpromotion should help avoid abuse of patronage, nepotism,and favoritism, and help foster the creation of an independent,meritocratic civil service. The reengineering and streamliningof business processes can improve the efficiency and effective-ness of the public sector while simultaneously reducing oppor-tunities for corruption.

In advancing such initiatives, the Bank affirms its de-sire to adopt a proactive and not a reactive stance. Most pri-ority governance initiatives will have significant positiveexternalities that will make corrupt behavior more difficult toengage in and more readily detected once it occurs. Over thelonger term, the Bank is likely to be much more effective if itfocuses its anticorruption efforts upon measures for preven-tion and not on short-term efforts aimed at prosecution.

The Bank may also be called upon to assist the DMCsin pursuing an explicit anticorruption program. Bank assistancewill be guided by three considerations: (i) the extent to whichBank assistance is requested by the DMC; (ii) the degree to whichthe request is consistent with the Bank’s broader country op-erational strategy and ongoing efforts in the field of governanceand capacity building; and (iii) the extent to which the requestfalls in an area where the Bank has expertise. Under this ele-ment of the policy, the Bank may also support regional anticor-ruption initiatives or anticorruption-related research.


ADB staff should exercise caution in addressing sev-eral sets of initiatives that will typically remain beyond theBank’s scope of involvement. They include efforts to influencethe domestic debate within the DMCs regarding an anticorrup-tion strategy or set of anticorruption initiatives; anticorruptionprograms that are highly politicized in nature and targeted ata particular individual or political party; and initiatives thatare largely cosmetic and designed to foster the illusion ofprogress without the substance. To ensure consistency with theBank’s Charter, any anticorruption initiatives supported by theBank must be apolitical in nature and motivated solely byessential economic considerations or concerns about the pro-bity of Bank operations.

The Bank has several mechanisms for engaging in dia-logue with the DMCs on issues of governance (including cor-ruption), ranging from the country operational strategy and thecountry assistance program discussions, to country portfolioreview missions, to project appraisal, implementation, andreview missions. Bank staff charged with country strategy andprogram formulation, including the drafting of the countryoperational strategy and country assistance program docu-ments, as well as staff responsible for loan or TA projects, shouldaddress corruption in the context of broader governance andcapacity-building issues. They should be knowledgeable aboutissues of corruption and its impact within their particulargeographic and/or sectoral sphere of operations. They will usethese mechanisms to discuss and recommend ways in whichthe Bank can help advance the principles of sound develop-ment management, including measures that would help tocombat corruption, in any country where corruption affects Bankprojects and the country’s general prospects for economicgrowth.

Country portfolio review missions and project reviewmissions may provide a useful venue for discussing the poli-cies and practices that impede the efficient implementation ofBank projects. Under most circumstances, staff who suspect that

Annex I 237

corruption may have occurred or may be occurring within agiven Bank project should follow the procedures outlined inparagraph 64 of this document and report the matter to theOffice of the General Auditor, who will determine the optimalcourse of action. In rare cases where rapid follow-up actionsmay be needed, staff can address such issues explicitly withthe relevant company, executing agency, or appropriate inves-tigative agencies after clearance from their director and, theOffice of the General Counsel (OGC). Any discussion with agiven firm or government agencies should, however, be lim-ited to a specific Bank operation or set of operations.

If the Bank’s efforts to reduce illicit behavior among itsDMCs are to be credible, it is essential that Bank staff be be-yond reproach and the Bank’s internal regulations and proce-dures support the highest ethical standards. Toward this end,the third pillar of the Bank’s anticorruption policy calls for morerobust internal measures to enhance the integrity of Bankoperations along five dimensions: (i) maintaining the integrityof Bank lending and TA operations; (ii) strengthening the Bank’sprocurement policy; (iii) updating the Bank’s Code of Conductand creating independent internal reporting mechanisms to ad-dress allegations of corruption among Bank staff or within Bankoperations; (iv) improving the quality of oversight for Bankloans and TA grants; and (v) ensuring that all Bank staff arefamiliar with the anticorruption policy and act in a mannerconsistent with both the letter and the spirit of the policy.

If there is credible evidence of corruption in a Bank-fi-nanced loan or TA grant, the Bank will address the issue in adialogue with the DMC. Breaches of specific loan regulations orcovenants could result in a decision by Management to blacklistthe firm involved, suspend disbursements, or cancel the loan.

In keeping with the evolving practice of IMF and theWorld Bank, Management and staff will consider issues ofcorruption more explicitly in the formulation of the countryoperational strategy and the country assistance program. Casesmay occur in which corruption has reached such proportions


that it poses a significant impediment to the probity of Bankoperations or the attainment of a country’s fundamental de-velopment objectives. Under such circumstances, Managementcould elect to lower or suspend Bank lending and TA opera-tions to that country after consultation with the country andthe Board.

Conversely, situations may also exist where a givencountry has made significant progress in improving the effi-ciency, effectiveness and integrity of its public and privatesectors. Under such circumstances, Management may elect toaccelerate the lending program or provide additional TA re-sources to ensure sustainability for the reforms.

In the light of the complex and highly differentiatednature of corruption, it is important that Bank Management andstaff be granted some degree of flexibility in dealing with in-dividual cases within the parameters laid out in this policy.While acknowledging the need for fairness and consistency inits operations, and strongly affirming the importance of a “zero-tolerance” policy when credible evidence of corruption existsamong Bank staff or projects, the Bank notes that different typesof corruption will require different responses. There is a needfor careful judgment based on accurate information and thespecifics of the situation. The Bank’s anticorruption effort willplace particular emphasis upon the implementation of practi-cal and cost-effective prevention control measures, in a fashionconsistent with the Charter principle of “economy andefficiency.”

An Anticorruption Task Force under the leadership ofthe Project Coordination and Procurement Division was recentlyconvened to examine Bank procurement policy. Having takeninto account the advantages of harmonizing the anticorruptioneffort among the MDBs with regard to procurement and theengagement of consultants, the Bank will introduce anticorrup-tion provisions effectively identical to those adopted by theWorld Bank in respect of rejection of proposals, loan cancella-tion, declaration of ineligibility, and inspection rights. The Bank

Annex I 239

will also introduce an optional “no-bribery pledge” in the bidform that will be similar to that of the World Bank. It will alsointroduce a mandatory clause that, when the contract is to befinanced wholly or partly by the Bank, the contract documentsshall include an undertaking by the contractor that no fees, gra-tuities, rebates, gifts, commissions, or other payments, otherthan those shown in the bid, have been given or received inconnection with the procurement process or in the contractexecution. Following the adoption of the anticorruption policypaper by the Board, provisions to this effect will be incorpo-rated in the Bank’s “Guidelines for Procurement” and the“Guidelines on the Use of Consultants by the Asian Develop-ment Bank and its Borrowers” and submitted to the Board forapproval. The “Guidelines” will be supplemented by provisionsin the Bank’s loan regulations allowing the Bank to cancel loanswhere there is evidence of corruption or fraud in connectionwith the award of a contract being financed by the Bank. 3

With regard to the Bank’s internal policies and proce-dures, several measures are necessary to ensure that they areconsistent with those of other MDBs and evolving best prac-tice. Currently, there are no independent channels whereby Bankstaff can report possible incidents of corruption and have theminvestigated. Under this policy, OGA will serve as the initialpoint of contact for allegations of fraud and corruption amongBank projects or staff. In consultation with the Strategy andPolicy Office (SPO), OGC, the Budget, Personnel, and Manage-ment Systems Department (BPMSD), Central Operations Ser-vices Office (COSO), and other relevant departments, OGA willconsider appropriate measures to be adopted under this policyto ensure that all Bank staff and projects adhere to the higheststandards of ethical conduct.

3 Office of the General Counsel, ADB, “Ordinary Operations Loan Regu-lations”, 1986.

Office of the General Counsel. ADB, “Special Operations Loan Regula-tions”, 1982


In May 1998, Management approved revisions to Ad-ministrative Order No. 2.02, Section 4, which contains the Codeof Conduct outlining staff ethical duties, rights, and responsi-bilities in greater detail than was previously the case.

The Bank will undertake a number of measures to im-prove the quality of project monitoring and audit. The capacityof OGA will be strengthened to enable it to address anticorrup-tion issues effectively. Specialized training in forensic account-ing and other investigative techniques will be provided, whichwill also be extended to select financial analysts and projectimplementation officers. Ongoing OGA efforts to streamlineinternal work procedures to free up greater resources for au-dits of high-risk and high-impact areas will continue. OGA willdevote more time to conducting audits of project procurement—related activities, which will help prevent and detect corrup-tion or other forms of fraud. OGA will strengthen its exchangeof information with supreme audit institutions in the DMCs,and— working in collaboration with other Bank departments—it will play an active role in assessing the need to upgrade theaudit capability of such institutions.

The relevant sections in the “Project AdministrationInstructions” and the Loan Disbursement Handbook will be re-vised to require that qualified accountant(s) be recruited by theexecuting or implementing agency, and that robust internalcontrol systems and accounting systems be in place for a projectbefore loan disbursement can be made. Greater resources willbe made available for upgrading the quality of project moni-toring and implementation missions. Consideration will begiven to the design of appropriate efficiency indicators, whichwill be utilized in monitoring financial and physical progresson a quarterly basis. The quality of the Bank’s managementinformation systems will be enhanced to provide managers withmore timely information for monitoring project processing, loanadministration, and the status of mission budget utilization.

These measures will be ineffective if Bank staff areunfamiliar with the provisions of the Bank’s anticorruption

Annex I 241

policy and Code of Conduct or fail to exercise due diligence inthe performance of their duties. While it is not the intention ofthis policy to turn Bank staff into “police officers”, or to makethe objective of reducing corruption paramount over otherdevelopment goals, all departments and staff have a strongobligation to ensure the integrity of Bank operations within theirrespective areas of responsibility. Bank staff should familiarizethemselves with the content of this policy and staff guidelines,and be prepared to respond appropriately as required.

In conclusion, this paper recommends a number ofconcrete actions to establish the Bank’s anticorruption policy.These measures can be broken down along three lines: recom-mended revisions of Bank policy and staff guidelines, newprogramming initiatives, and administrative changes.

Annex II 243

Annex IICODE OF GOOD PRACTICES ON

FISCAL TRANSPARENCY1

I. Clarity of Roles and Responsibilities

1. The government sector should be clearly distin-guished from the rest of the economy, and policyand management roles within government shouldbe well defined.

• The boundary between the government sectorand the rest of the economy should be clearly de-fined and widely understood. The governmentsector should correspond to the general govern-ment, which comprises the central governmentand lower levels of government, includingextrabudgetary operations.

• Government involvement in the rest of theeconomy (e.g., through regulation and equityownership) should be conducted in an open andpublic manner on the basis of clear rules and pro-cedures, which are applied in a nondiscrimina-tory way.

• The allocation of responsibilities between differ-ent levels of government, and between the ex-ecutive branch, the legislative branch, and thejudiciary, should be clearly defined.

1 Source: International Monetary Fund, Draft Manual on Fiscal Transpar-ency, October 1998.


• Clear mechanisms for the coordination and man-agement of budgetary and extra-budgetary ac-tivities should be established, and well-definedarrangements vis-à-vis other government entities(e.g., the central bank, and state-controlled finan-cial and non-financial enterprises) should bespecified.

2. There should be a clear legal and administrativeframework for fiscal management.

• Fiscal management should be governed by com-prehensive laws and administrative rules apply-ing to budgetary and extrabudgetary activities.Any commitment or expenditure of governmentfunds should have a legal authority.

• Taxes, duties, fees, and charges should have anexplicit legal basis. Tax laws and regulationsshould be easily accessible and understandable,and clear criteria should guide any administra-tive discretion in their application.

• Ethical standards of behavior for public servantsshould be clear and well publicized.

II. Public Availability of Information

1. The public should be provided with full informa-tion on the past, current, and projected fiscal activ-ity of government.

Annex II 245

• The annual budget should cover all central gov-ernment operations in detail and should also pro-vide information on central governmentextra-budgetary operations. In addition, suffi-cient information should be provided on therevenue and expenditure of lower levels of gov-ernment to allow a consolidated financial posi-tion for the general government should bepresented.

• Information comparable to that in the annualbudget should be provided for the outturns ofthe two preceding fiscal years, together with fore-casts of key budget aggregates for the two yearsfollowing the budget.

• Statements should be published with the annualbudget giving a description of the nature andfiscal significance of contingent liabilities, tax ex-penditures, and quasi-fiscal activities.

• The central government should regularly pub-lish information on the level and composition ofits debt and financial assets.

2. A public commitment should be made to the timelypublication of fiscal information.

• Specific commitments should be made to the pub-lication of fiscal information (e.g., in a budgetlaw).

• Advance release date calendars for fiscal report-ing to the public should be announced.


III. Open Budget Preparation, Execution,and Reporting

1. Budget documentation should specify fiscal policyobjectives, the macroeconomic framework, the policybasis for the budget, and identifiable major fiscalrisks.

• A statement of fiscal policy objectives and an as-sessment of sustainable fiscal policy should pro-vide the framework for the annual budget.

• Any fiscal rules that have been adopted (e.g., abalanced budget requirement and borrowinglimits for lower levels of government) should beclearly specified.

• The annual budget should be presented withina comprehensive and consistent quantitativemacroeconomic framework, and the economic as-sumptions and key parameters (e.g., effective taxrates) underlying budget estimates should beprovided.

• Existing commitments should be distinguishedfrom new policies included in the annual budget.

• Major risks to the annual budget should be iden-tified and quantified where possible, includingvariations in economic assumptions and theuncertain costs of specific expenditure commit-ments (e.g., financial restructuring).

2. Budget estimates should be classified and presentedin a way that facilitates policy analysis and promotesaccountability.

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• Government transactions should be on a grossbasis, distinguishing revenue, expenditure, andfinancing, and classifying expenditures on aneconomic and functional basis. In addition, ex-penditure should be classified by administrativecategory. Data on extrabudgetary operationsshould be similarly classified. Budget data shouldbe presented in a way that allows internationalcomparisons.

• A statement of objectives to be achieved by majorbudget programs (e.g., improvement in relevantsocial indicators) should be provided.

• The overall balance of the general governmentshould be a standard summary indicator of thegovernment’s financial position. It should besupplemented by other fiscal indicators (e.g.,operational balance, structural balance, and pri-mary balance) when economic circumstancesmake it inappropriate to base judgments aboutfiscal policy stance on the overall deficit alone.

• The annual budget and final accounts should in-clude a statement of the accounting basis (i.e.,cash or accrual) and standards used in the prepa-ration and presentation of budget data.

3. Procedures for the execution and monitoring ofapproved expenditures should be clearly specified.

• A comprehensive, integrated accounting systemshould be established. It should provide a reli-able basis for assessing payments arrears.


• Procedures for procurement and employmentshould be standardized and accessible to allinterested parties.

• Budget execution should be internally audited,and audit procedures should be open to review.

4. Fiscal reporting should be timely, comprehensive,and reliable, and should identify deviations from thebudget.

• During the year, there should be regular, timelyreporting of budget and extrabudgetary outturns,which should be compared with original esti-mates. In the absence of detailed information onlower levels of government, available indicatorsof their financial position (e.g., bank borrowingand bond issues) should be provided.

• Timely, comprehensive, and audited final ac-counts of budget operations, together with fullinformation on extra-budgetary accounts, shouldbe presented to the legislature.

• Results achieved relative to the objectives ofmajor budget programs should be reported to thelegislature.

IV. Independent Assurances of Integrity

1. The integrity of fiscal information should be subjectto public and independent scrutiny.

• A national audit body, or equivalent organiza-tion, should be appointed by the legislature, with

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the responsibility to provide timely reports to thelegislature and public on the financial integrityof government accounts.

• Macroeconomic forecasts (including underlyingassumptions) should be available for scrutiny byindependent experts.

• The integrity of fiscal statistics should be en-hanced by providing the national statistics officewith institutional independence.


NOTE ON CONTRIBUTORS

Leonor BrionesNational TreasurerPhilippines

Benjamin DioknoSecretaryDepartment of Budget and ManagementPhilippines

Francesco ForteProfessor of Public FinanceUniversity of Roma “La Sapienza”

Nihal JayawickramaExecutive DirectorTransparency InternationalGermany

Arigapudi PremchandAssistant Director, Fiscal Affairs Department (Ret.)International Monetary Fund

Salvatore Schiavo-CampoSenior Advisor for Governance and Public ManagementAsian Development Bank

Savenaca SiwatibauDirector, United Nations Development ProgrammePacific Center OperationsEconomic and Social Commission for Asia and Pacific

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Vito TanziDirector, Fiscal Affairs DepartmentInternational Monetary Fund

Daniel TommasiPublic Finance ConsultantParis

Clay WescottSenior Public Sector Management SpecialistAsian Development Bank

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