PUBLIC EXPENDITURE AND FINANCIAL ACCOUNTABILITY (PEFA)-PERFORMANCE MEASUREMENT FRAMEWORK

Module 8: Dialogue with Government and Monitoring Progress

OUTLINE OF MODULE 8

Part 1: Post PEFA and Government PFM reforms;

Part 2: Mapping PFM Functions against PEFA scores.

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Part 1: Post PEFA and Government PFM reforms

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What experience suggests for successful PFM reform

• Address the politics of reform- High-level political championship (political acquiescence may be sufficient)

- A Cabinet owned and approved PFM Reform Strategy

- Committed core senior professional cadre

Address the “supply side”- Link objectives (outputs) to resources (inputs)

- Adequate capacity & adequate recognition of PFM function linkages

- Adequate recognition of Legal and Regulatory/Institutional constraints

- Carefully managed sequencing (include “quick wins”)

- Institutional arrangements for managing the reform & adequate monitoring and evaluation

• Address the “demand side”- Organized and engaged civil society groups & informed and active press

- Functioning legislative sub-committees & external accountability agents

- Harmonized and aligned Donor support

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Overall use of the PEFA AssessmentsMay be employed as a:

• Guide for designing Government Strategy Paper- Input in assessing the context for reform, in the specification of outputs targets and in defining an

effective reform sequence

• Monitoring and Evaluation Tool for Reform Impact- Indicate improvements in high level indications of PFM performance over the medium term

- Tool for building reform consensus- The indicator scorings provide a simple basis for discussing strengths & weaknesses in the PFM

system as a way of building consensus on reforms to be undertaken

- Input to donors’ fiduciary risk assessments

• Improved coordination of technical and financial support to government reform programs –should lead to reduction in number of assessments and lowering transaction costs

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Practical use of PEFA to Guide PFM Reform A PEFA report provides insight on:

- External Factors – Functional/TechnicalMacroeconomic context, Legal and regulatory framework, Institutional arrangements

The level of coordination with the Budget by the Donors

The effectiveness of external accountability agents

- Internal factors – Functional/TechnicalCredibility of the budget, comprehensiveness and transparency of the budget, policy basis for the budget, control

and predictability in budget execution, accounting, recording and reporting, external audit and scrutiny

Ability of PFM to deliver on Fiscal Discipline, Strategic Allocation of Resources and Efficiency in the delivery of services

Institutional arrangements for managing the PFM Reform

- External Factors – PoliticalLevel of engagement of parliament

Level of support for PFM reform by Donors

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Practical use of PEFA to Guide PFM Reform (2)• PEFA has little or nothing to say on:

- External Factors – Functional/TechnicalMarket organization &function; Status of the financial administrative network

- Internal factors – Functional/TechnicalThe effectiveness of controls and achievement of efficiency in procurement;

The technical infrastructure other than the budget such as fixed assets register, supply chain management,

The capacity, by way of adequate staffing and qualification levels, general availability of PFM tools such as PCs and application software

- External and internal factors– PoliticalPolitical stability; How engaged and well informed the press is

Level of engagement of civil society and power relationships between key PFM players

Capacity/interest of professional cadres & effectiveness of any incentives/sanctions schemes

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Use of PEFA for a successful PFM Reform outcome

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High level performance Overview

Identify main PFM weaknesses

May require complimentary tools such as OECD/DAC NPA

May require diagnostics to be performed (increased burden and transaction cost?)

Identify underlying causes

Assess capacity constraints and political context

Implement PFM Reforms

Formulate PFM reform program specifying sequence

Dialogue with government on main areas of PFM reform

PEFA

Once the PEFA Assessment is complete

- - Allow the Government time to circulate the PEFA Report and build consensus both within the MOF and the major sector ministries;

• - Encourage a schedule to carry out this phase and possibly support a government workshop to identify areas of weakness and possible causes.

• - Need for further diagnostic to determine the underlying causes;

- Enter into a policy dialogue with the government on the next steps (based upon assessment of capacity constraints and political context, platform focus for reform, sequencing and time frame and indicator targets)

- Identify quick wins to ensure that the PFM agenda gains traction

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Developing a Sequence of Reform Activities – using PEFA

• Identify PFM weaknesses

• Elaborate a strategy of reforms

• Emphasize priorities

• Estimate roll-out effort (number of institutional units involved)

• Select the most important, simple activity chains (shortest) taking into account the roll-out effort to define the most appropriate sequence of PFM reforms

• Identify suitable candidates for quick wins (short activity chains, limited roll out effort, available capacity, right incentives)

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Consider the time it takes for reformDetermined by a host of factors:

Capacity constraints

Resource constraints

Length of the PFM Activity chain

Roll out Effort

The time for reform activity roll out is affected by:Whether only policy and oversight bodies need be considered

Whether reform measures are to be restricted to the coordinating ministries (MOF and Ministry of Planning)

Whether roll out is to be carried out to all spending units, and or procurement units

Note: A pilot project will not impact high level indicator scorings like PEFA

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Getting Traction on PFM Reform• Change Management considerations suggest that important for Reform

success are:• Clearly articulated vision

• Shared dissatisfaction

• First successful steps (quick wins)

• Limited resistance to change

• Activity chain length considerations suggest:• Debt management and tax revenue reforms to be good candidates for quick wins

• A most dramatic example for kick starting PFM reform was the debt management reform carried out by Nigeria in 2005. The reform put in a position to negotiate $18B debt relief from the Paris Club and has sparked growing efforts towards reforming its PFM.

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The PFM Reform Strategy

- Once the PFM Reform Strategy emanating out of the policy dialogue has been agreed this should be incorporated into a formal Government Strategy to be authorised by the very highest levels of government (e.g. the Cabinet).

-The requirement for carefully managed sequencing implies that PFM reform is best served by a programmatic approach – supported by a harmonised development partners, a single, coordinated funding vehicle, a common monitoring and evaluation framework;

- PFM Reform is not served by a fragmented, individual project approach.

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Monitoring Progress Over Time

• High-level indicators suggest significant movement captured by indicators will only show over the medium term.

• Note that once the PFM Reform Strategy has been agreed and authorised repeat PEFA Assessments may be used solely to monitor progress in PFM systems and practice

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Budget Support and PEFA- PEFA provides a tool for assessing the status of PFM in a country and facilitates the

monitoring of progress in the PFM systems and practice in the medium term

- The budget support instrument requires a basis for establishing the benchmarks for demonstrating progress in the PFM systems and practice from year to year to trigger disbursements

- PEFA provides a tool for supporting dialogue on the status and progress PFM practice with a partner country

- One object of the budget support instrument is to foster dialogue on improving PFM and in so doing enhance the chances of increasing the rates of development

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Budget Support and PEFA

• -

16PFM Progress over time

Measurements in progress over time using PEFA

Requirements for demonstrated progress to facilitate GBS disbursements

Agreed reviewable milestones

Part 2: Mapping PFM Functions against PEFA scores

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Mapping PFM functions against PEFA scoresThe contribution of two authors Jack Diamond & Daniel Tommasi

on the sequencing of PFM reforms:

D. Tommasi prepared a paper for the European Commission (EC) in the context of its involvement in the OECD DAC task force work on PFM (As a part of this involvement, the Commission has agreed with the IMF to work jointly on the development of guidance on PFM reform and its sequencing). Thus, three papers have been prepared by Jack Diamond for the IMF:

- “Towards good practice guidelines in the sequencing of PFM reforms”;

- "Beyond the core PFM functions“;

- "The external factors affecting PFM reforms”.

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Mapping PFM functions against PEFA scoresThe contribution of two authors Jack Diamond & Daniel Tommasi

on the sequencing of PFM reforms:

The paper for the EC by D. Tommasi (‘’The core PFM functions and PEFA performance indicators’’) examines the relationships between the core PFM functions and the PEFA performance indicators.

It is currently being debated and the workshop intends to inform the participants about its content (it is not an adopted practice).

It is referred to in the following slides.

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Mapping PFM functions against PEFA scores

What does that mean and why?

- Mapping PFM functions against PEFA scores means: Establishing the relationships between the core PFM functions and the PEFA performance measurement framework scoring system in order to identify whether the core PFM functions are present in a PFM system;

-By identifying the core PFM functions and, when relevant, the PEFA PIs scores associated with these functions, this can help in identifying priority actions for a PFM reform program

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What are the main core PFM functions?

1. The Basic control functions:

a) Control of revenues (transparency in applying taxes, tax administration);

b) Control of expenditures (by ministries, ex ante, ex post, systemic audit, internal and external controls, payroll controls, procurement controls, cash controls);

c) Control of physical assets.

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What are the main core PFM functions (2)? 2. Support functions and activities:

a) Budget classification

b) Accounting and financial reporting;

c) The legal framework;

d) Information technology.

3. Other functions

a) Intergovernmental fiscal relations.

b) Budget preparation process

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The core PFM functions and the PEFA

- The PEFA framework covers most core PFM functions, but not all;

- The PEFA framework does not deal directly with:

a) The legal framework (not covered in PEFA).

Key PFM procedures should have a legal status (Assessing the degree of compliance with the legal framework is required to assess the capacity of the PFM systems to ensure financial compliance);

b) The PEFA framework does not cover IT systems.

(Example: Managing payroll involves a high number of transactions and calculation. Implementing a payroll information system at an early stage of PFM systems development is good. Other IT developments are helpful, but provided that core PFM functions in accounting and budget execution areas are already operational).

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The core PFM functions and the PEFA (2)

The PEFA framework does not deal directly with: - Limited use of suspense accounts and special payment procedures

(Problems related to such procedures are met in different budget systems. Such procedures may be found under a single treasury account, when the Treasury pays special payment requests, generally issued by high authorities, without controlling them against the appropriations)

 

- Treasury and line ministries reconciliation of accounts;  

- Controls of payroll by line managers when payroll management is centralized; 

- Assets registering, for assets that may risk to be wasted, poorly maintained and embezzled; •  

• - Rules and systems to minimize cash handling in revenue collection and expenditure payments.

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The PEFA score of core PFM functions

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• PEFA score (corresponding to the “core PFM functions”) can be assigned to each dimension of PEFA performance indicators;

• The assigned score corresponds to the minimum level at which the relevant PFM function contribute effectively to achieve the PFM objectives corresponding to the core PFM functions.

Note: Following 3 tables deal with the scoring of PFM functions. Table 1 does not include the PI-1, PI-2 component (i), PI 3 and PI 4 component (i) because scores of these indicators depend on several PFM functions.

Score “D” means that the PFM function is not viewed as a core function.

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PEFA Indicators DimensionsScore PI

Score   (i) (ii) (iii) (iv)

PI-2-(ii) Actual expenditures charged to the contingency votePI-4-(ii) Arrears monitoring

BB

KEY CROSS-CUTTING ISSUES: Comprehensiveness and TransparencyPI-5 Classification of the budget M1 C C

PI-6 Comprehensiveness of information included in budget documentation

M1 A A

PI-7 Extent of unreported government operations M1 B B B

PI-8 Transparency of inter-governmental fiscal relations M2 A to C A to C

D

PI-9 Oversight of aggregate fiscal risk from other public sector entities

M1 B B to C

PI-10 Public access to key fiscal information M1 B B

POLICY-BASED BUDGETINGPI-11 Orderliness and participation in the annual budget process

M2 B B B B

PI-12 Multi-year perspective in fiscal planning, expenditure policy and budgeting

M2 C B D C C

PEFA Indicators and scores for the core PFM functions (Table 1)

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PEFA Indicators DimensionsScore

PI Score

  (i) (ii) (iii) (iv)

PREDICTABILITY AND CONTROL IN BUDGET EXECUTION

PI-13 Transparency of taxpayer obligations and liabilities

M2 B B DC+

PI-14 Effectiveness of measures for taxpayer registration and tax assessment

M2 C B C C+

PI-15 Effectiveness in collection of tax payments

M1 C B C C+

PI-16 Predictability in the availability of funds for commitment of expenditures

M1 C B B C+

PI-17 Recording and management of cash balances, debt and guarantees

M2 B B B B

PI-18 Effectiveness of payroll controls M1 C B C C+PI-19 Competition, value for money and controls in procurement

M2 B C B D C+

PI-20 Effectiveness of internal controls for non-salary expenditure

M1 B C B C+

PI-21 Effectiveness of internal audit M1 C C C C

PEFA Indicators and scores for the core PFM functions (Table 2)

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PEFA Indicators DimensionsScore PI

Score

  (i) (ii) (iii) (iv)

ACCOUNTING, RECORDING AND REPORTING

PI-22 Timeliness and regularity of accounts reconciliation

M2 B B B

PI-23 Availability of information on resources received by service delivery units

M1 D D

PI-24 Quality and timeliness of in-year budget reports M1 B B C C+

PI-25 Quality and timeliness of annual financial statements

M1 C A C C+

EXTERNAL SCRUTINY AND AUDITPI-26 Scope, nature and follow-up of external audit M1 C B B BPI-27 Legislative scrutiny of the annual budget law M1 B B B B BPI-28 Legislative scrutiny of external audit reports M1 C C B C+

PEFA Indicators and scores for the core PFM functions (Table 3)

PEFA scoring of PFM and countries

- Reform sequencing depends on the country and most core PFM procedures are common to all countries;

- Some scores presented in above tables may need to be specified according to the country context:

 

1. For certain functions, higher scores could be expected in countries with good infrastructure and Internet access than in the others;

 

2. Special attention should be paid on intergovernmental fiscal relationship in decentralised countries. Consolidating the general government accounts (Pi-8 iii) is always good, but is less important in countries where sub-national governments account for a little share of general government spending;

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Conclusions

- The PEFA Report serves as a useful tool for supporting policy dialogue on PFM Reform

- There are a number of important considerations beyond the PEFA findings that must be taken into consideration prior to arriving at an agreed PFM reform agenda

- The PEFA PMF serves to monitor PFM progress over the medium term (not the short term)

- It is possible to map core PFM functions against PEFA scores (taking into account that the PEFA does not cover all PFM functions). That means PEFA score (corresponding to the “core PFM functions”) can be assigned to each dimension of PEFA performance indicators

- The assigned score corresponds to the minimum level at which the relevant PFM function contribute effectively to achieve the PFM objectives corresponding to the core PFM functions.

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