UNICEF Visit to FAD

1. UNICEF Visit to FAD October 8, 2009

2. General Overview • Part 1: FAD and PFM • Part 2: Best Practices in PFM • Part 3: Specific PFM Tools of Likely Interest to UNICEF • Part 4: Country Case Studies

3. UNICEF Visit to FADPart 1: FAD and PFM Duncan Last

4. Overview of PFM Activities • Developing and promoting good practices and standards • Guidance notes and manuals, working papers, and books • Holding and participating in seminars on PFM issues • Membership in key PFM forums and groups • Providing technical assistance • TA diagnostic, specialized topic and review missions and desk work • Short term peripatetic and resident advisors • Regional technical assistance centers • Coordinating with donors • Special working relations with World Bank • Cooperation with other donors • Undertaking PFM assessments – ROSCs and PEFAs • Staffing

5. Developing and Promoting Good Practices and Standards • Guidance notes and manuals (http://blog-pfm.imf.org/#) • 12 guidance notes produced on subjects such as program budgeting, cash management, IFMS, commitment control, accrual accounting, now being made publicly available. • Working papers (http://www.imf.org/external/pubind.htm) • wide range including cross country comparisons of practices, evaluation of the effectiveness of FAD TA, and PFM issues in scaling up of aid • Books • general PFM guidance, implementing IFMIS, performance budgeting • Seminars and training • IMF managed training – INS, JVI, JAI, SAI; RTACs; Parliamentarians • Trainers in other events – CEF, country-based requests • Participation in key forums and groups • IPSAS, SBOs, DAC, CAPE, OECD symposiums • PFM-Blog (http://blog-pfm.imf.org/#) • Discuss recent developments in the PFM field

6. Providing Technical Assistance • FAD led missions – generally 2 to 5 members, 2 week, 50-70 page report • Responding to requests from countries with wide range of topics: • Broad diagnostic and action plan missions • Advice on new initiatives: program budgeting, accrual accounting, MTEF • Solving specific problem areas: arrears, budget execution bottlenecks, IFMIS • Progress reviews on implementing FAD recommendations • Some TA also being provided to regional organizations – WAEMU, EAC • Desk based work • Drafting/updating legal frameworks • Providing best practice guidance based world-wide knowledge of PFM systems • Reviewing proposals prepared by third parties • Assigning short-term experts and resident/regional advisors • Recruitment and backstopping of experts assigned for specific detailed implementation tasks and/or close advisory support • Regional Technical Assistance Centers (RTACs) • 7 currently operating - Africa (3), Middle East, Pacific, Caribbean and Central America – and 3 more expected in 2010 - Africa (2) and Central Asia. Also close association with CEF. • RTACs provide closer and more accessible support to member countries with regionally based advisors in core competence areas of IMF, which includes PFM • Often TA linked to programs and surveillance

7. Coordinating with Donors • All our TA work has some degree of coordination with donors • TA missions brief donor groups at the end of each mission • On occasion, donor assigned staff participate in FAD missions • RTAC, regional and resident advisors maintain regular contact with country-based donor staff working in PFM areas • Special coordination with the World Bank and Regional Development Banks • Frequent meetings of two staffs working on PFM issues, both on broad approach as well as country specific PFM issues • Regular consultation with World Bank staff ahead of missions • Participation in reviews of each other’s work • Availability of TA reports • Current policy encourages country authorities to share FAD provided TA reports to legitimately interested donors, once reports are finalized • Jointly organized forums and discussions on PFM issues

8. Undertaking PFM Assessments • Reports on Standards & Codes (ROSC) – Fiscal Module • Voluntary assessment instrument aimed at establishing degree of transparency and accountability of government fiscal operations • 107 countries have completed and majority published ROSCs (http://www.imf.org/external/np/rosc/rosc.asp) • ROSCs prepared by IMF staff • Public Expenditure & Financial Accountability (PEFA) • Voluntary assessment of a country’s PFM system aiming of determining fiduciary risk, often published (http://www.pefa.org/) • Multi-donor support (WB, IMF, EU, various bilateral donors) • FAD is a member of the PEFA Secretariat which meets to review development and use of the assessment instrument • PEFA assessments prepared by a wide range of assessors, many of which are consulting companies hired by a donor • PEFA Secretariat located in the World Bank

9. Staffing • HQ has two Divisions of 12 professional staff each (currently) • M1 looks after Anglophone Africa, Middle East and Central Asia, and Europe • M2 looks after Francophone/Lusophone Africa, Asia and Pacific and America • Supplemented by 12 RTACs advisors and a varying number of regional and resident advisors backstopped by HQ • Work shared with other FAD divisions • Decentralization • Macro-fiscal issues • Expenditure policy and frameworks • Special areas – PPPs • FAD also has Tax Policy and Revenue Administration Divisions

10. UNICEF Visit to FADPart 2: Best Practices in PFM Mario Pessoa

11. Why PFM is Important:Consequences of a Malfunctioning PFM System • Macro control can be lost: arrears, increase in public debt. • Resources can be misallocated and credibility in government undermined: poorly prepared or executed budget, combined with off-budget spending, can result in resources allocated to non-intended purposes, and, therefore, non-achievement of Government’s stated strategic objectives and policy goals. • The basis for sound policy analysis can be undermined: when fiscal data is incomplete, inadequate and/or unreliable, and not based on reconciled accounting data. • Unclear responsibilities and lack of transparency can lead to poor decision-making: due to inappropriate and outdated legal framework, poorly-defined internal structures (within the executive), fragmentation of responsibilities within the MOF, poor accountability arrangements (e.g., to parliament), and inadequately trained staff. The FAD Board papers on “Scaling Up Aid in LICs” note that the quality of PFM systems in LICs are generally poor and that the speed of progress in PFM reforms has often been slow.

12. Paris Declaration - Indicators

13. Key Features of a Good PFM System • Credibility and comprehensiveness of the budget: budget framed with clear fiscal objectives and within realistic resource projections, with allocations linked to priorities, and limited scope for major changes during the year. • Effective budget execution: adequate controls to ensure (a) that the budget is executed in a cost efficient and timely manner, and (b) that spending is in full conformity with the regulatory framework and procedures (including procurement). • Accurate accounts maintained and published: Appropriate government accounting and reconciliation with banking data, and regular, high-quality in-year fiscal reporting • Appropriate legal framework and institutional arrangements: (e.g., MOF structure; external audit) • Capacities exist to sustain the PFM system: Adequately trained staff and tools (in particular, computerized) to meet the above goals. • Promotion of transparency and accountability: administrative and management culture that promote transparency and accountability in PFM

14. Achieving a Good PFM System Requires Attention Across Many Areas • Legal and institutional framework • Budget preparation • Budget execution, internal control and internal audit • Cash and debt management • Accounting and annual accounts • Monthly fiscal reporting and computerization • Role of Parliament and external audit • Aid management However, not all can be tackled at the same time: reforms need to be customized to country needs, properly sequenced, and adjusted to suit capacity constraints.

15. Legal and Institutional Framework • Legal framework and regulations: Issue: laws and regulations no longer corresponds to the budget system the government wishes to implement. Impact: unclear budget responsibilities and procedures. Actions: adopt new law and/or regulations. • Institutional setup: Issues: Inappropriate structure or unclear/fragmented roles within the executive branch. Impact: Difficult internal decision-making process, e.g. between Finance and Planning Ministries, or between Budget and Accounting Departments. Actions: review and clarify roles and responsibilities, in particular authorities of Ministers, Ministries and senior officials. Strengthen horizontal coordination (between ministries, between departments).

16. Budget Preparation • Policy and budget relationship: Issue: long-term and medium-term policy are not linked to budget priorities. Impact: frustation in implementing policy priorities. Actions: Actions: introduce medium term framework, starting with MTFF, then progressing to MTBF/MTEF, strengthen sectoral planning, incorporate a programmatic approach, and improve ex-post assessment to calibrate policy in order to influence the budget process. • Coverage: Issue: off-budget spending. Impact: spending left out of budget framework. Actions: initiate regular reporting, scrutinize during budget preparation, include statement in budget annex, eventually bring on budget. • Dual budgeting: Issue: separate budgets, often prepared by separate ministries. Impact: recurrent costs of projects not taken into account, current spending on development budget, different classifications. Actions: merge ministries, merge documents, unify budget cycles. • Classifications: Issue: outdated (some countries) or incomplete (many countries) classifications. Impact: inadequate/unreliable fiscal analysis. Actions: upgrade classifications to GFS standard; for some, moving from GFS 1986 to GFS 2001 framework. • Performance budgeting: Issue: input focused budget (most countries). Impact: limited linkage between policy and budgetary allocations. Actions: introduce output focus to budget, starting with program classification, progressively adding performance elements.

17. Accounting and Budget Classifications • Economic (Asset x Liabilities; Revenue x Expenditure) • Institutional (Ministries, entities, companies) • Functional - Education (division) Pre and Primary Education (group) Primary Education (class) • Program/Project-Activity • Source of Funding • Geographic

18. Budget Execution, Internal Control, and Internal Audit • Expenditure execution procedures: Issue: multiple and complex execution procedures. Impact: incentive to use “parallel” procedures, to avoid controls. Actions: simplify procedures and accelerate spending execution (computerization helps). • Internal control: Issue: expenditure not adequately controlled at various stages of budget execution. Impact: overall fiscal control lost. Actions: record, report, monitor spending at each stage, especially commitments; establish approvals and controls for each type of spending. • Payment arrears: Issue: government does not pay its invoices (e.g., 21% of GDP in Togo). Impact: credibility in government payment system is lost, cost of procuring services goes up as suppliers add margins. Actions: multi-faceted approach - improving costing of budget, strengthening expenditure control, introducing cash management, and expanding accounting systems. • Internal audit: Issue: procedures/system for executing budget not reviewed adequately; Impact: poor expenditure control; corruption thrives. Actions: strengthen capacity and funding of internal audit units, develop appropriate internal audit guidelines, and raise profile of internal audit reports.

19. Cash and Debt Management and Government Banking Arrangements • Cash Management: Issue: no in-year management of cash flow. Impact: ad-hoc execution of the budget, no assurance of funding to line ministries, and delays procurement. Actions: introduce in-year cash flow planning and advance notification of spending limits. • Domestic debt management: Issue: treasury bills not serving fiscal needs. Impact: cash not available when required, unnecessary borrowing. Actions: align treasury bill regime to cash flow plans, integrate cash and debt management. • Coordination with Central Bank: Issue: fiscal and monetary policy not coordinated. Impact: inefficient monetary liquidity management, MoF and CB in competition for funds. Actions: establish monthly liquidity committee to coordinate fiscal and monetary operations. • Treasury banking arrangements: Issue: proliferation of bank accounts. Impact: idle balances, inefficient use of cash, difficulty in managing bank reconciliations. Actions: zero-balanced accounts, ultimately Treasury Single Account (TSA). • Other government accounts: Issue: separate accounts for agencies and funds. Impact: inefficient use of cash. Actions: bring agency and fund accounts into the treasury system.

20. Cash Management - TSA Account 1 $ Account 2 info info $ TSA info $ info $ Account n Account 3

21. Monthly Fiscal Reporting and Computerization • Monthly fiscal reporting: Issues: incomplete coverage, untimely reporting, not based on accounting data. Impact: inadequate information for decision making, available information ignored, undermines credibility of budget. Actions: strengthen reporting obligations from central government, subnational government, public companies; strengthen reporting from donor funded projects; ensure fiscal data is based on reconciled accounts. • Reconciling fiscal and monetary data: Issue: large discrepancies between monthly fiscal and monetary data. Impact: difficulty in establishing reliable information for macro-fiscal management. Actions: identify possible sources for discrepancies; establish task force with relevant staff to find solutions to the identified problems; strengthen bank reconciliation routines; routinely identify cash in transit. • Government Financial Management Information System (GFMIS): in principle can improve access to data, however some do not justify the expense; sometimes simple systems are more effective. Use of off-the-shelf x tailor made systems. Preparation of a proper conceptual design.

23. Role of Parliament and External Audit • Adoption of budget by parliament:Issues: Late adoption of annual budget; little discussion within parliament. Impact: Inadequate “ownership” of government’s budget; abuse of parliament. Actions: Change budget preparation calendar so that submissionof annual budget is 1-3 months before new FY begins; strengthen parliament committees and technical support to parliament • External Audit reports: Issues: Audit reports are often very late; audit offices are poorly equipped; Impact: Public accountability suffers. Actions: Strengthen capacity at Offices of Auditor General or Court of Accounts, as well as Parliament, to ensure high-quality audit reports and follow-up of recommendations. • Publication of budgets, accounts and audit reports:Issue: budgetary, accounting and audit information not routinely available to the general public. Impact: limited civil society interest/participation in government spending. Actions: establish routine publication (paper and/or website) of annual and in-year budgetary and accounting data, as well as audit reports.

24. Accounting Methodology and Annual Accounts • Cash versus accrual accounting:Issue: Pressure to adopt accrual accounting, given GFSM2001. Impact: Complicates accounting framework. Actions: Top priority: Improve timeliness and quality of cash-based accounts. Gradually introduce elements of accrual accounting (already the case in francophone countries). • Preparation of annual accounts:Issues: long lags for central government accounts; incomplete annual accounts for local governments; donor funds not fully accounted for. Impact: incomplete and late annual accounts and reports; reconciliation problems with annual budget. Actions: address weaknesses in government accounting; limit complementary accounting periods; catch up with accounting backlogs and ensure timeliness/quality of (cash-based) annual accounts for central government. • Consolidated General Government accounts:Issue: no consolidated picture of government accounts. Impact: limited fiscal analysis, limited focus of spending reviews. Actions: initiate steps to regularly consolidate general government accounts.

25. Aid Management • Information on aid flows: Issue: fragmented or partial information on aid flows. Impact: incomplete fiscal information, difficulties in reconciling accounts, including fiscal and monetary accounts. Actions: establish aid flow tracking unit and database, undertake regular reconciliation with donors and include aid flow information in accounts. • Uncertain aid projections: Issue: future aid commitments unclear or volatile. Impact: undermines credibility of the budget, forces uncertain aid flows off budget. Actions: work with donors to improve forward planning of aid commitments, improve country systems to track commitments. • Project bank accounts: Issue: separate accounts for donor funded projects (most countries). Impact: complex reconciliation, difficult to track spending. Actions: persuade donors to channel funds through national systems, or at least a TSA for external funds.

26. Drawing up a Strategy for addressing PFM Problems • Diagnosis—comprehensive (whole PFM system) vs. specific areas of focus • Prepare a reform strategy and action plan • identify the reform priorities • recognize past failures and address them • sequence implementation; avoid being too ambitious; • monitor developments and update action plan. • Country ownership: ensure authorities’ endorsement of action plan, and allocation of skilled staff to oversee the reforms. • Address capacity constraints: identify needs and establish appropriate training programs; allow time for new capacity to be developed. • Donor coordination: particularly important when significant funding required – common case in LICs.

27. Example of PFM Action Plan

28. Sequencing and implementing PFM reforms • Sequencing Issues: • What are main constraints to PFM reform (technical, capacity, managerial, and political). • Is there “ownership” by authorities? Champions for reform? Stumbling blocks? e.g., a non-cooperative Treasury director? • Speed of reform: judgment is needed. • Failure to address sequencing has led to PRGF program benchmark problems. • Lesson: Do not be too ambitious. • Implementing reforms also requires adequate PFM capacity. Need for on-going training programs: • through RTACs or resident advisors; and/or • through other donors, who have resources for training.

29. UNICEF Visit to FADPart 3: Specific PFM Tools of Likely Interest to UNICEF Duncan Last

30. Public Expenditure Tracking Surveys (PETS) • This instrument has been successfully used in countries to track the funding for specific service delivery type activities from budget through to implementing unit, identifying potential leakages and bottlenecks: • E.g. schools, clinics, hospitals • PETS have helped identify cases of misuse of funds, as well as inefficiencies in PFM systems • Well functioning internal control and audit systems should handle this. Where not available, PETSs have often been donor initiated and funded

31. Aid on Budget • Part of the push for donors to use country systems to channel their aid: • Paris DAC Declaration and Accra Agreement implementation • To encourage donors to reflect their aid on budget and in the accounts of the beneficiary country • To better coordinate and plan scarce resources • To avoid overlap/duplication of effort • To avoid investment spending where recurrent costs have not been planned for • Useful reference: Aid on Budget report prepared by CABRI (Africa’s SBOs)

32. Costing, Performance Setting, and Measuring Results • MTEFs • To improve prioritization of resource allocation at a sectoral level according to declared policy (e.g. growth and poverty reduction strategies, MDGs) • To ensure spending is constrained by resource availability • To provide a medium term planning framework • Program/performance budgeting • To provide a new approach to detailed budget preparation, also focused on policy based allocation of resources, linked to specific outputs/results • Requires improved managerial responsibility and flexibility to ensure successful implementation, as well as full integration of programs into the accounting system • MTEFs and program budgeting should complement each other • Both require improved costing techniques and strengthen sectoral planning capacities

34. Questions and Answers

35. UNICEF Visit to FADPart 4: Country Case Studies Duncan Last and Mario Pessoa

36. Example of a PFM reform strategyMOZAMBIQUE In 2002, after many years facing problems with TA coordination and having made little progress in reforming crucial PFM areas, the government took several measures: • Create an administrative unit (UTRAFE) in the MoF (headed by a coordinator, at director level, reporting directly to the minister) in charge of implementing the PFM reforms. • Eliminate parallel bilateral TA. • Create a Partners Committee for the PFM reforms, chaired by the UTRAFE coordinator, and comprising representatives of the main TA donors in the country, and the IMF and World Bank resident representatives. • International donors established a common fund to finance UTRAFE’s operations and the PFM reforms The invitation for FAD (a “neutral” entity) to place a PFM resident advisor in the country directly linked to the UTRAFE coordinator, who in practice began to coordinate all PFM TA delivered to the MoF. • Establish a Quality Assurance Group (QAG) to evaluate progress of the reforms.

37. Example of a PFM reform strategyMOZAMBIQUE (cont.) • FAD placed a PFM resident advisor for 3 years in the country directly linked to the UTRAFE coordinator. • Then moved for an annual follow-up mission to evaluate implementation progress and suggest other reforms. • Also comprises a Quality Assurance Group (QAG), established in late 2003, comprising four PFM experts. The QAG undertook missions to Mozambique twice a year to assess locally implementation progress. Its reports are distributed to the international partners and the government.

38. Post-Conflict CountryFAD PFM Assistance to Liberia • Immediately Post Conflict - 2003 • FAD mission recommended very basic systems – infrastructure and capacities had been destroyed by the civil war • Peripatetic regional advisor support to help with implementation • Before the new government - 2006 • Review of progress and guidance on establishing first level PFM system – budget management, cash management, simple accounting, auditing • Further use of peripatetic regional advisor • Some success but very slow due limited capacities and very basic infrastructure (generator based electricity, limited internet, mostly manual systems

39. Post-Conflict CountryFAD PFM Assistance to Liberia (cont.) • After installation of first elected government - 2007 • FAD diagnostic mission recommended a 3-year reform plan, including: • Development of a legal framework for PFM • Double entry accounting system • Further strengthening and streamlining of budget execution • Improved cash management • Peripatetic TA provided to assist with drafting new PFM Law • Regional advisor recruited and based in Liberia for 70% of time • June 2009 review and development of new PFM reform plan • Review of progress in implementing 2007 mission recommendation and preparation of an action plan for the next 3 years • New PFM Law adopted by the Legislature in August 2009 and regulations being completed currently • Close coordination with donors who have been and will continue to provide PFM TA, including significant capacity building