Public Financial Management (PFM) Strengthened Approach: Operational Issues for the World Bank

1. Public Financial Management (PFM)Strengthened Approach: Operational Issues for the World Bank T K Balakrishnan (OPCFM) November 2006

2. Purpose • Provide a briefing on emerging approaches to strengthen the Bank’s PFM) work • Adams-Leipziger memo and kiosk announcement, July 25, 2005 • Discussion on opportunities, issues and challenges with operationalizing the strengthened approach. • various elements already being implemented in several countries. What can we do to mainstream these?

3. Objectives of the Bank’s PFM Work • To improve country PFM performance as a key contributor to successful development • sound PFM is critical to the achievement of public policy objectives, including achievement of the Millennium Development Goals (MDGs) • To apply appropriate fiduciary arrangements to the financial support the Bank provides • Both objectives are closely related -- the best fiduciary assurance on the use of Bank funds is well-performing country PFM institutions • Bank financing is part of a country’s overall public finances • external aid constitutes only two percent of developing countries’ public expenditures • in addition to adjustment lending and debt relief, increasingly, country PFM systems are being increasingly used in investment lending

4. Much progress made in advancing the PFM agenda... • Increased knowledge of country PFM systems • Fairly recent CFAAs, CPARs and PERs in most active countries. 2 rounds of HIPC-AAP in about 24 countries • Increasing prominence of PFM in lending operations • PFM has become integral element of development policy lending: PFM analytical underpinning required for DPLs; 72% of DPLs include PFM in program content; about 14% of actions in DPLs relate to PFM • Increased financing for PFM : >$200 million of new investment lending commitments annually, large number of IDF grants • Improving collaboration with other donors and within Bank • PEFA, OECD-DAC, MDB harmonization group, IMF • increasing joint analytic work by FM/PREM/Procurement • PFM work is influencing other important decisions • setting of country financing parameters for investment lending • use of country systems and SWAps

5. …but the main challenge remains Country PFM systems are still weak and need substantial improvements

6. Why hasn’t there been more progress? • Inadequate sequencing of reforms, due to donor pressure or difficulties for government to determine the path of reforms • Inadequate realism important on achievable pace of change • Fragmented approach to reforms and limited leadership in government • PRSP and PEM reforms separate • Capacity constraints • Technical reform versus systemic/institutional change • Unhelpful donor practices • Limited monitoring of progress • mainly concentrated on inputs, did not allow lessons learning and did not encourage focus on results on the ground

7. Response: A Strengthened Approach • A country-led and owned PFM reform agenda • A donor coordinated program of support – coordinated, coherent, multi-year program of PFM work that supports and is aligned with the government’s PFM strategy • A shared information pool – a common framework and information set for measuring and monitoring results over time www.pefa.org and www1.worldbank.org/publicsector/pe/StrengthenedApproach/

8. Operationalizing the Strengthened Approach in the Bank • Main issues covered in Senior Management Memorandum • Use of the PFM Performance Indicators • Planning and Programming of PFM Analytic Work • Integrated Country PFM teams • Collaboration with other donors • Focus on supporting reform implementation, not just diagnostics or analytic work • Country leadership and ownership of reforms • Prioritization and sequencing of PFM reforms with a multi-year perspective

9. PEFA PFM Measurement Framework • Key message #1: The use of the PFM indicators are strongly encouraged for incorporation into PFM analytic work. • this enables objective and consistent information on the performance of country PFM systems, including progress over time • It is consistent with the “results agenda”

10. PFM Indicators – Need to Ensure Quality • Important message from PEFA Early Experience Report: Need to improve quality of indicator scoring • Correct scoring of indicators in line with performance and scoring criteria • Presentation of Evidence in the report

11. More responsive PFM analytic work • Key message #2: Base PFM analytic work on country-specific circumstances and requirements • We have moved away from uniform “mandated core ESW” • In determining scope and nature of PFM analytic work, take into account: (i) needs of the country’s reform program, and our fiduciary needs; (ii) available knowledge from other donors and country, and work already done by the Bank • Range of possible products e.g., (i) “PFM Performance Report”; or (ii) “just-in-time” policy notes on specific aspects of PFM system; or (iii) some of the current products (CFAA, CPAR, PER) or an integrated form of all of these • The PFM performance indicators are expected to included in PFM analytic work

12. PFM analytic work - What happens to current products ? • PERs, CFAAs, CPARs or Integrated versions of these (PEMFAR, Country Integrated Fiduciary Assessment - CIFA, etc) • May continue as needed but not mandatory any more • Since we have detailed fairly recent CFAAs and CPARs, the expectation is that numbers will be significantly lower than in recent years • Integrated products will increasingly be the norm • PERs increasingly expected to focus on “fiscal space” agenda, public finance policy, size and composition of expenditures • PFM Performance Report and/or indicators will help to serve as a “light update” of more detailed products. Detailed products may be done over a longer-time time horizon.

13. Integrated Country PFM Teams • Key Message #3: All PFM work in a country to be done by a joint team of FM, PREM and Procurement staff (the “Country PFM team”) • team can be led by any of the three network staff in a particular country • covers all PFM analytic work....and more… policy dialogue, PFM projects, IDF grants, development policy lending, training, technical assistance • underlying rationale: PFM cycle includes budget preparation, budget execution (including cash management, internal control and audit, procurement, accounting), reporting, audit, and oversight

14. Project Resource Annual budgets: Medium term appraisal allocation Development, Planning plans, e.g. three Recurrent and system year rolling plans Revenue Expenditure Liquidity review management Public expenditure Institutional Politics and Power Sharing review Fund release procedure, e.g... warranting Accountability Expenditure control Project monitoring Audit system Post event Accounting for Monitoring review revenue and & controlling expenditure Reports and financial statements One PFM cycle…..

15. Integrated Country PFM Teams: Examples of what this means in practice • All PFM analytic work is done by the country PFM team • whether analytic work on the whole system..., or on a specific part of the PFM system (e.g., procurement) • all outputs are products of the integrated PFM team, rather than the individual unit • Work planning/programming of PFM work is done by the integrated PFM team, rather than separately by each unit • One Bank assistance strategy and work plan for PFM in the country • reflected in CAS • Single inputs into DPLs • e.g., one section in the DPL Program Document • PFM projects, IDF grants are handled by the country PFM team • Does not mean that all tasks will necessarily include staff from all units • expertise will be deployed based on specific task needs

16. Increase collaboration with other donors • Key Message #4: Collaborate and coordinated closely with other donors working to support the country’s reform program • Coordinated multi-year program of work within a particular country context • shared objectives, policy dialogue, analytic support, financing, technical assistance, training • Wherever possible, produce joint-donor products • Wherever possible, consider joint-donor PFM teams

17. Collaboration on PEFA Framework Application • Key Message from PEFA Early Experience Report: All stakeholders need in particular to consider and agree - ideally at an early stage in the planning process - on the issues relating to the assessment: • packaging and sequencing of analytic work / reporting of the indicators (e.g., standalone PFM-PR, “dual products”, or integration of the indicators into other products and the extent of any recommendations in any component of such a package) • the role of various parties in conducting the assessments (ranging from government self-assessments with external validation, to assessments that are principally done by external partners with government collaboration, the leading manager of the exercise) • financial and personnel resources required • the time for finalization of reports (taking into account the need to ensure client understanding and ownership) • quality assurance arrangements • report disclosure arrangements

18. Support to Country PFM Improvements • Key Message #5 (Overarching message): More explicitly make developing country capacity and improving PFM performance as the principal focus of the Bank’s PFM work • analytic/diagnostic work continues to be important … but this is not the principal focus of our engagement • the traditional “analytic work – strategy – action plan – actions” sequence does not always work. Equally important to build awareness, foster ownership, and generate a momentum for changes • judge success by the extent to which we have helped the country to advance its PFM performance and reforms • requires a change in mindset

19. Supporting PFM Reforms : Crucial elements • Importance of country ownership and commitment, and focusing our efforts on fostering this • Key word: “Implementation” • Multi-year perspective, prioritization and sequencing of reforms, in line with country’s agenda and its choices • Realism in line with country’s capacity and current performance level • Factor in political economy and institutional dimensions, communication, human capital • Use the range of instruments • policy dialogue, analytic work, technical assistance, investment lending, IDF grants, development policy lending, training, mobilized cofinancing / grants • Country-specificity is important: tailor the agenda to each country’s needs and circumstances at that point in time

20. CAS and Annual Country Work Programs • Key Message #6: Ensure that PFM issues and work programs are well reflected in the CAS and annual country work programs • these are key processes in determining priorities and allocating resources • help to get management and government attention to the importance of the agenda

21. Summary of Key Messages • The PFM indicators and performance measurement framework are strongly encouraged. • Quality of indicator scoring is very important • Base PFM analytic work on country-specific circumstances and requirements • All PFM work in a country to be done by a joint team of FM, PREM and Procurement staff (“Country PFM team”) • Collaborate and coordinated closely with other donors working to support the country’s reform program • Developing country capacity and improving PFM performance is the principal focus of the Bank’s PFM work • Ensure that PFM issues and work programs are well reflected in Country Assistance Strategy and Annual Country Work Programs

22. Concluding thoughts … • Need for managerial attention and “push”, and leadership of senior staff • much of this is not new or novel… • … the major change required is in our own behaviors

23. Q&A and Discussion