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Public Financial Management: An Introduction

Public Financial Management: An Introduction. Training for Support PAC Staff Hilton Hotel, Windhoek, Namibia 10-12 May 2012. Objectives/Outcomes. Basic understanding of the concepts and importance of PFM increased.

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Public Financial Management: An Introduction

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  1. Public Financial Management: An Introduction Training for Support PAC Staff Hilton Hotel, Windhoek, Namibia 10-12 May 2012

  2. Objectives/Outcomes • Basic understanding of the concepts and importance of PFM increased. • Participants should understand the background for the increased policy attention to PFM and understand the principles and importance of PFM tools and processes (PEFA Framework & MTEF). • Training will include generic case exercises and group discussions in addition to presentations.

  3. Positive Developments Within the Region • CSOs are producing a review of how government has implemented the national budget in Cameroon, for the purpose of helping Members improve their understanding of budgetary processes. • Youth Development Organisations in Ghana have published an analysis of the 2012 budget statement • Kenya’s new Constitution (2010) gives Parliament an expanded mandate in the national budget process. • Creation of a PAC in Rwanda • New Parliamentary Budget Offices in Uganda and Kenya (Nigeria? Others?) • Enactment of the Public Finance Management Act in Zimbabwe gives Parliament more powers to engage in the budget process. • In Uganda the MTEF is now five years to resonate with the National Development Plan. • Other Examples?

  4. Public Financial Management (PFM) • A system of institutions, rules, regulations, procedures and processes through which decisions are made and implemented. • PFM concerns itself with the instruments in place to achieve policy objectives. • Crucial question is how well has money been spent? Has it been used efficiently and whether it has achieved the purposes for which it was allocated? • This has become even more important in the current climate of deficit reduction and spending cuts. • Created new challenges for parliaments and parliamentarians.

  5. Context of PFM Working Groups Consider the major implications for PFM of the • Governance Context • Institutional Context • Global Context Which is most important? Working Groups Consider the major implications for PFM of the • Policy Context • Macroeconomic Context • Fiscal Context Which is most important?

  6. PFM Objective 1: Aggregate Fiscal Discipline • Basic expenditure control. • Budget totals should be the result of explicit, enforced decisions (danger of repetitive budgeting); they should not merely accommodate spending demands. • These totals should be set before individual spending decisions are made, and should be sustainable over the medium term and beyond.

  7. PFM Objective 2: Allocative Efficiency • Expenditures should be based on government priorities and on effectiveness of public programs. • The budget system should spur reallocation from lesser to higher priorities and from less to more effective programs. • A medium-term framework will take account of future implications of current allocations. • Problems of limited resources that can be allocated; legally binding commitments; off-budget expenditure; political will.

  8. Budgeting Systems • Budgeting Systems can be classified according to the purpose of the authorization by the legislature; to purchase inputs for government activity; to produce specific outputs; or to achieve certain results: • Line-item budgeting (the purchase of vaccines for child immunizations) • Output budgeting (the number of child immunizations performed) • Program budgeting (reduction in incidence of a particular child disease)

  9. PFM Objective 3: Operational Efficiency • Value for Money • Agencies should produce goods and services at a cost that achieves ongoing efficiency gains and (to the extent appropriate) is competitive with market prices. • Importance of managerial discretion and an adequate control system and a culture of compliance

  10. Can Legislatures be more disciplined and independent in budgetary matters? • One argument is that centralized executive control of budgetary powers and procedures and limited powers of legislatures ensures fiscal discipline is maintained. • Danger is that this may also impede accountability mechanisms in the legislature and allocative and operational efficiency. • Is a reduction of fiscal discipline a price worth paying for greater legislature involvement? • One solution is to fix an overall constraint before the legislature proceeds to consider sectoral spending. A legislature can vote on budget totals before the consideration of departmental appropriations. • The Swedish Parliament fixes the aggregate level of expenditures and revenues; a Finance Committee recommends to the House the division of aggregate expenditure; and departmental committees prioritize departmental allocations within the agreed total for their expenditure area.

  11. Can Legislatures be more disciplined and independent in budgetary matters? • Clear fiscal rules related to fiscal discipline can also help ensure fiscal discipline (Indonesia, Mongolia, Chile) • Special fiscal requirements in Mongolia stipulate that the total budget expenditure growth rate shall not be more than the greatest of the non-mineral GDP growth rate and the average of non-mineral GDP growth rate for 12 consecutive years preceding the particular year. • These special requirements may be suspended temporarily if the GDP growth of a particular year compared to a previous year equals to 0% or below or in the event of a disaster and emergency situation (Article 8). • Some budget laws allow the Parliament to increase budget appropriations as long as it does not lead to a higher fiscal deficit(either through budget reallocations or by increasing revenues).

  12. Group Questions • Country X has been unable to spend according to the budget in the last 5 years. On average the country is spending 15 per cent more than envisaged in the budget, and the deviation from the composition of the budget is more than 10 per cent. On the basis of this information, which PFM objectives are under pressure in this country? • Aggregate Fiscal Discipline and Operational Efficiency • Allocative Efficiency and Operational Efficiency • Aggregate Fiscal Discipline, Allocative Efficiency and Operational Efficiency • Aggregate Fiscal Discipline and Allocative Efficiency • Is there a general hierarchy among the three PFM objectives; if so which objective should be reached first and why?

  13. Objectives of PFM • None of the main objectives of public financial management can or should be pursued in isolation from the others. Aggregate Fiscal Discipline Allocative Efficiency Operational Efficiency

  14. Stages of the Budget Cycle • Group Exercise • Please refer to Document A • Can you link the following operational and diagnostic instruments/tools to the relevant stages of the budget cycle? • National audit • Public Expenditure Review (PER) • Medium Term Expenditure Framework (MTEF) • Public Expenditure and Financial Accountability (PEFA)

  15. The PEFA PFM Performance Measurement Framework • PEFA – Public Expenditure Financial Accountability • Integrated approach to PFM – both task-based and institutional • A diagnostic instrument (or tool) to assess the quality of the management of public finances. • Can be used as a self-assessment • It should not be perceived from a developing nation’s perspective only; applicable to any jurisdiction (but used mostly with developing countries). • Covers four stages of the budget cycle: budget preparation, budget execution, accounting & reporting and external audit.

  16. The PEFA PFM Performance Measurement Framework PEFA is built on three pillars: • a country-led PFM reform strategy • a donor-coordinated and integrated programme of PFM work and support • a common framework for measuring and monitoring results over time through a shared information pool. The structure of the PFM performance report is predetermined. It includes the following elements: • Summary assessment; Introduction; Country background information; Assessment of PFM systems, processes and institutions; and Government reform process.

  17. Six Critical Dimensions of PFM • Credibility of budget • The Budget is realistic and implemented as intended • Comprehensiveness and Transparency • The budget and the fiscal risk oversight are comprehensive and fiscal and budget information is accessible to the public. • Policy-based budgeting • The budget is prepared with due regard to public policy

  18. Budget Classifications • In order of necessity and complexity: • the economic classification groups expenditures according to the types of resources (inputs) • the functional classification groups expenditure according to the function or purpose which they serve and is closely related to administrative structure of most governments • programme classifications comprise a hierarchy of functions, programs, activities and cost elements.

  19. Six Critical Dimensions of PFM • Predictability and control in budget execution. • The budget is implemented in an orderly and predictable manner and there are arrangements for the exercise of control and stewardship in the use of public funds. • Accounting, recording and reporting • Adequate records and information are produced, maintained and disseminated to meet decision-making control, management and reporting purposes. • External Scrutiny and audit • Arrangements for scrutiny of public finances and follow-up of executives are operating.

  20. PEFA Performance Indicators • Measure the high-level system performance of the core PFM functions and do not go into detail. • Comprehensive and cover all aspects of the PFM cycle (e.g. revenues, expenditure, external scrutiny etc). • Widely applicable and relevant to countries at all levels of development and with different types of PFM systems. • Robust and evidence-based – relevant, observable, verifiable, consistent. • Makes it possible for scoring to capture progress over time. • Cost-effective. The framework is not an audit; it should make use of data that are readily available (including audits that have been conducted) or can be collected cost-effectively in the timeframe of the assessment.

  21. Group Exercise on PEFA • The aim of this exercise is to: • to learn how to assess the PEFA summary and the PEFA scoring table • To understand how the PEFA relates to the three objectives of PFM • To help prepare participants to conduct their own PEFA Assessments after the training closes on Saturday.

  22. Task 1: Understanding the Scoring Methodology of PEFA • We will do this exercise during the training in your working groups. • You have three Documents: B, C and D • Please read Document B which contains an overview table and missing indicators marked in orange (D3, PI-7 & PI-11). Using the instructions in document B, mark the missing indicators. • Document C provides an explanation of the scoring methods to be used in this exercise. • Document D explains how to score the three missing indicators.

  23. Task 2: Group Discussion • On the basis of the information contained in the table, highlight the strong and weak points of the PFM situation in this country. • Are these strengths and weaknesses also true of your own country? • How would you rate your countries in terms of c(iv) External Scrutiny and Audit?

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