Public financial management is an essential part of the development process.

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1 IDA at Work Public Financial Management: Tracking Resources for Better Results Public financial management is an essential part of the development process. It supports the efficient and accountable use of public resources, helps underpin macroeconomic and fiscal stability, and guides allocation of resources to address national priorities. Since resources can leak wherever systems are weak, public financial management covers all phases of the budget cycle including budget preparation, internal control and audit, procurement, monitoring and reporting arrangements, and external audits. Strengthening public financial management has been a core IDA objective for a decade. This is being achieved by supporting country-led reforms and institution-building; fostering the closer coordination of donor analytical and technical assistance around government-led strategies; providing global leadership and applying internationally accepted monitoring frameworks and assessment tools to measure performance. Over the years, IDA support has evolved from helping analyze the level and composition of spending to an increased focus on measuring the quality of public financial management systems and developing indicator-based diagnostic tools to measure country performance. At a glance Loan commitments on projects with public financial management components of 25 percent or higher increased from $2.2 million over the period to $14.9 million over the period IDA countries that made substantial progress in public financial management and benefited from significant IDA support include Afghanistan, Albania, Armenia, Azerbaijan, Georgia, Guyana, the Kyrgyz Republic, Mali, Moldova, Niger, Senegal, Tanzania, Uganda, and Vietnam. IDA has made substantial progress on its Actionable Governance Indicators initiative, which was launched in 2007 and includes public financial management indicators for Public Expenditure Financial Accountability, the Country Performance and Institutional Assessment, and others. A website, already launched for internal Bank use, provides materials and data on Actionable Governance Indicators, as well as updates on progress on this initiative. The site will be made available publicly in October 2009.

2 I. Results Public financial management plays a key role in governance reform In IDA countries, the relative importance of public finance management-related reforms is pronounced. For example, loan commitments on projects with public financial management components of 25 percent or greater increased from $2.2 million over the period to $14.9 million over the period Of countries with access to IDA or a mix of IDA and other resources, some 75 percent obtained loans related to public sector reform and almost all had analytical and advisory components (see figure 1 below). The majority of this lending and technical advice is in the area of public financial management. Low-income countries frequently have weaker public institutions so reforms in this area are often seen as a necessary underpinning for effective government institutional strengthening. A robust results framework for public financial management systems is now in place The World Bank and other development partners have developed a comprehensive indicator-based framework to track progress in public financial management (see figure 2). This has 31 indicators covering the entire public financial management cycle and is linked to six objectives: Policy-based budgeting; Predictability and control in budget execution, accounting, recording and report- Figure 1: Lending Value in Projects with a Significant PSR Component 4,000 IBRD and IDA loans and grants 20 PSR lending (current dollars, millions) a 3,000 2,000 1, Percent of Bank lending Fiscal year of approval IBRD commitments Grants (negligible) IDA commitments Total, as percent of World Bank lending Source: World Bank data and IEG staff calculations. a. The graph represents the sum of loans and grants for all projects multiplied by the share that each project allocated to a PSR theme. 2

3 Box 1: Ghana, Mali and Nigeria: Making Improvements in Public Financial Management Ghana improved its budget classification system and identification of pro-poor spending to enable the better management and tracking of spending. It brought in regular reconciliation of accounting and banking data to assure the integrity of budget expenditure reporting and reduced expenditure payment arrears. In budget reporting, it improved the classification of in-year expenditure reports to match the budget and enable closer management of spending to improve accounting accuracy. Progress was shown by the 2006 budget being the first to be enacted before the start of the financial year, an achievement repeated in subsequent years. The budgets also gave more information about internally-generated funds and donor grants. Key factors that helped produce progress include strong country commitment to improving public financial management performance, an external assessment that highlighted weaknesses, and a government-led reform strategy. IDA helped by providing technical assistance, analysis, and donor co-ordination to support the government strategy and lending. Mali has also made good progress in strengthening budget preparation and execution. A mediumterm expenditure framework has been introduced and extended to several ministries. Budget execution has been improved by decentralizing important functions from the Ministry of Finance to spending ministries, increasing their responsibility and management for a smooth budget process. Government leadership around public financial management reforms is well-supported by donors, including IDA. In Nigeria, IDA has helped the federal government since 2003 to make progress on macroeconomic and governance reforms, including the introduction of an independent oil price fiscal rule. To promote governance reforms at the sub-national level, where about 50 percent of public expenditures take place, the Bank has supported three states in improving their public financial management and public administration and law reforms. The project helped double tax revenues of two states, while at the same time cutting in half the time to submit relevant financial reports. ing expenditure; External scrutiny and audit; Comprehensiveness and transparency; Budget credibility; Plus three indicators on donor practices. Most recent data show that a total of 95 public expenditure and financial accountability assessments have been completed in IDA countries. While the vast majority of these have been conducted at the central government level, an increasing number have been completed at lower levels of government. (See Annex 1) These studies have been led by a variety of agencies including the Bank, the European Commission, and the relevant jurisdiction. IDA and overall public financial management strategy IDA s overall public financial management strategy emphasizes country ownership and a harmonized and coordinated approach to reform: A country-led reform program is the leading element, involving effective partnerships between governments and donors to support country leadership and ownership in the reform process. In Tanzania, the annual government-led public expenditure review is managed by a joint government/donor/ civil society working group which reviews 3

4 Figure 2. CPIA Indicators on Public Sector Management and Institutions, the budget and analyzes selected policy and management issues. A coordinated, multi-year program of support for a country s public finance management reforms is another key lynchpin. This builds on dialogue between governments and donors, provides analysis and advice, technical support and sequenced funding and training. In Madagascar, the government developed an action plan consolidating public finance management reforms drawing on a variety of diagnostics such as the public expenditure and financial accountability (PEFA) assessments mentioned earlier. The government now The Public Expenditure and Financial Accountability (PEFA) program, started in December 2001 has been jointly financed by the World Bank, the European Commission, the UK s Department for International Development (DFID), the Swiss Secretariat for Economic Affairs, the Royal Norwegian Ministry of Foreign Affairs and the French Ministry of Foreign Affairs. The International Monetary Fund (IMF) is also a partner. expects donors to align their program of work against this action plan. Monitoring results through a common information pool. The PEFA assessment is an objective, indicator-based assessment and monitoring tool to provide common information on public financial management performance. It focuses on the results of reforms in terms of actual improvements rather than the reforms themselves. Coordinating analysis and public financial management reform at country and sector level. Within the public expenditure and financial accountability framework, donors increasingly support integrated approaches to reform of public expenditure, procurement and financial accountability. In Ghana, in 2006, numerous donors came together to support one public financial management assessment, avoiding duplicative assessments. The donor group included IDA, the UK s DFID, Denmark, the International Monetary Fund, Canada, France, Netherlands, Germany, Switzerland, and the European Commission. 4

5 Table 1. PFM analysis in IDA countries FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 Total Public Expenditure Review Country Financial Accountability Assessment Country Procurement Assessment Report Total Source: World Bank IDA lending for Public Financial Management The number of projects focusing on public financial management rose in all regions from to , including an increase from 22 to 64 projects in Africa, from 5 to 18 projects in East Asia and the Pacific, and from 11 to 22 projects in Europe and Central Asia. Total commitments on projects with public financial management components over 25 percent rose in all regions, most notably in Africa, Europe and Central Asia, and Latin America and the Caribbean. A World Bank review in 2006 found that 32 of 34 recent development policy operations had milestones linked to public financial managementrelated analytical work and, in most cases, were appropriately sequenced, supported the evaluation of results, and avoided addressing too many issues. Substantial analytical and advisory work in public financial management is helping build capacity and increase country ownership of the reform agenda. Between 2000 and 2005, 189 analytical products were provided to IDA countries. The Independent Evaluation Group review of 2008 also credits good diagnostic work in public financial management as having contributed to successful outcomes in Bank operations. In particular, it cites Public Expenditure Reviews and the public expenditure and financial accountability indicators as useful in this regard. The review also indicates that public financial management was by far the most common theme: it was a major component of 81 percent (379) of the Public Sector Reform projects in the data set. Although projects a year contained public financial management components in the late 1980s and 1990s, this figure has risen to more than 30 projects a year since Many of these projects contained public financial management as a primary theme of the project. These can support public finance reforms, particularly if done in cooperation with the authorities. In Tanzania, Uganda, Ethiopia, Ghana and Vietnam, analytical work is carried out annually and the content determined with country officials and donors, widening the scope for more country participation and leadership in the assessments. Between 2000 and 2008, 242 analytical products were provided to IDA countries. These can support public finance reform, particularly if done in cooperation with the authorities. 5

6 IDA has been a leader in promoting donor harmonization around a common results framework in public financial management. For example, IDA has led harmonization efforts such as the Bank-Fund Joint Implementation Committee for HIPCs, the Public Expenditure & Financial Accountability (PEFA) program, the OECD DAC Task Force on Public Financial Management and the DAC itself. Additionally, IDA has been an active contributor to the Accra Agenda for Action, in particular through the Task Force on PFM. II. Tackling multiple challenges IDA has helped address public financial management challenges through: Clear leadership and global knowledge in developing frameworks such as the public expenditure and financial accountability tool, and before that the Heavily-Indebted Poor Countries expenditure tracking assessments. Experience in public financial management and institution-building beyond narrow technical training. In Armenia, reforms are aimed at building a strong Ministry of Finance better able to manage resources and deliver policy results. They include technical reforms to budget classification, skills development, business process reengineering, and helping policy officials understand and use the tools at their disposal. Multi-sector expertise and using multiple tools. Reforms often have many dimensions including technical public finance issues, and administrative, legal, and civil service issues. IDA has the experience, tools and skills to handle multi-dimensional reforms. In Ghana, Mozambique and Malawi, IDA has supported medium-term budget planning through multiple instruments such as economic and sector work, technical assistance and lending. Decentralization of central government activities and services adds a further dimension and again IDA has the experience and skills to help. Utilizing its convening power to encourage country leadership and foster country-level donor coordination. In Vietnam, IDA leads the annual public expenditure review process and manages a multi-donor trust fund to support analytical work. III. Looking ahead Key challenges remain in implementing a strengthened approach to public financial management: Country-led reform strategies. Countries vary in their ability and willingness to lead reform efforts, and donors vary over the degree of space they are willing to provide to countries in setting the reform agenda. Donor analyses can provide input into country agendas but should refrain from producing public financial management action plans once a government has produced a plan itself. Donors should then focus on the implementation of that plan. Donor coordination around country action plans. Discussion between governments and their donors is key for reaching consensus on the way forward. Establishing functioning working groups comprising donor and government representatives poses unique challenges. Monitoring progress. The public expenditure and financial accountability framework is still being rolled out, despite over 125 assessments completed in 100 countries 6

7 and states. Only 20 repeat assessments have been completed as of the end of May Critical challenges include ensuring country-level work is coordinated among donors and helps reduce duplicating evaluations. Another priority is to encourage government leadership or involvement in such assessments and to ensure these are of a high quality and are published in a timely manner. All assessments are being collected and included in a database so progress can be monitored and lessons drawn. In addressing these challenges, an active program of lesson-learning is planned, with results being published and built into public financial management training programs for Bank staff and others to ensure continued improvement across countries. Looking ahead, IDA will remain a key player in public financial management reform because of its technical expertise, global experience, and its acknowledged leadership role. Countries will continue to need IDA financing and advisory support to achieve progress in public financial management reform an essential input into improving the spending of public resources and the effective use of aid to support national poverty reduction strategies. July Annex 1: PEFA Work in IDA Countries 7