Capacity Building in Public Financial Management- Key Issues Parminder Brar Financial Management Anchor The World Bank May 2, 2005
Overview 1. Definitions 2. Track record 3. Why is PFM capacity building important? 4. Why is scaling up critical? 5. Donor practices 6. What do we need to do differently? 2
Definitions: Capacity Development Capacity is the ability to perform functions, solve problems and set and achieve objectives (UNDP, 2002). Capacity development is about developing people, institutions, practices. Source: WBI Capacity Enhancement Brief 3
Definition: Public Financial Management Core Areas of PFM Budget Formulation Budget Execution Cash Management Internal Controls Accounting Auditing Legislative Oversight Other Related Areas Fiscal policy management, Debt management, FX management, Pension etc. 4
The track record Need for upgrading PEM Systems (HIPC tracking) 15 (8) Number of Benchmarks met 9 Benin (8) Burkina Faso (9) Chad (8) Guyana (8) Honduras (8) Mail (8) Rwanda (8) Tanzania (8) Uganda (9) Little Upgrading Some Upgrading Required Required 2004 Assessment Bolivia (5) Cameroon (4) Ethiopia (6) Gambia, The (5) Ghana (1) Guinea (5) Madagascar (7) Malawi (7) Mauritania (7) Mozambique (5) Nicaragua (5) Niger (3) Sao Tome & Principe (4) Senegal (4) Zambia (3) Substantial Upgrading Required 2 Tanzania (11) Mali (11) Guyana (10) Burkina Faso (9) Benin (8) Rwanda (8) Uganda (8) 2001 Assessment 5 Ethiopia (7) Ghana (7) Honduras (7) Senegal (7) Sierra Leone (7) Chad (7) Cameroon (7) Guinea (5) Malawi (5) Niger (5) Democratic Republic of Congo (4) Bolivia (4) 18 Madagascar (4) Mozambique (4) SãoTomé & Principe (4) Gambia, The (3) Zambia (3) Guinea Bissau (0) Little upgrading required Some upgrading required Substantial upgrading required HIPC Assessments in 2001 and 2004 show that PFM systems remain weak. Capacity development efforts have had limited impact. 2004 Source: World Bank HIPC Assessments 5
The track record 90 80 70 60 50 40 30 20 10 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Formulation Execution Reporting Procurement % of countries meeting benchmark in 2001 % of countries meeting benchmark in 2004 Indicators that deteriorated in 2004 : Off budget expenditures increased (2), Reliability of budget decreased (3), Data on donor financing reduced (4), Payment arrears increased (8), Quality of internal audit worsened (9), Timeliness of monthly expenditure reports deteriorated (12). 6
The track record 90 80 70 60 50 40 30 20 10 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Formulation Execution Reporting Procurement % of countries meeting benchmark in 2001 % of countries meeting benchmark in 2004 Indicators that improved in 2004: Coverage of budget entity (1), Classification of budget (5), Identification of poverty reducing expenditures (6), Projections integrated into budget formulation (7), PETS (10), Reconciliation (11), Classification of expenditures (13), Timeliness of accounts closure (14), Timeliness of audit (15). 7
The track record The track record of PFM interventions is mixed: IFMIS projects, on average, - took 7 years to be complete, ranging from 9.1 years for AFR to 5.8 years for LCR, average Bank-financed cost was $12.3 million, component changes in 75 % of projects, only 6% of projects are assessed to be highly likely to be sustainable (self assessed sustainability) MTEF s : A recent preliminary review has shown that the process was relatively mature only in Uganda, South Africa and Albania. Civil Service Reforms: Very few civil service reform projects succeeded between 1987-1997 in Africa Decentralization: The Lessons from the 1990 s study has shown that decentralization is not synonymous with greater accountability and delivery of public services. 8
The track record Number of countries PFM systems remain weak but overall CPIA indicators in SSA are improving. 50 45 40 35 30 25 20 15 10 5 0 7 5 15 12 11 10 10 15 16 15 14 19 18 18 18 14 22 25 16 14 16 17 17 16 1996 1997 1998 1999 2000 2001 2002 2003 3.3 3.2 3.1 3.0 2.9 2.8 2.7 2.6 Average CPIA CPIA>=3.5 3.0<=CPIA<3.5 CPIA<3.0 SSA Simple Average Data sources: World Bank CPIA sheets 9
Why is capacity development in PFM important? Over the last decade, the development community has come to understand the importance of Public Financial Management for reaching the Millennium Development Goals, as well as the need for accountability systems that perform well in client countries. We have needed a cultural and personality change: we must learn to listen, to simplify, to harmonize, to follow, to lead to do whatever is necessary to improve development results. We have an obligation to be more systematic about identifying what gets results, intensifying our support for partnerships that deliver results, measuring and reporting on these results, and, together, charting progress towards our common goals. James D. Wolfensohn 10
Why is capacity development in PFM important? Recognition that improved country PFM performance is a key contributor to successful development Enabling countries to judge impact of PFM reforms over time Community of interest among domestic and external stakeholders to improve PFM performance. Increasing reliance on country PFM systems in aid flows Increased results focus of development agencies 11
Why is scaling up in PFM critical? Increased impact when approach is to strengthen systems impacting all spending. New approach is to seek to develop and use country systems, rather than ring-fenced systems for donor projects Ring-fenced systems have not generally not developed country capacity, and have often diverted the best country capacity for donor use Scaling up is critical for improving sustainability. Countries have incentives to improve own systems. Reduce transaction costs..annual compliance costs fall in a range of US$ 118-215 million, of which 50-60 percent are incremental to the costs of compliance with the borrower s own requirements for procurement, audit (WB Task Force, 2004) Focus on institutional capacity building. 12
Why is scaling up in PFM critical? Official Development Assistance accounts for less than 5% of Government expenditures in developing countries. Region Country Net Comm Amt ($m) ODA as share of Government Expenditure SAR India 12,623.7 2.1% EAP China 12,442.7 2.2% LCR Brazil 3,821.2 0.1% ECA Turkey 3,775.1 0.0% LCR Mexico 3,602.3 0.0% LCR Argentina 3,135.6 0.2% EAP Indonesia 2,923.4 7.7% EAP Vietnam 2,502.9 23.5% SAR Bangladesh 2,186.0 21.4% ECA Russian Federation 2,143.1 4.6% The scaling up agenda is not an option. It is an imperative if the MDG s are to be achieved. 13
Why is scaling up in PFM critical? Africa presents a particular challenge. 900 Number of people living on less than $1 per day (millions) 800 700 600 500 400 300 EastAsia Average GDP per capita growth of 5.9% 200 100 0 Sub-SaharanAfrica 1981 1984 1987 1990 1993 1996 1999 2001 Average GDP per capita growth of 0.7% Source: WB: JP Presentation to SPA, January 2005 14
Why is scaling up in PFM critical? It is now clear that most countries in SSA will not achieve the MDG s. Scaling up for improving PFM system is therefore all the more urgent. Most countries in SSA will NOT reach MDGs 100% 100 50 50% Likely/possible Unlikely No data 0 0-50 Child malnutrition Primary school completion Gender equality in school Child mortality Maternal mortality Births attended HIV/AIDS prevalence Access to water Source: World Bank: PD Presentation to SPA, January 2005 15
Donor practices Donor practices need to be aligned with the scaling up agenda. SPA countries (excl. Nigeria) Gross ODA flow Gross ODA $US billion 25 20 15 10 22 17 13 12 12 The mystery gap The Gap 5 6.1 5.6 5.6 6.6 6.7 0 1999 2000 2001 2002 2003 OECD report SPA country report Data sources: OECD IDS online databases. OECD reported Gross ODA was calculated by adding ODA loans received to its ODA net. 16
Donor practices Donor practices need to be aligned with the scaling up agenda. SPA countries (excl. Nigeria) Gross ODA flow 25 $US billion 20 15 10 5 What donors see Explainable gap Unexplained What countries see Technical cooperation Debt forgiveness grant Emergency Development food aid Government assistance Gross ODA reported by SPA countries 0 1999 2000 2001 2002 2003 Data sources: OECD IDS online database and SPA country report 17
Donor practices Donor practices need to be aligned with the scaling up agenda. SPA countries (excl. Nigeria) Gross ODA flow 6.0 5.0 Unexplained difference $4.9b Current $US b. 4.0 3.0 2.0 $1.5b $2.1b $3.1b $3.2b 1.0 0.0 1999 2000 2001 2002 2003 Data sources: OECD IDS online database and SPA country report 18
Donor practices Donor practices need to be aligned with the scaling up agenda. Data Source: www.oecd.org/dac 19
Donor practices Number of donor missions per annum: Data Source: www.oecd.org/dac 20
What do we need to do differently? Country ownership, leadership and commitment to the PFM reform agenda including a PFM reform strategy and action plan Focus on increased use of Country Systems - necessary to improve development impact. Donor coordinated program of support coordinated, coherent, multi-year program of PFM work that supports and is aligned with the government s PFM strategy Issues of appropriateness and sequencing of reforms appropriate fit versus best fit. Shared information pool with a focus on results agreed set of PFM indicators for measuring and monitoring results over time Realistic expectations 21
Country ownership of the PFM agenda Country ownership is critical. The reform program has to be tailored to match with the existing human resources, institutions, legal system, administrative and political culture. Source: WBI Capacity Enhancement Brief 22
Donor co-ordination and alignment Fragmented Government reform strategy influenced by ad-hoc donor requests encourages a fragmented approach to PFM reforms A Strengthened Approach A government-led reform strategy, supported by a coordinated program of work by donors, facilitates an integrated and sequenced reform process. Donor 2 External audit Donor 3 Procurement Government-led PFM Reform Strategy Donor 1 Budget preparation Donor 4 Treasury reforms Coordinated program of support by donors 23
Appropriateness and sequencing Foster an environment that supports and demands performance before introducing performance and outcome budgeting Budget for work to be done before budgeting for results to be achieved Adopt and implement predictable budgets before insisting that managers efficiently use the resources entrusted to them Control inputs before seeking to control outputs Establish internal controls before introducing managerial accountability Establish external controls before introducing internal control Account for cash before accounting for accruals Operate a reliable accounting system before installing an integrated financial management system Have effective financial auditing before moving to performance auditing Allan Schick: Get the Basics Right. 24
Results measurement framework Work in progress High level of international consultation. PEFA Steering Committee, OECD DAC, clients in Africa region, CIS... 17 assessments completed. Most are desk studies. One assessment done by the UK Treasury. 28 high-level indicators Builds on 16 HIPC indicators, but broader Based on available data and analytic work Can be customized where appropriate (including for sub-national level) Can be supplemented by detailed indicators on specific aspects as needed e.g., procurement, audit, revenue, budgeting, internal controls Indicators expected to remain constant over time to allow progress to be monitored 25
Realistic expectations Recognize that PFM expertise needs to be supplemented by capacity building / change management skills Understand the challenges Understand the political economy implications Base plans on good diagnostics Understand the institutional constraints Have clear objectives, and plan for early wins Understand the client s priorities and constraints Use an array of instruments Be opportunistic Develop locally-appropriate solutions think globally, act locally Build effective external partnerships with donors, professional bodies Build internal islands of excellence / specialization Learn to perform in sub-optimal environments Recognize that capacity-building is an incremental process 26
Realistic expectations Modify program in light of experience gained. Source: WBI Capacity Enhancement Brief 27
Implement the Paris Declaration on Aid Effectiveness Indicators of Progress: Partners have operational development strategies Reliable country systems Aid flows are aligned on national priorities Strengthen capacity by co-ordinated support Use of country systems Strengthen capacity by avoiding parallel implementation structures Aid is more predictable Aid is untied Use of common arrangements or procedures Encourage shared analysis Results oriented frameworks Mutual accountability 28
Thank you. 29