Module 1.2Why reform PFM systems? Why establish a sequencing?

The Issues of Budgetary ReformUnit 1. Approaches to PFM Reform

•Module 1.1. PFM objectives and budgetary approaches

•Module 1.2. Why reform PFM systems? Why establish a sequencing?

•Module 1.3. The starting point: assessing PFM systems

•Module 1.4. Conditions for successful reform

Day 1: Approaches to PFM reform

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• After a brief presentation of the objectives of reform, this module introduces basic notions (or essential functions) of a budgetary system and examines issues related to “sequencing” (determination of the different stages) of a budgetary reform

Module 1.2. Why reform PFM systems? Why establish a sequencing?Objectives of the module

• Why reform?

• Why establish a sequencing?

• The foundations (or essential functions) of PFM

• The platform approach

• How to address reforms that are too complex in the context of a given country

Module 1.2. Outline

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Why reform a budgetary system?

• Reforms of a public finance management system aim at improving the performance of the system• ie. Strengthen it according to the criterias of PFM at each

stage of the PFM cycle• Improving the performance of a PFM system generally requires

to combine three different approaches: (i) strengthen, (ii) improve, (iii) reform• The relative importance of each of these approaches depends

on the country context

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Combine: (i) strengthen; (ii) improve;(iii) reform

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• Strengthen the existing system• Training• Introducing tools

• Improve• Improve manuals, systems and

processes • Training

• Reform• Reshape laws, regulations,

processes• Change institutional dispositions• Create structures for reform

management

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• Why reform?

• Why establish a sequencing?

• The foundations (or essential functions) of PFM

• The platform approach

• How to process reforms that are too complex for the context of a given country

Module 1.2. Outline

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Why establish a sequencing of reforms? (1)

• In developed countries, experience has demonstrated that budgetary reform takes a long time

– Over 5 years for an acounting reform in the United Kingdom

– In France» Preparation of the LOLF in1999» Vote of the LOLF in 2001» Implementation of the LOLF: 2006 Budget

• Experience has shown that premature introduction of complex instruments in developing and transition countries is not conclusive

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Why establish a sequencing of reforms? (2)

• A budgetary system is shaped by a number of factors, both political and cultural. Bending these to reshape the system takes time.

• Reform is a continuous and permanent process. It is crucial to go through the process of learning by experience (There is no magic formula!)

– Correct errors,– Adapt to changes– Step by step improvement

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• Why reform?

• Why establish a sequencing?

• The foundations (or essential functions) of PFM

• The platform approach

• How to process reforms that are too complex for the context of a given country

Module 1.2. Outline

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Allen Schick: the foundations first!

• In 1998, Schick decides to react against the trials to export the New Zealander model and apply it to developing countries.

• He recommends to consolidate the foundations before anything, rather then “leapfrogging”. • The foundations have also recently been

referred to as “core functions”

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Schick, Allen. 1998. “Why Most Developing Countries Should Not Try New. Zealand Reforms.” The World Bank Research Observer

World Bank.

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In his thesis on the need to have a system with a sound base, Schick recommends:•To create an environment that enables and demands performance before introducing performance or results based budgetary systems.•To control the credits before the products•To account the disbursements before the accrual accounting• To introduce external control (sector ministries) before the internal control•To do internal control before introducing mechanisms that give responsibility to managers•To have a sound accounting system before establishing a financial management integrated system.•To foresee in the budget the work to be done before defining the expected results.•To ensure the right implementation of the private contracts before introducing performance contracts in the public sector.•To envisage performance audit only when financial audit is effective.•The government should adopt and execute reliable and predictable budgets before asking managers to manage the resources effectively.

Guidance for the development of internal supervision

• Following the same path of thought, A. Schick identifies three stages to the development of control systems:• 1st stage: supervision carried out by a third party

external to the spending ministries (ministry of finance)• 2nd stage: internal supervision within the spending

ministries• 3rd step: Strengthen managerial accoutability

• Schick considers following these three stages necessary to developing a budgetary culture• Nevertheless, the third party supervision (1st stage)

must be fair and realistic in order to constitute a solid foundation

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What are the objectives and dimensions of the foundations?

Be accountable towards citizens, be receptive

Role of the Parliament in democratic societies

Proper procedures (integrity, regularity)

Aggregate fiscal discipline

Ressource allocation and fiscal policy consistent with

objectives

Efficient public service provision and tax

administration

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How to define the foundations?• Also called ``core functions’’• Definitions are linked to the hierarchy amongst PFM objectives

indicated in module 1.1• Suggested definitions:

• The set of functions necessary to ensure that the other functions are sustainably applicable, at limited cost

• Functions that aim at ensuring budgetary discipline (integrity, regularity – financial compliance)

• Taking in account, at least in the 2nd stage, of the ‘‘budget credibility’’ under PEFA (ie. the executed budget according to initial previsions)o Budget credibility requires a certain level of aggregate

fiscal discipline (consideration for macroeconomic stability)

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Examples of basic functions

• Administrative as well as economic classification of expenses (consistent with GFS/SFP)

• Satisfactory level of comprehensiveness of the budget• Taxpayer registration• Regular monitoring of the financial budget – cash and

commitment• Registry of physical assets for “risky” assets (eg. Vehicles,

computers)• End-of-year accounts/ Budget Review Act for the n-1 Budget

transmitted to the Parliament at the latest at the same time as the n+1 year Budget plan

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‘‘Foundations first’’: Should we have some reservations concerning this approach?

• We rarely start from scratch• “Advanced” reforms may have been implemented already even

if not all core functions have• Systems have strengths and weaknesses. Must we always wait

to have 100% of the foundations?• Reforms must be attractive from the start• Central control is not a panacea

• Risks of hypercentralisation and corruption of supervisors. Schick highlights that central supervision must be loyal

• Sectoral ministries must be involved in the reforms. They cannot only be controlled

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• Why reform?

• Why establish a sequencing?

• The foundations (or essential functions) of PFM

• The platform approach

• How to process reforms that are too complex for the context of a given country

Module 1.2. Outline

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The platform approach

• The platform: a coherent set of measures that achieve a set of realistic improvements in public finance management

• The platform strategy is composed of a sequence of different platforms

• Each platform sets the ground for the next one

Cf. Peter Brooke. Rapport pour PEFA et DFID briefing paper juillet 2005 19

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Example

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The shortcomings of the the platform approach

• Implemented in Cambodia, Kenya,…• Too early to judge (?), but this approach can sometimes be

very complex• According to Allen

• Insufficient emphasis on institutional constraints, underestimation of resistances

• Activity overload. In Cambodia: the platform comprised 27 activities, 250 specific actions

• Unrealistic time horizon, mediocre prioritization• Micro-management

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The platform approach: avoid being schematic, keep it simple

• As platforms follow each other, some will inevitably overlap• The existing system must be taken into account, as it may

be more “advanced”• The previous “platforms” must be strengthened

• The first platform (foundations+?) can be defined, and probably the second one as well. But can we really go any further??

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• Why reform?

• Why establish a sequencing?

• The foundations (or essential functions) of PFM

• The platform approach

• How to process reforms that are too complex for the context of a given country

Module 1.2. Outline

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• As discussed in module 1.4, many developing countries implement complex reforms, whereas their foundations (or “core functions”) are only partially implemented• E.g. MTEF, programme budget, accrual accounting,

etc.• Implementing such reforms goes against the logical order

that is presented in this module, but it may be difficult to rule them out• Pressure from the lenders to pursue complex reforms• Internal determination to show that the country is on

the path of modernisation and is capable to carry out complex reforms, etc.

The dilemma

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• Strengthening the foundations must stay a priority. However, if there is no possibility to avoid the complex reforms, it will be necessary to:o Ensure that the basic measures and the necessary pre-

conditions to the efficiency of the measures of the complex reform are included in the reform programme

– Cf. priorities defined by domains of PFM in the day 2 modules– Example: introducing assets registers if the country wishes to

develop accrual accounting

o Reshape some of the complex reform measures and limit their ambition

– Eg., a programme budget may, at first, be limited to an information document

How to handle such situations?

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Key message

• A budgetary reform encompasses a series of distinct stages. During the first stage of the reform, utmost attention should be paid to the foundations of the budgetary system, ie. the functions that ensure budgetary discipline.

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