Public Financial Management

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Nov 10, 2013 (3 years and 10 months ago)

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Public Financial Management

International trends

Priorities in Armenia

Jens Kromann Kristensen

Senior Public Sector Specialist

The World Bank

Agenda

1.
Perspectives on public financial management

2.
International trends and lessons


Reform trends


Lessons


Impact of the financial crisis

3.
Public Financial Management in Armenia


Status


Challenges

4.
Vision: The Armenian Governments Public Financial
Management Strategy

5.
Q/A
-

discussion

Perspectives…

PFM is power, policy and politics


Budgeting is power, policy and politics


the
authoritative allocation of resources in a society


who gets what, how, why and when


The study of the budget should be a center piece
of political science


Surprisingly, budgeting not very well researched
academically. Most recent analyses are
operational/practical/applied research


Reform of budget systems is the structuring of
politics and power….


…but obviously only part of the story…

Perspectives…

PFM and good governance







The budget and the public financial management
provides a good entry point for enhancing these
principles in a polity.

Transparency

Accountability

Effectiveness

Efficiency

Forward vision

Perspectives…

PFM and Development

Perspectives…

Objectives

Managing Public Expenditure, introduction
, Allen & Tomasi, OECD 2001

Perspectives…

The public financial management cycle

7

Project

appraisal

Resource

allocation

Liquidity

management

Expenditure

control

Monitoring

& controlling

Post event

review

Accountability

Expenditure

review

Source: Adapted from
Integrated Financial Management
.

Michael Parry, International Management Consultants Limited.

Training Workshop on Government
Budgeting in Developing Countries. THE UNITED NATIONS. December 1997.

Annual Budgets

Medium term
plans

Planning

systems

Funds release

Accounting

Reporting

Audit system

Expenditure
review


Changing global context: emerging pressures on the State


Growing global competition


demands for macro stability & competitive investment
climate


Growing citizen demands for effective service delivery, transparency, & accountability


Growing fiscal demands for efficiency & effectiveness



Vision


A more capable, responsive & high
-
performing State that:


Provides stability & credible investment climate for growth


Delivers public services to make growth inclusive & equitable


Ensures value
-
for
-
money of public spending


Demonstrates transparency, accountability & good governance



Demands on public sector: much more performance focus

A public sector that


serves the public and delivers on promises


is less inward
-
looking and rule
-
bound, and more performance
-
focused


dynamically achieves key objectives and outcomes

8

International…

Trends

Sources: Presentation by
Guenter

Heidenhof
, Sector Manager, Public Sector & Governance November 2010, The World Bank
and Manning and Shepherd, Public Management Reform: should Latin America learn from the OECD?


1990
s



Performance



Concern to make promises and deliver on them



Measurement of results and the use of
measurements for planning or accountability purposes

1970s
-

Responsiveness to elected officials and
political priorities



Frustration with political neutrality



Concern that the public service is an obstacle to political objectives

1950
s

-

Equal

access

and

equal

treatment



Impartiality



Concern that employment in the public sector should be representative of society

19
th

century

-

Due

process

and

institutional

continuity



Patronage & purchase of public positions



Northcote
-
Trevelyan Reforms of 1854 in UK



Driven by the law

9

International…

Trends

Source: Manning and Shepherd, Public Management Reform: should Latin America learn from the OECD?


IN HIGH INCOME OECD COUNTRIES


Increasing emphasis on
allocative

and
operational efficiency


Introduction or strengthening of many
fiscal rules since 1990s for aggregate
discipline


Responsiveness & performance
increasingly targeted
allocative

&
operational efficiency



Performance
-
based budgeting: recent trends


Shifting focus from input control to
accountability for results


Example: UK Public Service
Agreements (
PSAs
) with the
Treasury: three
-
year agreements
with objectives & targets, published
& monitored by Treasury



Accounting & auditing reforms


Strengthening accounting practice (e.g.
move to accrual accounting) and
performance & value
-
for
-
money audits

10

IN OTHER COUNTRIES


Strengthening of Budget Rules to foster aggregate Fiscal
Discipline


Numerical restrictions, “Fiscal Responsibility” laws


Procedural rules


Centralizing
authoriy
, limiting
particularistic interests of ministers and legislators



Reforms to improve performance


Many countries tried to introduce performance
elements in their budgeting framework, but only few
countries have mastered sophisticated approaches
such as results
-
based budgeting (e.g. Chile)


Some progress in linking development plans to the
annual budget (a substantial number of countries
around the world)


But still a lot of countries with limited linkages
between development strategy and budget (e.g.
Bolivia, Peru, countries in Africa)



Strong focus on Integrated Financial Management
Systems (
IFMSs
)


Many successful reforms efforts around the world in
1990s


But many systems did not go the “extra mile” to
strengthen public procurement or institutions of
accountability (e.g. Supreme Audit Institutions)

International…

Trends

Source: Presentation by
Guenter

Heidenhof
, Sector Manager, Public Sector & Governance The World Bank

Macrofiscal
Discipline

Strategic
Allocation

Operational
Efficiency

Medium
-
Term Expenditure Frameworks







Performance, Program budgeting





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11

International…

Trends

Source: Presentation by
Dorotinsky
,
Sector Manager, ECA PREM, Practice Co
-
Leader,
PSP

GET,July

2010


Anti
-
corruption
-

anti
-
corruption
commissions


Decentralization to lower levels of government


Deconcentration



to ministries and creation of agencies


Demand
-
side


Legislative oversight, involvement


Civil society oversight, participation


Sovereign wealth funds


Public
-
Private Partnerships


Monitoring and Evaluation


Sectoral

measures (e.g. road funds)


Long
-
term planning


Debt sustainability analysis

12

International…

Trends

Source: Presentation by
Dorotinsky
,
Sector Manager, ECA PREM, Practice Co
-
Leader,
PSP

GET,July

2010

International…

Lessons


Government
-
led reform strategy
-

ideally,
government approved


Balanced development of components


Overly advanced components regress


Less advanced hinder progress


System components need to work together


Focusing on weakest link, foundation
elements, good starting point problem
-
driven
reforms provides the soundest foundation

Source: Presentation by
Dorotinsky
,
Sector Manager, ECA PREM, Practice Co
-
Leader,
PSP

GET,July

2010


Reform should also address current needs of or
gaps felt by decision
-
makers and managers


Government (PM or President + Cabinet)


Minister of Finance


Ministry of Finance


Spending ministries


Management


Budget managers


Street level


Parliament


Civil society

International…

Lessons

Source: Presentation by
Dorotinsky
,
Sector Manager, ECA PREM, Practice Co
-
Leader,
PSP

GET,July

2010


Pragmatic, practical reform measures


Specific,
monitorable

measures


Benchmarking to assess success


Measure current performance as baseline


PEFA

as broad measure of system performance


Improvements should get the right information to
the right people at the right time


not only data, but information and analysis


generally, improved transparency



International…

Lessons

Source: Presentation by
Dorotinsky
,
Sector Manager, ECA PREM, Practice Co
-
Leader,
PSP

GET,July

2010

International…

Impact of the Crisis

The global financial crisis has not changed
priorities but highlighted even more


Expenditure efficiency


Performance information for prioritization


Wage bill management


Better revenue collection


Medium
-
term budgeting and fiscal space


Capital investment efficiency

Source: Presentation by
Dorotinsky
,
Sector Manager, ECA PREM, Practice Co
-
Leader,
PSP

GET,July

2010

PFM in Armenia

General overview


PFM in Armenia is well analyzed and documented across the cycle.
Strengths and weaknesses are well understood.


Major achievements have been made (Planning processes,
MTEF

and macro management,
TSA
, cash planning and management,
payment processing etc.)


Substantial activities have been undertaken in preparation of the
next phase of reform including in the areas of i) Program based
budgeting, ii) GFMIS, iii) debt management, iv) Internal control, v)
Accounting, vi) procurement, Etc.


In addition efforts have been initiated to bring the parts together in
a comprehensive PFM reform Strategy.


Work has gone into formulating a long term
PIFC

strategy


Challenges remain...

PFM in Armenia

2008 PEFA Self Assessment

PFM in Armenia

2010 OECD
-

EC
PIFC

Gap Analysis


Overall Management Structure:


Centralization of responsibility


limited delegation


Focus on compliance and cash management not efficiency and
effectiveness


Information systems:


GFS

2001 provides a solid basis for budgeting


The classification does not deliver on the needs of budget managers


Links to objectives:


Limited link between resources and objectives at all levels





PFM in Armenia

2010 OECD
-

EC
PIFC

Gap Analysis


Internal structures for governance and control


No finance director position


No risk management


Inappropriate supervision of NCOs and public companies


Internal assurance measures:


Internal audit it weak in regard to independence, regulatory
framework and quality


Central Harmonization Unit:


Just established


Internal and external reporting:


Line managers are given limited information about budgets and their
use


External reporting includes only financial information





PFM in Armenia

Government Reform Vision

2010
-
2020



“The purpose of the reforms is to increase the efficiency of public
expenditure management thereby ensuring improved quality of policies and
delivered services, specifically



ensuring fiscal discipline which will contribute to macroeconomic stability
and predictability of budget system;


guaranteeing the linkage of funds with main policies and priorities through
following up on strategic approaches;


ensuring value for money and guaranteeing efficient, effective and
economic use of funds;


ensuring accountability in public spending.




21

Source: Government Decree on Approving the Strategy for Reforming the PFM System

PFM in Armenia

Government Reform Visions

2010
-
2020



“The core vision of the reforms is:
“Centralized regulation
-

decentralized management”
.
To accomplish this, public finance management system reforms should facilitate the
establishment of a management culture which,


on the one hand ensures centralized (harmonized) regulation of PFM
-
related
procedures and on the other hand;


grants powers to managers at all levels (decentralization), and they have obligation and
accountability for optimal use of resources (managerial accountability and
responsibility).


The aim of PFM reforms shall be ensuring a PFM system acting in accordance with the
following principles in all levels of governance:


managerial accountability and responsibility;


availability of control;


ongoing improvement of services delivered. “



22

Source: Government Decree on Approving the Strategy for Reforming the PFM System

PFM in Armenia

Stages towards the vision

23

Stage 1


Complete the work on introduction of the basic systems and
controls while gradually transitioning from centralized
administration to decentralized management and result
-
based
program management

Stage 2


Increase managerial accountability


Stage 3


Increase emphasis on efficiency and effective use of resources


PFM in Armenia

Challenges to achieving the vision


Potential for stronger integration of functional
processes


Integration and enhanced capability of ICT systems


Building Capacity, Professionalization and Motivation
of FM staff across the cycle and across Government
institutions


Reform management, prioritizing, phasing
-

integration and coordination of reforms at all levels of
the reform process (design, implementation,
management)

PFM in Armenia

Priority stage 1 reform activities

Suggested activities in order of priority:


1.
Integration of information and business processes
across the budget cycle

2.
Strengthening internal control and accounting

3.
Gradually advance Program Based Budgeting

4.
Build ICT management capacity incl. ICT strategy


These actions would be pursued in coordination to
achieve stage 1 and would be internally sequenced in a
work plan.

25

PFM in Armenia

Priority reform activities (1/4)

1. Integration of information and business processes
across the budget cycle


Why: To enable planned reforms of functional processes
(
PBB
, IPSAS,
PIFC
), reduce transaction costs, enhance
data quality and increase accuracy
-

i.e

to use one
capture of data for many purposes.


How: Through implementation of ICT enabled business
process reengineering ( i) BPR, ii) GFMIS)


26

PFM in Armenia

Priority reform activities (2/4)

2. Strengthening internal control and accounting


Why: Mitigate fiduciary risks (incl.
SNCOs
). Enhance transparency
and accountability.
Enable decentralization without loss of control.


How 1:
Establish managerial accountability and clarify overall
management structure in line with
PIFC
. Build internal audit
capacity. Develop standards, including public and corporate
accounting standards to provide assurance to stakeholders.
Adequate information systems including automation of the internal
audit function. Establish strong CHU covering both financial
management and control and internal audit. Strengthen internal
and external reporting. Enhance controls over
SNCOs
.


How 2: Reorganize spending units through delegation and
accountability


27

PFM in Armenia

Priority reform activities (3/4)

3. Gradually advance Program Based Budgeting and further
strengthen budget preparation processes and capacity


Why: To further deepen policy orientation of the budget
process and to prepare for results based budgeting
implementation and management


How: Build on existing process and
address downstream
implications of Program Based Budgeting (Adjustment of the
Chart of Accounts, reporting, treasury operations). Consider a
consultation with current and potential
PBB

users and
checklist assessment of template before appropriating against
the
PBB
. Build capacity for investment appraisal. Strengthen
risk and sustainability analysis.


28

PFM in Armenia

Priority reform activities (4/4)

4. Build ICT management capacity incl. ICT strategy


Why: To enable for
GFMIS
. To
improve
management of existing
systems. To establish data security.


How: Improve
IT management capacity (technology architecture,
policy framework, human resource management). Reconsider
infrastructure aspects of
GFMIS

strategy (wide
-
area network, data
center) in light of e
-
Government plans of
GoA
. Identify essential
data input and reporting requirements of PFM reform program and
develop interim IT solutions for them based on current or new
software, according to cost and technology factors. Design and
engineer interim IT solutions for possible expansion and industrial
strengthening. Execute training plan for internal IT staff (
SOA
,
project management, IT procurement)



29

Assessment and key messages


Further integration of business processes are necessary to achieve a next
level of PFM.


Status quo on ICT is not an option if ongoing reforms are implemented.


Work on PPB with a view to strengthening policy orientation of the budget
should continue while maintaining the existing execution controls.


ICT management capacity should be improved in any reform scenario.


Capacity development and change management should take center stage
in any reform scenario.


Current plans for reforms implies a rather large investment. Further
preparatory activities should be informed by priorities and funding
availability.


PIFC

is an important but complicated and long term process. Focus on
delegation and organization is hugely important for the efforts to go
beyond increased compliance control.


PIFC

and reforms to “up
-
stream” reforms should go hand in hand

30

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