PFM: Why is this important and how can we improve it?
What was Public Financial Management (PFM)?
PIC refers to a set of laws, rules, systems, and processes used by sovereign nations (and subnational governments) to mobilize revenue, allocate public funds, conduct public spending, account for funds, and audit results. It covers a broader range of functions than financial management and is typically designed as a six-phase cycle, beginning with policy formulation and ending with external review and evaluation (Figure 1). This “PMM Cycle” involves multiple stakeholders to ensure you operate effectively and transparently while maintaining accountability.
Figure 1: The PFM cycle and the key actors involved
Why is PFM important?
A strong PFM system is an essential aspect of the institutional framework for an efficient state.
- Effective public service delivery is closely linked to poverty reduction and growth, and countries with strong, transparent and accountable PFM systems tend to deliver services more effectively and equitably and regulate markets more efficiently and fair. In this sense, a good GFP is a necessary, if not sufficient, condition for most design results.
- A key element of statehood is the ability to tax fairly and efficiently and to spend responsibly. These are fundamental characteristics of "inclusive" government institutions that build trust, foster innovative energies, and allow societies to prosper. (See Acemoglu & Robinson, 2012, Why Nations Fail and Dani Rodrik, 2003, The Pursuit of Prosperity).
Improving the effectiveness of a PFM system can bring broad and lasting benefits, and in turn help amplify broader societal changes towards inclusive institutions and thus stronger states, poverty reduction, greater gender equality and growth. Even when donor staff are not trying to strengthen PFM systems, they need to understand them, as they often work through them, providing budget support or climate finance, or using them to deliver project-funded interventions that are then serviced and supported through the state. budget.In summary, PFM is important and all donor staff need a basic understanding of PFM.
What are the objectives of the GFP system?
To evaluate a PFM system, we must first define its end goals: the end results against which performance can be measured. It is generally accepted that a PFM system should achieve three objectives, to which we add a fourth here, namely promoting accountability and transparency, which are increasingly seen as objectives in their own right due to their close relationship. relation to the notion of inclusive institutions:
- Maintaining overall fiscal discipline is the first objective of a PFM system: it must ensure that the aggregate level of tax collection and public spending is consistent with budget deficit targets and does not create unsustainable public debt.
- Second, a PFM system must ensure that public funds are allocated to agreed strategic priorities, i. h that allocation efficiency is achieved.
- Third, the PFM system must ensure that operational efficiency is achieved in terms of maximum profitability in service delivery.
- Finally, the PFM system must follow due process and be seen as such, be transparent, contain publicly available information, and employ democratic oversight mechanisms to ensure accountability.
How do we know if a PFM system is working correctly or not?
Ideally, it would be possible to assess the PFM system simply by measuring performance against these four objectives. To some extent this is possible. The achievement of budget discipline is easily measured internationally and the Open Budget Index (OBI) provides a reasonable indicator of transparency. However, measuring allocation and operational efficiency requires special studies. Some OECD countries and more advanced middle-income countries (such as South Africa) do this regularly through program evaluations or cost-effectiveness reviews. Some Public Expenditure Reviews (PER) also address these issues, but in general these studies are not common in developing countries and their structure rarely allows for easy international comparison.
In practice, the evaluation of PFM systems focuses on a level below the final result, that is, it examines the institutions, rules and procedures that are most likely to ensure that the main objectives of the PFM system are achieved. . This approach was developed in the 1930s and revived by Allen Schick at the Maryland School of Public Policy (Lecture 1). This approach forms the conceptual basis for the Public Expenditure and Financial Accountability Assessment (PEFA) Framework developed by the IMF and the World Bank in collaboration with the EU, DFID and other bilateral donors. It offers a set of 31 high-level indicators to measure the performance of a PFM system. Since 2005, nearly 300 PEFA assessments have been carried out by national and subnational PFM schemes in more than 100 countries. Despite the inevitable shortcomings of such a standardized measurement system, the PEFA framework has gained wide acceptance and, when properly interpreted, provides good guidance on the state of PFM systems. An updated set ofIndicators PEFAIt will be released in 2015.
What is known about the best way to strengthen PFM systems?
Since the late 1990s, DFID and other donors have paid unprecedented attention to reforming PFM systems in developing and transition countries. However, the results were mixed. With few exceptions, reform progress has been slow and the benefits elusive. However, some countries have been more successful than others in implementing PFM reforms. What explains this difference in performance? And how does this affect the design of reforms and the provision of external support?
Recent research and evaluations suggest that three critical ingredients are required for successful PFM reform:
- guide– strong political and technical commitment, clear reform communication and coordination, and a growing cadre of reform leaders managing fears, expectations, and disagreements
- Political space to develop appropriate reforms– A deep understanding of the context, focusing on the functionality of the system rather than just the form, and teams and organizations experimenting and taking risks, questioning both the problem and the proposed solutions.
- Adaptive, iterative and inclusive processes– where monitoring, learning and adaptation are crucial.
While these lessons may seem obvious in retrospect, the evidence suggests that many past donor interventions in support of PFM reform have ignored them, trying to push reforms from the outside and impose context-inappropriate “design solutions”. Many governments, unwilling or unable to engage in genuine reform processes, have often joined in on this farce, pretending to welcome reform when in reality they embrace form rather than function. Current research on PFM issues is focused on a better understanding of approaches and techniques that can help prevent it. The selected readings are intended as an introduction to this literature. Some of the reading is also relevant to understanding how to successfully support civil service reform, a closely related issue as weak public governance systems often breed weak PFM systems.
key readings
Reading 1:Schick, A. (1998).A Contemporary Approach to Public Expenditure Management, Chapter 1, pp. 1-27, World Bank Institute, Washington DC.
Schick outlines the three objectives of a PFM system and explains the characteristics of the institutional arrangements that are most likely to ensure the achievement of these objectives. He is simply written and provides an excellent introduction to the institutional approach to PFM, which is incorporated into much of the literature that follows. He specifically encourages readers to read Tables 1.2, 1.3, and 1.4, which summarize institutional arrangements for enforcing general discipline, improving allocation efficiency, and improving operational efficiency.
Reading 2:Ramkumar, V. y Shapiro, I. (2010).A Guide to Transparency in Budget Reporting, Internationale Budgetpartnerschaft (IBP), Washington DC.
This guide (produced by IBP, the sponsors of the Open Budget Index) is intended for civil society groups, but can also be used by donor officials to support CSO activities or work directly to achieve internationally recognized budget transparency standards. It also provides excellent guidance on the key results of the fiscal cycle. The summary table in the appendix (pp. 44-47) describes the role of major budget documents and lists their "ideal" content and timing of publication.
Reading 3:Krause, P. (2013).Reforms, signs and adjustment of the GFP, Conference paper presented at the 9th Annual CABRI Conference for Senior Household Officials, Nairobi, August 2013 (see PDF, pp. 7-8).
Philipp Krause (ODI) criticizes the practice of transferring “international best practice” without considering the national context. He describes the widespread adoption of such models as a process of imitation rather than innovation and, at worst, a mere process of ventriloquism. This is the case when only the form has been imitated, not the function, with the aim of giving a 'signal' of reform, when in reality it serves to hide the absence of real reform. The article stresses the importance of ending donor incentives that encourage such behavior.
Reading 4:Lawson, A. (2013).Successful PFM reforms: What is the right context and what are the right mechanisms?Conference paper presented at the 9th Annual CABRI Conference for Senior Household Officials, Nairobi, August 2013 (see PDF pages 8-9)
This conference paper presents a summary of a broader assessment of ten years of PFM reforms in Burkina Faso, Ghana and Malawi between 2000 and 2010. Based on analysis of nine case studies of PFM reforms in these countries, emphasizes the importance of political leadership. , strong coordination mechanisms, policy space, innovation and learning. The case histories help bring these cross-sectoral lessons to life by providing helpful insight into the details of the project and the management of the reform.
Reading 5:Andrews, M., Pritchett, L. y Woolcock, M. (2012).How to escape skill traps through problem-based iterative adaptation, Center for Global Development (CGD) Working Paper 299, Washington DC.
Matt Andrews and colleagues show how the practice of "mimicry" (also described by Krause) serves to perpetuate "capacity traps" in which government capacity stagnates or even declines, even as governments remain and continue. involved in the rhetoric of development. resources. They recommend a different approach to support PFM and other reforms, called problem-based iterative adaptation (PDIA), which emphasizes solving locally defined problems through experiential approaches that encourage learning and adaptation.
Reading 6:Petersen, S.B. (2006).Automating Public Financial Management in Developing Countries, John F. Kennedy School of Government Docente Research Working Paper Series RWP 06-043, Universidad de Harvard.
Many PFM reforms involve the introduction of Integrated Financial Management Information Systems (IFMIS), often with a significant financial and administrative burden. Experience shows that these systems often fail or malfunction. This document provides a framework and case study from Ethiopia that illustrates an approach that has worked and effectively supports the PDIA reform approach, despite being written before the invention of PDIA terminology.
Reading 7:Simson, R., Sharma, N. and Aziz, I. (2011).A guide to the public financial management literature for practitioners in developing countries, Institute for Overseas Development, London.
This literature review provides a comprehensive list and introduction to key texts that cover the entire PFM cycle and address technical issues such as sequencing and reform design. It is an excellent resource when donor staff and colleagues need guidance on how to address specific PFM issues, such as procurement, cash management, medium-term spending structures, program budgets, and more.
Questions to orient yourself while reading.
- PFM is often seen as a 'technical' problem, when it is much more fundamentally a political and institutional problem. What leads to this misunderstanding? And what can be done to promote a better understanding of the institutional nature of PFM? (Readings 1 and 2.)
- Andrews, Pritchett, and Woolcock present "isomorphic imitation"—copying other countries' models of reform—as generally wrong. Is that necessarily the case? Do you, like Krause, believe that pantomime can be used positively? If so, how? (Readings 3, 5 and 6.)
- It is well known that leadership is required for PFM reform to be successful. The question is what kind of leadership? Reforms always require political leadership, as the experience of Burkina Faso, Ghana and Malawi shows. Or can leadership take more diverse forms, as some authors suggest? (Readings 4 and 5.)
- PFM reforms need to address problems perceived by actual users of the system on the ground. Ideally, political leaders would feel the urgency to address these issues; But what can or should be done if political leaders do not see a weak PFM system as a problem? Is there a way to go? (Readings 4, 5 and 6.)
- PFM reforms should represent locally developed solutions to locally perceived problems; therefore, they must be based on a diagnostic process. However, sometimes the solutions are not clear cut and some experimentation may be required; therefore, it is also necessary to learn and adapt. How can reformers avoid costly and time-consuming diagnostic procedures while avoiding many failed experiments? What is the right balance between diagnosis and adaptation? What criteria might be appropriate to define this balance? (Readings 4, 5 and possibly 7.)
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