Fiduciary Risk Assessment Public Financial Management Performance Measurement

Fiduciary Risk Assessment Public Financial Management Performance Measurement Framework PEFA Public Financial Management Performance Measurement Framework and its Precursors ICGFM May 08 2006 David Joseph Ormandy MA CGA CIM FCSI Advisor to the Financial Secretary Government of Montserrat

Why Perform FRA/PEFA/PEM ? l l l Link governance and development Build capacity to govern to reduce poverty Provide environment to Encourage development – Resolve conflict – Root out corruption –

Focus of FRA/PMF l The goal of the exercise are gradual improvements in financial governance Non-hectoring – Focus on constraining potential abuses of power – Making long term commitment to institutional reform –

What is new about these processes ? l These incentives reduce the focus on individual aid projects (“enclave” projects) to reduce poverty which were in many cases unsuccessful as aid is fungible. And to increase the emphasis on poverty reduction by promoting sound public administration and efficient delivery of public services

Role of PEFA in Good Governance - encourage macroeconomic stability Promote investment Account for public sector resources Promote honest and accountable government

Economic Stability/Investment l l Support markets and liberalization of markets Government involvement is between centralizing and disaggregating Promote state institutions to administer financial policy Regulate financial activities including private property rights

Account for public sector resources/budgetary outcomes l l l Encourage effective government spending by fiscal discipline including debt management Establish strategic prioritization of spending Assure efficiency and effectiveness to minimize corruption by transparency in procurement systems (value for money)

Promote honest and accountable government l l Failure here will compromise other objectives Minimize “grand” corruption” Independent audit of government financial systems and independent parliamentary oversight of spending (via “Public Accounts Committee) “Transparency in Accountability”

Components of PEM System l The Budget Process l Links between expenditure and public policy (such as links between recurrent spending and national development priorities) l The political legal and institutional context

The Budget Process l l l Policy Review Strategic Planning Budget Preparation Budget Execution Accounting and monitoring Reporting and audit

Links between expenditure and public policy • In developing countries, in the absence of a MTEF or Strategic Plan, recurrent spending may not be prioritized.

The political legal and institutional context l The institutional structure is the framework of rules, customs and incentives which influence how expenditures are made and how people behave. A good public sector will have well defined rules for authority for delegation. l All systems will operate on the basis of informal and formal rules which determine to what extent “official” policy is acted on or ignored.

When does DFID perform a FRA? l l Mandatory when providing Poverty Reduction Budget Support (PRBS either general or earmarked support) and where government systems are the primary channels for financial aid FRA should be undertaken every three years if there are no material changes in circumstances or deterioration in public financial management otherwise, annually.

Why does DFID perform a FRA? Audit discharge requirements to UK government 1 Accounting/Financial discharge-evidence that funds have been paid 2 Fiduciary Discharge evidence for effective use of the funds The FRA is undertaken because of the limited reliance which may be available from the financial statements and SAI reports l

What documentation may be examined in the FRA l l l l ISO/Audit reports Public Accounts Committee reports National Public Accounts Service Delivery Surveys Budget Execution Reports Public Expenditure Tracking Surveys Poverty reduction Strategy Progress Reports Additional examination for anti-corruption, institutional context and procurement

PEM Diagnostic tools l Formerly – – – PER WB Public Expenditure Review CFAA WB Country Financial Accountability Assessment CPAR WB Country Procurement Assessment ROSC IMF Report on Fiscal Transparency HIPC AAP WB/IMF public expenditure tracking in HIPC EC audits

From 2005 “PEFA” PFM Performance Management Framework l l l The PEFA PFM Performance Measurement Framework and Report provides a common pool of information for measurement and monitoring of PFM progress and common platform for dialogue June 2005 further revision pending www. pefa. org

PEFA Goals l l l Reduces the transaction costs to countries. Enhances donor harmonization. Allows monitoring of progress of country PFM performance over time. Better addresses developmental and fiduciary concerns. Leads to improved impact of reforms. Encourages country ownership.

Why is PEFA a “strengthened approach” to PEM/PFM l l l Country led “non-hectoring”/non-admonitory International donor harmonization Result focused on improvements Based on dialogue Achieves objectives of

Account for public sector resources/budgetary outcomes l l l Encourage effective government spending by fiscal discipline including debt management Establish strategic prioritization of spending Assure efficiency and effectiveness to minimize corruption by transparency in procurement systems (value for money)

6 Critical Dimensions for an open and orderly PFM system which are measured by PEFA l l l l Credibility of the budget Comprehensiveness and Transparency Policy based budgeting Predictability and control in budget process Accounting recording and reporting External scrutiny an audit Concern with Country specific issues ( e. g. “persistent volcanism”)

These 6 dimensions are measured by 28 indicators of 3 types l l PFM system outturns expenditures and revenues actual compared with planned Cross cutting features of the PFM system comprehensiveness of the PFM system across the budget cycle Budget cycle performance of key systems processes and institutions within budget practices + donor practices which impinge on PFM performance

PFM Performance Report 5 Sections approx 35 pages 1 Summary assessment 3 -4 pages Contains assessment of PFM along 6 dimensions, assessment of weakness in PFM and prospects for reform planning 2 Introduction to preparation of report 1 page 3 Country related Information 4 -5 pages 4 Body 60 indicators in total + country specific issues 18 -20 pages 5 Section on ongoing government reform activities No recommendations for reform or action plans are included in the Performance Report

PFM High Level Performance indicator Set A. PFM Out-Turns Credibility of Budget PI-1 Aggregate expenditure outturn compared to original approved budget PI-2 Composition of expenditure outturn compared to original budget PI-3 Aggregate revenue out-turn compared to original approved budget PI-4 Stock and monitoring of expenditure payment arrears

PFM High Level Performance indicator Set B. Key Cross Cutting Issues (Comprehensiveness and Transparency) PI-5 Classification of Budget PI-6 Comprehensiveness of budget documentation PI-7 Extent of unreported government operations PI-8 Transparency of inter-government fiscal relations PI-9 Oversight of fiscal risk from other public sector entities PI-10 Public access to key fiscal information

PFM High Level Performance indicator Set C. Budget Cycle C(i) Policy Based Budgeting PI-11 Orderliness and participation in the annual budget process PI-12 Multi-year perspective in fiscal planning expenditure and other public sectors

PFM High Level Performance indicator Set C. Budget Cycle C(ii) Predictability and Control in Budget Execution PI-13 PI-14 PI-15 PI-16 Transparency of Taxpayer obligations and liabilities Effectiveness of taxpayer registration and assessment Effectiveness in collection of tax payments Predictability in availability of funds for commitment of expenditures. Recording and management of cash balances debt and guarantees. Effectiveness of payroll controls Competition value for money and controls in procurement Effectiveness of internal controls for non-salary expense Effectiveness in Internal Audit PI-17 PI-18 PI-19 PI-20 PI-21

PFM High Level Performance indicator Set C. Budget Cycle C(iii) Accounting Recording and Reporting PI-22 PI-23 Timeliness and regularity in account reconciliation Availability of information on resources received by service delivery units Quality and timeliness of in-year budget reports Quality and timeliness of annual financial statement PI-24 PI-25

PFM High Level Performance indicator Set C. Budget Cycle C(iv) External Scrutiny and Audit PI-26 PI-27 PI-28 Scope nature and follow up of external audit Legislative scrutiny of the annual budget law Legislative scrutiny of the external audit reports

PFM High Level Performance indicator Set D. Donor Practices D-1 D-2 D-3 Predictability of Direct Budget Support Financial information provided by donors for budgeting and reporting Proportion of aid that is managed by use of national procedures.

Scoring-PFM High indicators l l l Each of the 28+3 indicators has one to four individual “dimensions” (sub-indicators) which are graded on the basis of specific benchmark grades A to D. Where there is more than one dimension the individual grades are averaged to determine an overall core for that indicator Scoring is described in a narrative and tabulated

PFM Performance Report Indicators +Country Specific Issues + Description of Reform Activities = Basis for Report Summary

Performance Measurement Framework l l Wrap up Because the sponsors of the Performance Measurement Framework, who are the PEFA secretariat, include many development agencies if your country is dependant of external aid you may well be faced with a PFM evaluation in the future. PS: Don’t get “hectored” !

PEFA Partners l l l l l The PEFA Partners World Bank (WB) European Commission (EC) U. K. Department for International Development (DFID) Swiss State Secretariat for Economic Affairs (SECO) Norwegian Ministry of Foreign Affairs French Ministry of Foreign Affairs International Monetary Fund (IMF) Strategic Partnership with Africa (SPA)