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The Centrality of Public Finance Policy & Management in Development Presented to: Presented by: The Centrality of Public Finance Policy & Management in Development Presented to: Presented by: Public Finance Analysis & Management Course May 1, 2006 Washington, DC Sanjay Pradhan Director Public Sector Governance Board The World Bank Sanjay Pradhan PREM Public Sector Governance Page 1

Governance and Development: Lessons of Global Experience • An effective state is crucial for Governance and Development: Lessons of Global Experience • An effective state is crucial for growth and poverty reduction: – Building a sound investment climate for growth (macroeconomic stability, rule of law, regulatory system, physical & financial infrastructure) – Empowering people to make growth inclusive through effective delivery of basic services (education, health, social protection) • State effectiveness requires a two-pronged strategy: • Match role of the state to its institutional and fiscal capability – including level and composition of public finances • Strengthen state capability – both capacity and accountability in state functions, including public finance management The World Bank Sanjay Pradhan PREM Public Sector Governance Page 2

The Centrality of Public Finance System for Good Governance and Development A well functioning The Centrality of Public Finance System for Good Governance and Development A well functioning PF system is crucial for: v Enabling the state to finance & deliver key public services and infrastructure to achieve MDGs v Achieving three levels of fiscal outcomes: v aggregate fiscal discipline v allocation of resources according to strategic priorities v efficient and effective use of public resources v Ensuring transparency and accountability of a government to its citizens v Providing assurance to donors that their funds are being used for the purposes intended The World Bank Sanjay Pradhan PREM Public Sector Governance Page 3

Recent global developments have put PF systems in the spotlight The new international aid Recent global developments have put PF systems in the spotlight The new international aid architecture emphasizes the principle of mutual accountability Scaling up of donor assistance requires sound PF systems and reduced corruption in partner countries The World Bank Important benefits from using country's own systems -- but need to strengthen capacity and accountability of PF Increasing recognition that "ringfencing" projects will not work Sanjay Pradhan PREM Public Sector Governance Page 4

Two Aspects of Public Finance Systems v Focus on Public Finance System includes: v Two Aspects of Public Finance Systems v Focus on Public Finance System includes: v Efficiency, equity & sustainability of public expenditures and how they are financed (“numbers”) v Efficiency & effectiveness in how public finances are raised, allocated and utilized (“institutions”) v Two Aspects of PF Systems: v Public Finance Policy: Aggregate fiscal stance, level and composition of public expenditures & revenues v Public Finance Management: Institutional mechanisms that ensure fiscal discipline, allocative and operational efficiency The World Bank Sanjay Pradhan PREM Public Sector Governance Page 5

Key Issues in Public Expenditure Analysis v Public Expenditure Analysis: v Rationale for Government Key Issues in Public Expenditure Analysis v Public Expenditure Analysis: v Rationale for Government Intervention: Market Failure, Redistribution v Mechanisms for Intervention: Regulation, Subsidy, Public Provision v Cost-benefit & Cost-effectiveness of Expenditure Allocations v Some Issues: v Data & Methodological Limitations of cost-benefit analysis: Analyzing broad allocations of spending v Benefit valuation & Intersectoral Allocations v Growth impact of expenditure programs v Generating Fiscal Space for infrastructure & social programs The World Bank Sanjay Pradhan PREM Public Sector Governance Page 6

Public Finance Analysis, ‘Fiscal Space’ & Governance: Diamond • Fiscal policy – level & Public Finance Analysis, ‘Fiscal Space’ & Governance: Diamond • Fiscal policy – level & composition of public finance – is important not only for stability but also crucially for growth • Governments have 4 basic alternatives for additional fiscal space – revenue, grant aid, borrowing & efficiency savings – as shown in the fiscal diamond • Improved governance is crucial for all dimensions The World Bank “Fiscal Space” Increase of Grant Aid in % GDP 5 4 3 Improved Expenditure Efficiency in % GDP 2 1 0 Improved Revenue Effort in % GDP New Borrowing in % GDP Sanjay Pradhan PREM Public Sector Governance Page 7

Challenges in Public Finance Management v PFM systems in many countries are still very Challenges in Public Finance Management v PFM systems in many countries are still very weak v Governance and corruption indicators reveal major challenges v Fragmentation of donor approaches and overlapping diagnostics The World Bank Sanjay Pradhan PREM Public Sector Governance Page 8

Robust PF System can mitigate key risks from corruption Development Effectiveness Risk Sound PF Robust PF System can mitigate key risks from corruption Development Effectiveness Risk Sound PF System can ensure that budget systems, including donor supported projects, achieve development goals Reputational Risk Fiduciary Risk Sound PF systems can ensure that donor resources are used for the purposes intended The World Bank Sound PF systems can ensure that large amounts of aid in countries do not tarnish donors’ reputation Sanjay Pradhan PREM Public Sector Governance Page 9

Majority of PEM Systems Still Require Substantial Upgrading 19 Relative Need for Upgrading HIPC Majority of PEM Systems Still Require Substantial Upgrading 19 Relative Need for Upgrading HIPC PEM Systems (Number in Paranthesis indicate total of benchmarks met) 9 0 2 TZA (11) MLI (12) Little Upgrading Required Source: Fund-Bank AAP database The World Bank BEN (8) BFA (8) GUY (8) HND (8) MLI (8) RWA (8) TZA (8) TCD (8) UGA (8) 5 BEN (8) RWA (8) UGA (8) BFA (9) GUY (10) Some Upgrading Required 2001 15 BOL (5) CMR (4) ETH (6) GMB (5) GHA (1) GIN (5) MDG (7) MWI (7) MRT (7) MOZ (5) NIC (5) NER (3) STP (4) SEN (4) ZMB (3) GNB (0) GMB (3) ZMB (3) COD (3) BOL (4) MDG (4) MOZ (4) STP (4) GIN (5) MWI (5) NER (5) NIC (6) CMR (7) ETH (7) GHA (7) HND (7) SEN (7) SLE (7) TCD (7) Substantial Upgrading Required 2004 Sanjay Pradhan PREM Public Sector Governance Page 10

Main elements of a ‘strengthened approach’ to PFM Strengthened Approach: v A country-led agenda Main elements of a ‘strengthened approach’ to PFM Strengthened Approach: v A country-led agenda – including a PFM reform strategy and action plan v A donor coordinated program of support – coordinated, coherent, multi-year program of PFM work that supports and is aligned with the government’s PFM strategy v A results focus with objective performance measurement The World Bank Sanjay Pradhan PREM Public Sector Governance Page 11

Performance Measurement Framework The Performance Measurement Framework A standard set of high level indicators Performance Measurement Framework The Performance Measurement Framework A standard set of high level indicators • Widely accepted but limited in number • Broad measures of performance relative to key PFM system characteristics • Enabling credible monitoring of performance and progress over time PFM Performance Report • Integrative, narrative report based on indicators using observable, empirical evidence. • Updated periodically, depending on country circumstances and operational needs • Contributes to coordinated donor assessment • Feeds into government-donor policy dialogue Credible results measurement framework with standardized reporting should help shift focus to capacity building The World Bank Sanjay Pradhan PREM Public Sector Governance Page 12

Trends in PFM can be monitored Net Change in HIPC Tracking Indicators, 2001 -2004 Trends in PFM can be monitored Net Change in HIPC Tracking Indicators, 2001 -2004 8 7 7 6 6 6 5 4 3 2 2 1 1 0 Decline in 3 categories The World Bank Decline in 1 -2 categories No change Improvement in 1 -2 categories Improvement in 3 or more categories Sanjay Pradhan PREM Public Sector Governance Page 13

PFM operations perform satisfactorily regardless of governance starting point, but ACSR operations are successful PFM operations perform satisfactorily regardless of governance starting point, but ACSR operations are successful in stronger settings All projects No. of Projects project with s Satisfacto ry or better (%) PFM 39 85% CPIA (Q 16) from 3. 0 to < 3. 0 3. 5 No. of projec ts Projects with Satisfacto ry or better (%) No. of projec ts 15 87% 18 CPIA (Q 16) Greater or equal to 3. 5 Projects No. of with project Satisfacto s ry or better (%) 83% Projects with Satisfacto ry or better (%) 6 83% ACS 24 58% 11 36% 9 78% 3 100% R OED Evaluated PSGB-mapped projects with PFM (without ACSR) and ACSR (without PFM) primary themes, FY 00 -FY 05 The World Bank Sanjay Pradhan PREM Public Sector Governance Page 14

Improving PFM – A Platform Approach Cambodia – Sequence of Platforms Enables more accountability Improving PFM – A Platform Approach Cambodia – Sequence of Platforms Enables more accountability for performance management Enables focus on what is done with money Enables a basis for accountability Platform 1 Platform 2 Improved internal control and public access to key fiscal information to hold managers accountable A credible budget delivering a reliable and predictable resource to budget managers • Integration of budget (recurrent & capital budgets) § Strengthen macro and revenue § Forecasting § Streamline spending processes The World Bank Integration of accountability and review processes for both finance and performance management Platform 3 Improved linkage of priorities and service targets to budget planning and implementation Broad Activities § Full design of FMIS Broad Activities § Develop IT § Management Broad Activities Platform 4 § Re-design § Budgeting § Classification system § Initial design of FMIS for core business processes § Strengthen external audit and define internal audit function § Re-design budget cycle (e. g. MTEF) § Strategy § Pilot program based budgeting & budget analysis § Initial design of asset register § Further fiscal § Decentralization Source: See “Study of measures used to address weaknesses in Public Financial Management systems in the context of policy-based support, ” by Peter Brooke, at www. pefa. org Sanjay Pradhan PREM Public Sector Governance Page 15

Reforming PFM Systems: Strengthen Links with Broader Accountability Systems Citizens/Firms Political Institutions Check & Reforming PFM Systems: Strengthen Links with Broader Accountability Systems Citizens/Firms Political Institutions Check & Balance Institutions • Parliament • Judiciary • Oversight institutions Executive-Central Govt PFM Systems Oversight Groups in Society • Civil Society Watchdogs • Media • Business Associations Citizens/Firms • Political Parties & Leadership • Social & Econ Interest Groups Service Delivery & Regulatory Agencies Subnational Govt & Communities The World Bank Citizens/Firms Sanjay Pradhan PREM Public Sector Governance Page 16

Strengthening Demand for Public Financial Accountability Civil Society Oversight; Transparent, transparent, competitive eprocurement (Slovakia) Strengthening Demand for Public Financial Accountability Civil Society Oversight; Transparent, transparent, competitive eprocurement (Slovakia) (LAC) Strengthening Public Accounts Committees of Parliament Strengthening Supreme Audit Institutions (Hungary) (Kenya, Ghana, Zambia -AFR) Accountability, Transparency & Integrity Project (Tanzania) Participatory Budgeting, Puerto Alegra (Brazil) Procurement oversight by CSOs (Philippines) Strengthening Public Accounts Committees of Parliament (India) Public Expenditure Tracking & Information Campaigns (Ghana, Madagascar, Mozambique, Peru, Senegal, Tanzania, Zambia) Key Issue: Instrument to Support Demand-side Interventions The World Bank Sanjay Pradhan PREM Public Sector Governance Page 17

Philippines: Procurement Reform Mobilizing Support & Oversight by Civil Society Transparency and Accountability Network Philippines: Procurement Reform Mobilizing Support & Oversight by Civil Society Transparency and Accountability Network (20+ member groups) PAGBA & AGAP (w/in Gov’t) Drew other civil society groups into the advocacy efforts and coordinated the activities Local chambers of Commerce (Private sector) The World Bank Walang Ku-Corrupt Movement (Youth) CBCP (Church) Philippine Contractors Association (private sector – main stakeholder) Sanjay Pradhan PREM Public Sector Governance Page 18

The Media Campaign: The Communications Strategy Radio: The swath & the dagger Print Media: The Media Campaign: The Communications Strategy Radio: The swath & the dagger Print Media: Amplifying the problem The World Bank Reaching Out TV: Raising the ante Advertising: Creating a ‘brand name’ Sanjay Pradhan PREM Public Sector Governance Page 19

Media, Transparency, and Combating Corruption “BIR Officials Amass Unexplained Wealth” By Tess Bacalla, Philippine Media, Transparency, and Combating Corruption “BIR Officials Amass Unexplained Wealth” By Tess Bacalla, Philippine Center for Investigative Journalism Owner: Regional Director in the Bureau of Internal Revenue; forced to resign; currently facing corruption charges; other officials suspended, also facing charges CAR MODEL BENEFICIAL OWNER Nissan Patrol Edwin Abella BIR Reg'l Director, Quezon City Suzuki Grand Vitara Nissan Cefiro Ditto BMW Lucien E. Sayuno BIR Reg'l Director, Makati City Ditto BMW Honda Accord Mitsubishi L 200 The World Bank Ditto Danilo A. Duncano BIR Reg'l Director, Quezon City Corazon P. Pangcog Asst. Reg'l Director, REGISTERED OWNER Sulpicio S. Bulanon Jr. 1817 Jordan Plains Subd. , Quezon City (listed address of Abella in his SALs) Merrick Abella (son of Abella) 24 Xavierville, Loyola Heights, Q uezon City Elizabeth S. Buendia 152 Road 8, -asa, Quezon City Limtra Dev. Corp. Zone 4, Dasmariñas, Cavite Marie Rachel D. Mene c/o Metrocor and Holdings, G&F, Makati City Daniel Anthony P. Duncano 2618 JP Rizal, New Capital Estate, Quezon City Alberto P. Pangcog (husband) B 2 L 23 Lagro Subd. , Quezon City Sanjay Pradhan PREM Public Sector Governance Page 20

Strategic directions for PF work for future From fragmented, overlapping PFM diagnostics … … Strategic directions for PF work for future From fragmented, overlapping PFM diagnostics … … to integrated, harmonized, PFM assessments From ad hoc PE analysis … … to more systematic PF policy analysis From diagnosis & producing reports… … to capacity building & improving PF performance From technocratic, supplyside interventions … to strengthening demand-side pressures & accountability systems From silos of separate EP, FM, Procurement, PSG teams … to integrated country PF teams The World Bank Sanjay Pradhan PREM Public Sector Governance Page 21

Broadening of the PF Agenda v From PREM preoccupation in early years of PERs Broadening of the PF Agenda v From PREM preoccupation in early years of PERs to broad cross-network interest v PFAM course is offered in collaboration with HD, INF and AGR networks, as well as participation of IMF v PEFA Indicators developed in partnership between FM, Procurement and PREM within Bank, and with PEFA donor partners v Integrated Public Finance Thematic Group v Finally: Thanks to Course Organizers: v Anand Rajaram, Bill Dorotinsky, Tuan Minh Le as thematic leaders v Excellent supporting work by Juliet Teodosio, Zhicheng Li Swift, Nataliya Biletska The World Bank Sanjay Pradhan PREM Public Sector Governance Page 22

Discussion The World Bank Sanjay Pradhan PREM Public Sector Governance Page 23 Discussion The World Bank Sanjay Pradhan PREM Public Sector Governance Page 23

EXTRA SLIDES The World Bank Sanjay Pradhan PREM Public Sector Governance Page 24 EXTRA SLIDES The World Bank Sanjay Pradhan PREM Public Sector Governance Page 24

Anticorruption has many dimensions Bank operations focus only on some Institutional Checks & Balances Anticorruption has many dimensions Bank operations focus only on some Institutional Checks & Balances • Independent, effective judiciary • Legislative oversight (PACs, PECs) • Independent oversight institutions (SAI) • Global initiatives: UN, OECD Convention, antimoney laundering Civil Society & Media • • • Freedom of press Freedom of information Civil society watchdogs Public hearings of draft laws Report cards, client surveys Participatory country diagnostic surveys Primary focus of WB operations in governance The World Bank Effective Public Sector Management Political Accountability • Ethical leadership: asset declaration, conflict of interest rules • Meritocratic civil service with adequate pay • Transparency & accountability in budget mgnt • Transparent, competitive procurement • Anticorruption in sectors • Political competition, broad-based political parties • Transparency & regulation of party financing • Disclosure of parliamentary votes GOOD GOVERNANCE Private Sector Interface Local Participation & Community Empowerment • Decentralization with accountability • Community Driven Development (CDD) • Oversight by parent-teacher associations & user groups • Beneficiary participation in projects • Effective, streamlined regulation • Transparent publicprivate dialogue • Break-up of monopolies • Transparency in Extractive Industries • Corporate governance • Collective business associations Sanjay Pradhan PREM Public Sector Governance Page 25

Cutting-edge diagnostics help ‘unbundle’ corruption & identify entry points Control of corruption, 2004: World Cutting-edge diagnostics help ‘unbundle’ corruption & identify entry points Control of corruption, 2004: World map Purchasing of public positions Percent of public officials believed to have purchased their positions Colors are from Dark Red - the worst bottom 10 th percentile rank to Dark Green - the best above 90 th percentile. Source: Governance Matters IV: Governance Indicators for 1996– 2004, D. Kaufmann A. Kraay, and M. Mastruzzi (2005) Public expenditure tracking (Uganda) Public info campaign (1999) Source: Kaufmann, Pradhan, Ryterman (1998) Proportion of firms affected by capture of … 30 Parliamentary Votes Presidential Admin. Decrees 25 Civil Court Decrees 20 15 10 5 Source: Reinikka and Svensson (2004) The World Bank Hungary Estonia Russia Ukraine Sanjay Pradhan PREM Public Sector Governance Page 26

Robust PFM can mitigate key risks from corruption Development Effectiveness Risk That corruption in Robust PFM can mitigate key risks from corruption Development Effectiveness Risk That corruption in weak PFM systems will undermine the achievement of development goals in general and in donor supported projects Reputational Risk Fiduciary Risk That donor resources will not be used for the purposes intended The World Bank That large amounts of aid in countries with high corruption & weak PFM systems will tarnish donors’ reputation Sanjay Pradhan PREM Public Sector Governance Page 27

Improvements in Satisfaction: public Services in Bangalore 100 94 96 92 85 90 80 Improvements in Satisfaction: public Services in Bangalore 100 94 96 92 85 90 80 73 73 67 % satisfied 70 60 50 47 41 78 73 77 42 34 40 34 32 32 25 30 16 6 pl 5 10 14 9 4 ity 20 1 n/a 1999 The World Bank 2003 y ho rt sp o Tr an Pu bl ic au t bu ho au t rit se s y rit e lic La nd sp bl ic ho ph Pu 1994 Agencies Po ls ita es on y Te le at er su p ric ec t El W C ity co un ci l 0 Source: Public Affairs Committee, India Sanjay Pradhan PREM Public Sector Governance Page 28

Corruption is not just a developing country problem Percentage of firms that pay public Corruption is not just a developing country problem Percentage of firms that pay public procurement kickbacks by country of origin of foreign direct investment Source: “Are Foreign Investors and Multinationals Engaging in Corrupt Practices in Transition Economies? ” by Kaufmann, Hellman, Jones, in Transition, May-June 2000. Note: Survey Question was “How often nowadays do firms like yours need to make extra, unofficial payments to public officials to gain government contracts? ” Firms responding “sometimes” or “more frequently” were classified as paying kickbacks. These figures are subject to significant margins of error and thus should be regarded as approximate. The World Bank Sanjay Pradhan PREM Public Sector Governance Page 29

Transparency in Extractive Industries Publish What You Pay (PWYP) – (focus on home governments) Transparency in Extractive Industries Publish What You Pay (PWYP) – (focus on home governments) Initiation: Participants: The PWYP campaign was founded by Global Witness, CAFOD, Oxfam, Save the Children UK, Transparency International UK and the Open Society Institute. There are now several Publish What You Pay national NGO coalitions around the world, including in Azerbaijan, Chad, Congo Brazzaville, Democratic Republic of Congo, France, Kazakhstan, The Netherlands, Nigeria, the United States and the United Kingdom. Extractive Industries Transparency Initiative (EITI) (focus on host governments) Initiation: Participants: Countries: The World Bank The UK Prime Minister, Tony Blair announced the EITI initiative at the World Summit on Sustainable Development in Johannesburg, September 2002. In January 2005, the International EITI Secretariat in the UK Department for International Development (DFID) produced the first version of the EITI Source book. Governments, donors, companies, industry associations, international organizations, NGOs and investors Azerbaijan, Congo, Republic of, Ghana, Kyrgyz Republic, Nigeria, Sao Tome and Principe, Timor Leste, Trinidad & Tobago Sanjay Pradhan PREM Public Sector Governance Page 30

The World Bank Sanjay Pradhan PREM Public Sector Governance Page 31 The World Bank Sanjay Pradhan PREM Public Sector Governance Page 31

Ethics Infrastructure Political Leadership Legislative Framework Codes of Conduct Coordinating Body The World Bank Ethics Infrastructure Political Leadership Legislative Framework Codes of Conduct Coordinating Body The World Bank Control Guidance Management Accountability & Control Professional Socialization Public Service Conditions Sanjay Pradhan PREM Public Sector Governance Page 32

Progress in Meeting HIPC Benchmarks (Percentage of benchmarks met by indicator) Source: Fund-Bank AAP Progress in Meeting HIPC Benchmarks (Percentage of benchmarks met by indicator) Source: Fund-Bank AAP database 2005 The World Bank Sanjay Pradhan PREM Public Sector Governance Page 33

Performance Measurement Framework The PFM performance areas monitored in the framework All represent different Performance Measurement Framework The PFM performance areas monitored in the framework All represent different aspects of risk to client and Bank funds, projects and objectives Accountability and Transparency : Are effective external financial accountability and transparency arrangements in place? Budget Realism: Is the budget realistic, and implemented as intended in a predictable manner? Comprehensive, Policy-based, budget: Does the budget capture all relevant fiscal transactions, and is the process, giving regard to government policy? Comprehensive Fiscal oversight: Are the aggregate fiscal position and risks are monitored and managed? The World Bank Six PFM System Aspects Control : Is effective control and stewardship exercised in the use of public funds? Information: Is adequate fiscal, revenue and expenditure information produced and disseminated to meet decision-making and management purposes? Sanjay Pradhan PREM Public Sector Governance Page 34