Public Financial Management International trends

Perspectives…PFM and good governance The budget and the public financial management provides a good entry point for enhancing these principles in a polity.<br>

Perspectives…PFM and Development<br>

Perspectives…Objectives Managing Public Expenditure, introduction, Allen & Tomasi, OECD 2001<br>

Perspectives…The public financial management cycle 7 Project monitoring 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<br>

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?<br>

9 International…Trends Source: Manning and Shepherd, Public Management Reform: should Latin America learn from the OECD?<br>

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<br>

11 International…Trends Source: Presentation by Dorotinsky, Sector Manager, ECA PREM, Practice Co-Leader, PSP GET,July 2010<br>

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<br>

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<br>

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<br>

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<br>

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<br>

PFM in ArmeniaGeneral 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...<br>

PFM in Armenia2008 PEFA Self Assessment<br>

PFM in Armenia2010 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<br>

PFM in Armenia2010 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<br>

PFM in ArmeniaGovernment Reform Vision2010-2020 “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<br>

PFM in ArmeniaGovernment Reform Visions2010-2020 “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<br>

PFM in Armenia Stages towards the vision 23<br>

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)<br>

PFM in Armenia Priority stage 1 reform activities Suggested activities in order of priority:

Integration of information and business processes across the budget cycle
Strengthening internal control and accounting
Gradually advance Program Based Budgeting
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<br>

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<br>

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<br>

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<br>

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<br>

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<br>

http://www.worldbank.org.am/<br>