Sustainable Public Finance through Good Financial...

Third Public Finance Conference

commissioned by:

State and DemocracyPublic Finance and Administrative Reform

Sustainable Public Finance through Good Financial Governance

Sustainable Public Finance through Good Financial Governance Third Public Finance Conference

State and DemocracyPublic Finance and Administrative Reform

Conference on Public Finance and Administrative Reform, 7-8 September 2006 in Eschborn

Topics Page

Sustainable public finance through good financial governance .......................................................................005

The national budget as a lever in sustainable poverty reduction ...................................................................014

Configuring internal financial relationships to strengthen the role of the local authorities .......... 018

The role of the Supreme Audit Institutions – SAIs: external control function ..........................................020

Increasing revenue: functioning tax systems in developing countries .........................................................024

Participative and transparent budgeting – Experiences from Latin America ............................................030

Extractive Industries Transparency Initiative – EITI ................................................................................................032

Challenges for technical cooperation under PBA .......................................................................................................034

Lessons learnt: further strengthening of political analysis and process backstopping –

PBA just one instrument among many ..............................................................................................................................036

Contents


The increased attention to issues of pub-

lic finance in development cooperation

(DC) is apparent in a range of internatio-

nal conventions, including the Declara-

tions of Rome and Paris, the HIPC

Initiative and the Monterrey Consensus.

Public finance plays a central role in the

Paris Declaration on Aid Effectiveness

(2005) in particular. Among other fac-

tors, this involves expanding the fiscal

space for developing countries by increa-

sed public revenue, creating a transparent

budget system and establishing ap pro-

priate implementation structures as a

condition for more harmonised provision

of donor funds.

For more on the Paris Agenda 2005, see:

www.aidharmonization.org

Sustainable public fi nance through good fi nancial governance

The third GTZ Public Finance Confer-

ence was held on 7- 8 September 2006.

The focus of the forum was on how

public finance systems can be sustaina-

bly configured for the purposes of good

governance, and what instruments (e.g.

budget support, programme-based approa-

ches) are suitable for successful develop-

ment cooperation.

Some 100 experts from German tax of-

fices, Supreme Audit Institutions (SAI)

and the financial sector together with

representatives of bilateral and multi-

lateral development cooperation organ-

isations came to Eschborn to discuss

new approa ches to reforms in the pub-

lic finance sector.

005

The position of the German Federal

Ministry for Economic Cooperation

and Development (BMZ) with regard

to the programme orientation called for

in the Paris Declaration is clear. The in-

struments of programme-based approa-

ches (PBA) and budget support will be

steadily expanded. This is not a question

of replacing existing instruments, but

rather of expanding the existing “tool-

box”. Currently, German programme

aid totalling some EUR 100 million is

in preparation or in the process of im-

plementation. The concept of account-

ability should be embedded in the poli-

tical dialogue with the partner countries,

including both accountability to parlia-

ment and the civil population (internal)

and accountability to donors (external).

In this way, PBA sees itself as a contri-

bution towards promoting democracy

as well.

The plenary discussion concentrated on

the following points: The review for par-

ti cipation in PBA focuses on an evalua-

tion of the public finances of the partner

countries. Implementation of the agreed

reforms is seen as an indicator of demo-

cracy-oriented responsible governance

by the partner countries. This includes

reporting by the partner countries on

proper use of the transfers under budg-

et support.

008

German development policy discussion

The most suitable instrument for donor

contributions (aid modality) should be

selected, and depending on the specific

conditions and goals this might be gen-

eral budget support, sectoral budget su-

pport, or even cooperation through pro-

grammes and projects. The modalities

should supplement each other usefully.

This in turn requires intensive donor

dialogue on public finance reforms. In-

dicators and conditions for disbursement

must be formulated in such a way that

the political goals of the priorities in the

budget remain evident.

German DC should generally use its ex-

perience to make clear the value of budg-

et support in terms of improved state

ser vices; German Financial Cooperation

(FC), for example has clear priorities in

procurement, monitoring construction

work and performance standards.

The role of Technical Cooperation (TC)

was explained using the concept of Good

Financial Governance (GFG). Reform

processes leading to good finan cial gov-

ernance are extremely sensitive political-

ly, extend to practically all the institu-

tions working with public funds, and

also require open and critical collabora-

tion between the executive, parliament,

regulatory and audit agencies, civil soci-

ety and the donor community.

On the revenue side, good financial

governance means that public funds

(external and/or internal) are predicta-

009


bly available and regularly sufficient to

match planned expenditures, and that

funds are collected with regard to the

taxpayers' ability to pay.

On the expenditure side, good financial

governance requires rule-driven, effective

and efficient planning and execution of

public expenditures in accordance with

political priorities which reflect the po-

pu lation’s preferences and needs. Produc-

tion of poverty-oriented budgets is a

starting point for effective poverty re-

duction.

The conference made it clear that budget

support has implications for administra-

tive structures. The position of the fi-

nance ministries, which negotiate with

donors and then allocate funds to the

sectoral ministries, is enhanced compared

with the situation under classic project

aid, where there is a direct dialogue be-

tween donors and the relevant ministries.

The sectoral ministries need advice on

formulating sectoral priorities that will

stand up in negotiations with a dominant

finance ministry. This creates a new field

of action for German development co-

operation, which is taking on addition-

al importance in the framework of sec-

toral basket support.

010


011


Although there are no internationally

agreed methods and instruments as yet

for analysing the effectiveness of PBA

against poverty or distinguishing it from

other forms of intervention, methodo-

logical progress has been made, as the

World Bank showed on the panel.

The PEFA (Public Expenditure and Fi-

nancial Accountability) Secretariat at the

World Bank aims to assist harmonisation

between donors involved in budget aid

by developing uniform instruments. Cur-

rent PEFA indicators measure the capa-

bility of administrative systems, but not

their development potential. Through

the “Performance Measurement Frame-

work” (see GTZ Public Finance Newslet-

ter, No. 5, August 06) the PEFA working

group is seeking to measure and compare

progress in financial management by

partner countries over extended periods.

Conference participants suggested con-

sidering sectoral approaches in expendi-

ture tracking systems in future too and

inter-country comparisons which part-

ner countries could benefit from. There

was also discussion of how realistic it is

to extend the selected approach to as-

pects relevant to poverty, e.g. in terms

of budget items.

The OECD presented another approach.

For the purpose of South-South coop-

eration, the OECD is promoting net-

works of budget directors in developing

countries dealing with public financial

management. The value of peer review

mechanisms by the partner countries

themselves was emphasised particularly

in this connection (see box next page).Ca

se S

tudy

012International experience


Directors of budget departments are the de-cisive interface between the political process of budget drafting and administrative budget implementation. Their coordination of finance ministries, parliamentary budget committees and those responsible in the relevant minis-tries ensures that the political priorities are appropriately matched with resources.

This is the focus of the OECD’s “Senior Budget Officials” (SBO) initiative. Its goal is to estab-lish self-supporting networks for pooling good practices between high-level decision makers in the budget system. Joint preparation of budget analyses for a peer review process, and financial and technical assistance with con-ferences are intended to strengthen the par-tner countries’ sense of responsibility for the impending budget reforms.

Even without OECD support, SBO networks are evolving for Africa, Asia, Latin America and central and Eastern Europe. One example of such a regional initiative is the Collaborative African Budget Reform Initiative (CABRI), with members from South Africa, Mozambique and Uganda.

The initiative is very well accepted, as expe-rience is exchanged at the regional level and takes into account the search for solutions to local problems, discussion is adapted to par-ti ci pants' needs and can be influenced by them, and there is no attempt to offer a set solution. Initial experience suggests that a relatively simple budget system and restric-

tion to a small number of goals are more easily accepted than optimal but complicated answers. For example, medium-term financial planning is not necessarily superior to other planning methods where there is uncertainty about the availability of funds. In addition, transparency and information are the keys to effective reforms, rather than formulating de-clarations of intent. A certain basic political commitment to reform and the imposition of sanc tions for non-compliance with agreements are essential for progress.

Practitioners’ experience has also shown that budget reforms require years of effort, and can not be completed through short-lived cam-paigns. The long-term focus on results also leads to a more pragmatic and different view of controversial issues (e.g. public-private par-tner ships) than in the past (“value for money” and “pay for performance” as criteria for decisions on outsourcing specific administra-tive functions).

South Africa is regarded as a positive exam-ple of implementing the recommendations of the regional initiative CABRI.

For other country studies, see: www.africa-sbo.org.

Peer processes in the South: budget experts learn from each other

013

014


more flexible and “budget friendly”,

and should incorporate the political

priorities of the partner country, restor-

ing the balance between internal and

external accountability.

If at all, a politically desired use of

funds can only be sustainably influenced

if DC addresses the government struc-

tures – in this case, those involved in

implementing the budget – and tries

to streng then these. For sustainable re-

forms in public finance, it is more im-

portant to support political processes

than to plan individual instruments or

procedu res in detail.

Studies were carried out in 2001 and

2004 on the use of funds from debt

forgiveness, with the beneficiary coun-

tries divided into three categories.

There are only seven countries in the

more recent study whose budget sys-

tems display little or relatively minor

need for reform; by contrast, 19 coun-

tries still need substantial reform. De-

spite considerable donor efforts in pub-

lic financial management, the number

of problem candidates in this category

has actually risen since 2001.

In the discussion in the plenary session,

World Bank representatives self-critical-

The national budget as a lever in sustainable poverty reduction

The integration of PRSPs (Poverty Re-

duction Strategy Papers) and national

budget processes were discussed on the

basis of a joint study by GTZ and the

World Bank. Drawing on the 2005 PRS

Review and the accompanying German

report, the study noted that in the course

of the PRS there had been a shift in the

balance of internal and external account-

ability towards external actors. The result

is that the fragmentation of the public

financial system (e.g. divergences between

planning and bud geting or between PRSP

and other plans) continues to impact the

credibility of the PSRP approach. Inter-

nal accountability can only be strength-

ened through improved links between

PRS and national budget systems.

The core problem is not a misplaced

concept of public budget systems – that

PRS and national budgets currently have

virtually no relationship with each other.

Instead, it is a question of the poverty

reduction strategies not being formula-

ted in such a way that they can easily

be turned into coherent budget plans.

In addition, budget planning has little

binding force for budget implementa-

tion. The result is that PRSPs had to be

modified and implementation had to be

supported by appropriate institution

building and capacity development in

the budget process. PRSs should be made

015


ly agreed that this can also be connect-

ed with the orientation of donor contri-

butions in the course of PBA-accompa-

nying measures. Much of the “support”

for PFM reforms consisted of studies –

on average, 4.6 for each recipient coun-

try – which tied up substantial capacity

on the side of partners. Despite the com -

mitment to donor coordination, there

was substantial duplication of work and

overlapping. Implementation of the re-

commendations of such studies was of-

ten not followed up.

Global budget goals (e.g. expenditure of

a given amount) are easy to formulate.

However, in GTZ’s experience, this does

not guarantee any useful poverty-related

implementation in the partner countries.

This is partly due to the lack of capaci-

ty among partners, but is ultimately the

result of the genuinely political nature

of the use of funds. Too many indicators

also overburden partners (representatives

of a GTZ project in Madagascar talked

about over 4,000 budget indicators) and

involve the risk that the political vision

will be buried in numbers.

Conditionality in the past has only re-

sulted in sustainable reforms where the

partner governments themselves had an

interest in the agreed reforms. This is not

always the case, particularly with budget

reforms whose goal is transparent and ef-

ficient use of public resources. Conditions

which are solely concerned with reducing

the fiduciary risk for donors are not nec-

essarily a priority for partners.

At the conference, the World Bank sup-

ported a joint framework of measures

and monitoring for the success of reforms

in public financial management. The aim

is to create a performance measurement

framework from performance indicators

which can be generally agreed, are em-

pirically verifiable, and can be adapted

to changing conditions if necessary:

Greater attention should be paid to

I. the partners’ priorities, II. providing

technical aid for the implementation,

and III. coordinating disbursement con -

ditions between donors.

To be accepted, indicators should reflect

political goals. Donor efforts should be

directed at increasing the acceptance of

regular evaluations.


Although reform processes in the partner

countries take place in their different con-

texts, parallels and common regional

features in budget reforms can be seen.

This was done e.g. within the framework

of the Collaborative African Budget Re-

form Initiative – CABRI (see box on page

13), a self-supporting network for ex-

changing good practices between high-

level budget decision makers.

Based on the observation that successful

budget reforms must be embedded in the

partner government’s administrative pro-

cesses, the following factors were rated

as decisive for the success of budget re-

forms:

➝ Besides sustainable commitment by

partners, realistic incentive mechanis-

ms in particular were identified.

Apart from achieving macroeconom-

ic stability, the most important moti-

vations for budget reforms cited were

donor interests and more recent mo-

des of aid delivery. In this context it

has also proved important for donors

and partners to discuss possible reform

options, and to avoid imposing re-

forms and strategies on partners, as

the assumption of ownership of re-

forms by the partner government

strongly affects motivation and hence

the sustainability of reform measures.

➝ Medium-term financial planning

should not be regarded as a realistic

reform option in all partner countries.

In view of the volatility of prices for

export products, it was argued that

some partner countries have so little

security regarding revenue that me-

dium-term planning is pointless.

Other participants in the discussion

felt that a Medium Term Expendi-

ture Framework (MTEF) should be

established as a political goal and dis-

cussed with the sectoral ministries.

➝ It was agreed that timing and ade-

quate resources were decisive for both

a realistic assessment of the time

needed for reform processes and for

possible entry points.

➝ Experience in Germany shows that

budget reforms are long-term, expen-

sive and politically difficult processes.

There are Länder in the Federal Re-

public of Germany which have carried

out successful budget and administra-

tive reforms. The processes initiated

in Hesse in 1998 are one example.

016Approaches to budget reforms

Under the programme “New admin-

istrative management”, the costs and

quality of state services were system-

atically reviewed, accompanied by a

general switch from public account-

ing methods to commercial account-

ing based on cost and performance

accounting, and output-oriented bud-

gets and goal systems based on this.

The switch in accounting is one of

the reforms recommended by inter-

national consultants in the partner

countries in connection with PBA.

This example was used in the work-

ing group on budget reforms to show

the complexity of such reforms, as the

switch also requires other measures,

e.g. the introduction of decentralised

sectoral and resource management,

mo dern personnel management, new

reporting and controlling instruments

and many other measures.

There was consensus among the partici-

pants that process support with technical

and financial cooperation supplement-

ing the observed incentive effects is es-

sential, particularly with regard to the

qualitative improvement of the public

finance system.

017

018


The TC project on fiscal decentralisation in Serbia started in May 2006 with the goal of putting local authority finances on a solid basis. Particular challenges include the reor-ganisation of the state after the final di s-integration of Yugoslavia (partly as a result of deficits in financial compensation of in-

terests between regions), the secession of Montenegro in the context of the desired ap proach to the EU, and unclear domestic policy majorities. To date, funding for local authorities has been completely unresolved, with plans for sharing in government reve-nue under a fixed schedule and financial

Confi guring internal fi nancial relationships in Serbia

Confi guring internal fi nancial relationships to strengthen the role of the local authorities

It is apparent that poverty reduction

strategies can only be effective and the

above deficiencies in the quality of state

services can only be eliminated if the

central government and subordinate

levels of government are both able to

perform their tasks. The conference

accordingly devoted a separate work-

shop to the topic of fiscal decentrali-

sation, to review and discuss the insti-

tutional ways in which sub-national

levels are supplied with funds to per-

form their tasks.

In most PBA partner countries there

was some element – varying in scale –

of decentralisation in the 80s and 90s.

Local authority responsibilities were

delegated to the local authorities. In

Africa in particular, but also in parts

of Latin America, these reforms were

almost without exception unsupported

by increasing allocations of funds to

the subordinate levels of government.

GTZ experience in various countries

shows that improved cooperation be-

tween national and decentralised levels

of government is generally a decisive

success factor for fiscal decentralisation.

The focus is on the finance ministry in

particular as an important actor in the

decentralisation process, because it has

great influence on the level of financial

transfers to the local authorities. In ad-

dition, local administrative capacity has

to be developed to enable the local au-

thorities to collect their own taxes and

so reduce their dependence on limited

national transfers (see box below).

Case Study


compensation of interests. Other legislative reforms are still pending. Collection of pro-perty tax in particular is lagging behind its potential. GTZ will cooperate with the na-tional finance ministry, the Standing Confer-ence of Towns and Municipalities and pilot authorities to facilitate the flow of informa-

tion between levels and to reduce political risks (multilevel approach). The TC contribu-tions include advice on legislative reforms, organisational and technical advice, advanced training and financial support.

With transfers it is important to ensure

that they do not create false incentives

with regard to raising local revenue.

Given the political decentralisation in

Africa, fiscal decentralisation will gain

sharply in importance in the near future.

019

Case

Stu

dy

020


The role of the Supreme Audit Institutions - SAIs: external control function

1 In October 1977 the IX International Conference of Supreme Audit Institutions (INCOSAI) adopted the “Lima Declaration of Guidelines on Auditing Precepts”, setting out the fundamentals of independent and external fi nancial audit under the rule of law. The Lima Declaration still represents the standard for inde-pendent external fi nancial control.

It was agreed that SAIs make a decisive

contribution towards informing parlia-

ment and government about the use of

state funds and advising the public ad-

ministration on establishing procedures

which offer little opening for corruption.

With regard to good financial govern-

ance, the following potential effects of

the work of SAIs are crucial:

➝ They increase the transparency of

public finances.

➝ They have an educational and pre-

ventive effect, as ministries and

sub-national levels of government

know that their budget could be

audited at any time.

➝ Their recommendations (to the ex-

tent that they are implemented) con-

tribute to savings or more efficient

use of funds in individual areas and

so increase the effectiveness of the

public budget.

➝ In the long term they can work to

change the system by publicising

cases of corruption and contributing

to a change in the underlying culture.

How far can SAIs in recipient countries

contribute towards improving budget

support without losing their independ-

ence? The consensus was that external

audit of bud get support by the SAIs of

recipient countries is indispensable.

SAIs are interface managers for parlia-

ment, media and the general public, ad-

visers and provocateurs. Audits have indi-

rect effects on administrative actions and

the budget process. SAIs shed light on

shadow budgets, corruption and ineffi-

ciency. This role is important for a trans-

parent and effective public finance sys-

tem, but also involves potential conflicts.

To maintain the credibility of the SAIs

in puplic relations, it is important to

promote their independence, but also

a certain self-restraint on their part.

However, participants noted that the SAIs

in the partner countries are generally not

independent in the sense of the Lima

Declaration1. The SAIs also mostly see

themselves as auditors, and not ad visors.

This is where TC has an oppor tunity –

in the working group’s general opinion –

to contribute towards a change in role.

Until 2001, there was no independent finan-cial control institution at all in Montenegro. However, this became necessary in the course of the increasing independence vis-à-vis Serbia and profiling as a European reform state.

GTZ assisted the establishment of a SAI from the start, beginning with the development of the legal basis (while there has been a SAI Act since 2004, the SAI is still not enshrined in the constitution), and continuing with advising on the structure and procedures of

the new institution and developing audit procedures to international stan dards. The newly formed SAI took as its first task the audit of the national accounts for 2004.

This was the first budget year for which the Montenegrin parliament had an audit report from an independent state audit institution, with criticisms of various accounting short-comings and formal errors. The parliament adopted all the SAI’s recommendations and called on the government to correct the errors.

Montenegro: a new SAI for a new country021


024


Increasing revenue: functioning tax systems in developing countries

2 This aspect and the discussion on the role of tax reforms in the context of scaling aid generally will also be tackled in the next two years by OECD/DAC GOVNET. The focus for 2007-8 is on “Accountability and Domestic Resource Mobilisation”.

Increasing domestic revenue through a

functioning tax system is a key instru-

ment for sustainable public finance, in

the sense of the Paris Agenda. This is re-

lated to the need for exit strategies – bud-

get support is seen as a temporary trans-

fer process, rather than a permanent one.

It also poses the worrying question of

whether greater focus on budget support

in DC is leading to reduced tax collec-

tion efforts, which in turn raises the

ques tion of how to avoid such paradoxi-

cal incentives.

How: steps towards a transparent and understandable tax system

Taxation basically has positive effects on

governance (although not in every indi-

vidual instance), as it involves a recipro-

cal obligation on government and citi-

zens. Taxpayers demand some return

from government for their financial con-

tributions. This obligation is weakened

if a significant part of state revenue comes

from exporting natural resources or from

transfers under development aid2.

A question that frequently arises here is

whether the tax ratio is “right”. Discus-

sion at the conference showed that this

question is too simple as it stands. There

is no particular value for PRS countries

any more than there is for industrialised

nations. Instead, the expectations and de-

mands of the citizens determine the state’s

role through complex political negotia-

tion processes.

Expectations determine the extent of

state activity, and hence the intensity

with which the state utilises resources.

However, the main challenge in the

PBA context is then to identify more

clearly the political – including devel-

opment policy – relevance of these

questions.

The global trends in tax reform include

simplifying tax law, modernising admini-

stration, and introducing value added

tax (VAT). At the administrative level,

the international spread of semi-auton-

omous revenue authorities is particular-

ly notable.

There was lively discussion at the confe-

rence about the effects of VAT on po ver-

ty reduction and economic development

in countries with low per capita income.

As the bulk of VAT revenue comes from

large corporations in the formal econom-

ic sector, there are initially no direct ne-

gative effects on poverty reduction.

However, the burden of VAT can be in-

directly passed on to goods which are not

taxed and are consumed by poor people.

Undesired distributional effects can also

arise because collection of VAT involves

a large number of exceptions in practice.

This also undermines taxpayer confiden-

ce in the tax system and administration.

There was agreement at the conference

that an effective tax system involves an

adequate combination of a wide range

of different types of tax, and cannot be

dominated by a single tax. In the discus-

sion about partner country domestic re-

venues and exit strategies, participants

felt it was not necessarily a matter of in-

creasing tax rates, but rather of broad-

ening the tax base in a way which takes

into account the problems of poverty

and the rights of taxpayers. One objec-

tion raised was that tax reforms have so

far failed to include the informal sector,

which is very relevant in the partner

countries, inviting scope for arbitrary

decisions and misunderstandings.

Another issue which is relevant to PRS

and also for many TC projects is tax

revenue at local authority level. This

strengthens the self-financing capability

of local authorities and reduces their

dependence on limited national financial

transfers, and together with the develop-

ment of appropriate models for financial

compensation of interests is relevant for

the sustainability of a PRS.

The consensus at the conference was that

local taxes must above all be “simple” in

their conception. For developing coun-

tries, property tax has a dominant posi-

tion in local authority taxation. It was

also emphasised that cooperation be-

tween local and national tax administra-

tions can significantly improve the con-

026


ditions for efficient local tax collection.

A general observation was that although

partner countries have similar problems

in this area, the solutions vary widely

from one country to another, depending

on the initial conditions. Country-

specific technical and process advice

is accordingly indispensable.

What: embedding tax systems in cultural framework conditions – taxation and culture

A current GTZ study “Taxes and cul-

ture – tax reforms for sustainable de-

velopment” (http://www.gtz.de/de/doku-

mente/en-tax-and-culture.pdf ) identifies

cultural factors which affect tax policy,

tax administration and taxpayers, and

the reciprocal relation-

ships between these ac-

tors. This shows that

there is a complex and

reciprocal relationship

between culture and taxation, where the

prevailing form and perception of gov-

ernment affects tax ethics and the feasi-

bility of tax reforms, while tax reforms

in turn feed back into citizens’ identifi-

cation with the state.

In Ghana, for example, the traditional

chiefs in particular play a strong role in

tax collection, although this is not gen-

erally accepted. The tax system is also

perceived as lacking in transparency. As

a result, many taxpayers were not pay-

ing their taxes at the start of the TC

project, with willingness to pay heavily

dependent on the level of education.

These specific features had to be taken

into account by the advisers in order to

achieve the intended goals (see box next

page).

How can the know-

ledge gained about the

relationship between

taxes and culture be fed

into practice in DC,

and specifically TC?

Case

Stu

dy

The study "Taxes and culture"

GTZ, 2006

027


The aim is to make collection of direct taxes more efficient, in order to expand the government’s political and economic freedom of action and make corruption more difficult. A concept was first formulated for this, and subsequently a start was made on organisa-tional advice on increasing the efficiency of administration and gradual automation of the associated procedures.

Tax refunds were accelerated in the course of the reforms. Joint workshops discussed whether and how far traditional authorities can be involved in tax collection, e.g. through

information campaigns, in order to improve communication with taxpayers.

With GTZ support, the project succeeded in boosting revenue from all direct taxes by 22% in real terms in just two years (2003-2005), and revenue from corporation tax was actually increased by 44% despite de-clining tax rates. Focused human resource development, improved organisation and professional customer dialogue increased transparency and reduced resistance to taxation among the larger taxpayers in particular.

Improving tax collection in Ghana

Here conference participants explicitly

emphasised the recommendations of the

study, which calls for advisory approach-

es to tax systems to pay more attention

in future to factors of cultural relevance,

and for increased promotion in devel-

oping culture and gender sensitive reform

approaches within the framework of an

intercultural dialogue between partners

and donors. One prerequisite for this is

that all the relevant actors be included,

for the purpose of adding to mutual

knowledge.

As changing traditional values and stan-

dards inevitably takes a great deal of

time, conventional ideas about timeta-

bling need to be modified.

028


The conference made it clear that there

is a wealth of decentralised experience,

which GTZ can contribute to the donor

dialogue. GTZ is supporting e.g. partici-

pative budget reforms for young people

in Rosario, Argentina, participative local

authority budgets in Nabón and Cota-

cachi, Ecuador, and the development of

a budget transparency act in Ecuador.

A relatively neglected prerequisite for

participation and transparency in the

budget process is appropriate legal

foundations, such as those created in

Bolivia by the Participation Act (Ley

de Participación Popular) and the local

authority development councils pro-

vided for under this.

Another basic question which has so far

received little attention in the context

of PRS and budget support is gender-

responsive budgeting, which emerged

in the 90s before the start of the PRS

debate. While there are gender-sensitive

budgets in 60 countries, these are rarely

linked to the PRS process.

GTZ experience has shown that even

participatively produced budgets are

not always gender-sensitive, because

population groups do not all participate

to the same extent in such processes.

Th e solution in the view of the working

group is primarily a gender-sensitive re-

view of draft budgets. Existing data must

be evaluated to see if the planned expen-

ditures adequately refl ect the specifi c

needs of men and women. Do men and

women have equal opportunities to bene-

fi t from relevant state services? If the re-

view shows defi cits, intrasectoral priori-

ties should be adjusted until a balance is

struck.

GTZ published a set of guidelines

on gender-responsive budgeting in

October 2006.

030


Participative and transparent budgeting – Experiences from Latin America

Case

Stu

dy

Under the project “Assisting decentral gov-ernance and poverty reduction”, GTZ is sup-porting the Colquechaca local authority in Bolivia. After internal political conflicts in 2003, the local authority had become se-verely damaged and virtually ungovernable, and its accounts had been frozen by the SAI because of mismanagement.

The GTZ project concentrated on the follow-ing interventions: developing administrative capacity in the fiscal sector (presenting agreed plans and informative reports), or-ganisation building and advanced training for the personnel involved, clarification of roles and functions among political office holders, dialogue and consensus building processes, strengthening civil society's participative ca-pacity through organisation building for local authority councils, advanced training and promotion of public accounting (e.g. public presentation of budget report).

The offer was well received. 300 citizens participate in the quarterly public account-ing, the financial reports are up to date, the accounts have been released again, and a draft budget was drawn up participatively which reflects the differences in develop-ment within the community. A significant increase of 30% was reported in voter turn-out in 2004, and participation by women also rose. The model of the local authority devel-opment council is to be implemented in other local authorities in the region.

Bolivia: making ungovernable local authorities governable031


The Extractive Industries Transparency

Initiative (EITI) plays a special role in

the issue of transparency in public fi-

nance. The initiative, which dates back

to 2003, is specifically concerned with

greater transparency for state revenue

from the primary commodities sector.

States rich in natural resources are asked

to commit to disclosing revenue from

the sale of oil, gas and minerals and pay-

ments to the state by companies in the

extractive sector. This leads to important

control functions for the private sector

and civil society. In all, over 20 coun-

tries have now declared their willingness

to implement the criteria. Participation

in the initiative is voluntary in principle,

but in several countries it was one of

the conditions for debt forgiveness un-

der the HIPC initiative.

It became clear at the conference that im-

plementing this much-praised initiative

is not without its problems. As partici-

pation is voluntary in principle, part of

the contracts for extraction and export

of primary commodities is confidential,

non-monetary benefits are difficult to

estimate, and the control function of

Extractive Industries Transparency Initiative - EITI 032

civil society is not effective in many

countries, there is limited possibility for

reviewing the accuracy of the published

figures. In addition, the initiative lacks

any organisational structure or regular

revenue to finance an administrative

apparatus. Western companies often

support the ethical principles of EITI,

but are concerned about competitive

disadvantages, as companies from the

emerging nations often do not share

these scruples.

Nevertheless, current DC projects in fi-

nancial reform offer scope for support-

ing EITI. For example, Ghana with its

gold mining operations has been an

EITI member since 2003. The TC

project based in Ghana is primarily

assisting with creating and modifying

the strategy and the necessary operatio-

nal and administrative structures, e.g.

developing appropriate reporting forms

or a working plan. It has also provided

legal advice. These are measures, which

projects in other countries can use as

orientation. However, EITI advisory

services in Ghana were limited to the

tax authorities as partners of the TC

project, and civil society groups were

not considered.

033

034


While efforts to harmonise financial con-

tributions by bilateral and multilateral

donors with joint financing have made

significant progress in the last few years,

comparatively little attention has been

paid to harmonising TC.

Joint procedures are being used in par-

ticular to study public finance systems

including use of funds controls (e.g.

expenditure tracking, audits). Much of

the consulting services provided have

been used for short-term measures, in-

cluding many studies to identify the

status quo and thus primarily to meet

donor information needs (see above).

However, harmonisation of short-term

and (particularly) long-term consulting

services has been rare to date. This is

partly due to the fact that advisory serv-

ices are virtually impossible to standard-

ise, but also partly due to overoptimis-

tic assessments.

Conference participants felt that GTZ

is able to contribute a combination of

solutions and a long view to backstop-

ping political processes in the partner

countries, which has been responsible

for the success of accepted TC projects:

➝ “No One Size Fits All” (NOSFA

principle) – advisory services must be

adapted to conditions in the partner

country.

➝ The nature of political processes com-

plicates the pre-formulation of and fit-

ting in of sequences with time tables.

Rather, it is important to identify cen-

tral actors and to strengthen their po-

sition within reform processes.

➝ The design of feasible reform pro-

grammes is an important advisory

domain of political TC. Thus, it is

crucial to sensitize stakeholders to

the limits of reform approaches;

pure approaches of Timing and Se-

quencing as e.g. regarding invest-

ment measures with little necessity

by the partner government to take

political decisions are not imagina-

ble for a political TC.

➝ It is important to design processes as

institutional change processes, with

appropriate change management.

There was agreement at the conference

that – contrary to initial expectations –

need for advisory services on the sub-

ject of budgets and also in other areas

has risen since the introduction of pro-

gramme aid.

Challenges for technical cooperation under PBA

035


For German TC, this implies a three-

dimensional orientation: I. technical

advisory services on technical issues,

II. organisation building to enhance

the capacity of partner institutions,

and III.policy formulation.

Organisations such as the World Bank

noted that German TC on public finan-

cial management in particular had ad-

vantages over the short-term orientation

of the advisory services of many other

donors. While many donors focus on

the question of the right reforms and

short-term measures in their advisory

services, the actual challenge lies in

implementation, for which GTZ suc-

cessfully provides backstopping in

many countries.

For the GTZ participants, however, the

operational question is how they can

supplement the "classic" long-term TC

services for assisting partners e.g. in

budget or tax reforms with short-term or

flexible products which meet the needs

of partner countries and DC organisa-

tions in the PBA process. Thematically,

the following areas are possible:

➝ Advisory services on budget prepara-

tion, where GTZ has know-how from

decentralisation and municipal de-

velopment.

➝ Advisory services on limiting fiduci-

ary risk, e.g. by involving short-term

experts (STEs) with regional experi-

ence from the SAI sector.

➝ Another possible field for STEs could

be fiscal decentralisation and local

authority finance. This topic is on

the agenda for political dialogue in

many countries, but the donors in-

volved often lack detailed knowledge

of the local situation. German DC is

strong in this area, and GTZ could

effectively contribute its know-how

here.

036


Lessons learnt: further strengthening of political analysis and process backstopping – PBA just one instrument among many

Summarising, this year’s conference

showed that the instrumental structur-

ing of financial reforms and the opera-

tionalisation of Good Governance have

made great progress in recent years. The

growing share and diversity of country

experience has initiated a process of in-

stitutional learning among all the im-

plementation organisations involved.

Good Financial Governance is establish-

ing itself as a new discipline in the

world of aid.

However it is important not to restrict

discussion to technical (financial) aspects

and overlook the political dimension of

distributional struggles or the background

to resistance against reform by specific

client networks or the armed forces.

The new Performance Assessment Frame-

works (see above) also neglect analysis

of the interests of various actors and in-

stitutions, their weight in the politics of

the partner country, and hence a realis-

tic assessment of the likelihood of suc-

cess. There is also no possibility of stan-

dardising a package of conditions which

could eliminate the risks of improper

use of budget support at subordinate

levels. Budget support, as a tool at the

macro level, cannot replace manage-

ment and capacity development at the

micro level, i.e. at decentralised levels.

Another example of tackling highly po-

litical questions is the call for long-term

domestic funding of PRSPs. There is

general consensus that growing poverty-

related expenditure should be financed

by growth in revenue from levies in the

long term. However, this net approach

often overlooks the question of which

levies and taxes are imposed, and by

whom. In many countries, in fact, low-

income groups are burdened by rising

consumer taxes (including VAT) or

fees, while e.g. property tax remains

untouched. The distributional effects of

such reforms are doubtful at best, but

have so far been neglected by donors.

Strengthening analysis of the political

context, micromanagement and back-

stopping for budget and other reform

processes, as well as decentralised PRS

monitoring are accordingly important

residual tasks in the PPA context, which

it is important to expand, and where

German TC should play an important

role.

In addition, discussion at the conference

confirmed that PBA can be an instru-

ment for programme-oriented DC, but

not the only one. The current PBA dis-

cussion is excluding a large number of

partner countries from the debate. In

Latin America and the Caribbean, for

037


example, PBA in combination with pri-

or debt forgiveness are only relevant to

Bolivia and parts of Central America.

The stronger economies in the region

have repaid their debts to the IMF ahead

of schedule and can now borrow from

the World Bank and even commercial

banks to fund major sectoral projects

without attached macroeconomic con-

ditions. The same goes for Asia and the

MENA region.

Several of these countries have also de-

veloped their own national poverty re-

duction programmes and programmes

to reform public services, and these

should be supported by German DC

in the interest of promoting good gov-

ernance and the MDGs.

038


Advisory services on reforming public

finance have been a part of GTZ's work

for 25 years now. Currently, such reforms

are being supported in 45 countries with

some 40 long-term experts and an even

larger number of short-term experts. At

GTZ’s Head Office in Eschborn, this

priority area has been covered technical-

ly since 2003 by the sectoral project

"Public finance and administrative re-

form" in division 42.

Its tasks are to advise the BMZ and de-

velop new technical and methodologi-

cal concepts for making public finance

systems in partner countries more trans-

parent, efficient and development-ori-

ented. In particular, financial policy

and administration should be more

closely oriented towards achieving de-

velopment goals (MDGs, poverty re-

duction).

Current thematic priorities:

➝ Functional and transparent budget

systems (planning, drafting, imple-

mentation)

➝ Structuring internal financial

relationships

➝ Systems of levies (customs duties,

taxes) which are fair, efficient and

follow the rule of law

➝ SAIs as external control and advisory

institutions

➝ Establishing regional expert net-

works for pooling information and

experience

➝ Participation in multilateral initiatives

to reform public financial manage-

ment (World Bank, OECD DAC),

tax reform (OECD DAC/Tax

Centre, EITI, International Tax

Dialogue), or financial control

(INTOSAI, EUROSAI, AFROSAI,

ARABOSAI, OLACEFS).

Contact: www.gtz.de/public-finance

Public fi nance as a fi eld for GTZ advisory services

Published by:Deutsche Gesellschaft fürTechnische Zusammenarbeit (GTZ) GmbHDag-Hammarskjöld-Weg 1-5 65760 Eschborn, GermanyT: +49 6196 79 - 0F: +49 6196 79 - 71 36E: [email protected]: www.gtz.de/public-finance

Division: State and DemocracyPublic Finance and Administrative Reform

Person Responsible:Jörg-Werner Haas, Director of DivisionState and Democracy, GTZ

Editor:Dr. Matthias Witt

Authors:Dr. Matthias Witt, Roland von Frankenhorst, Cormac Ebken

Contact:Dr. Matthias Witt E: public-fi [email protected]

Design:2007, creative republic.Thomas Maxeiner Kommunikationsdesign60318 Frankfurt am Main, GermanyT: +49 69 .91 50 85 60F: +49 69 .91 50 85 64E: [email protected]

Layout/Printing:ROHLAND & more Mediengesellschaft mbH Offenbach, Germany

Eschborn, Germany – 2007

Deutsche Gesellschaft fürTechnische Zusammenarbeit (GTZ) GmbH

State and DemocracyPublic Finance and Administrative ReformDag-Hammarskjöld-Weg 1-5 65760 Eschborn, GermanyT: (+49 6196) 79 - 0F: (+49 6196) 79 - 71 36E: [email protected]: http://www.gtz.de/public-finance

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