The World Bank

Public Expenditure and Financial Management

Overview of Issues and Approaches

Bill Dorotinsky,

PREM public sector groupPEAM CourseJanuary 13, 2004

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Outline

• Framework for Review

• Approaches to PEM review– What is reviewed?

• Common Problems

• Common Solutions

• Getting the basics right

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Three Objectives of Public Expenditure Management Systems

• Macrofiscal discipline and stability– Support economic growth and stability (and reduce

poverty)– Avoid public finance crises

• Strategic allocation of resources– Match government policy with programs, objectives

• And assure social safety nets, and promote growth

• Technical efficiency– Getting the most from each zloty spent

• And just delivering core services

Framework

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Basic principles of PEM

• Comprehensiveness– include all revenue and expenditure, all agencies

• Accuracy– record actual transactions and flows

•  Annuality– cover a defined period of time (e.g. one year budget, multi-year

forecasts)

• Authoritativeness– only spend as authorized by law

• Transparency– information on spending is public, timely, understandable

Framework

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What institutions matter?

• Laws and regulations– Fiscal, budget, procurement, civil service

• Process– Policy– Planning– Financial/resource management

• Organizations

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Approaches to PEM Review

• Cycle, Process

• System– broad scope– organizations

• Functions/tasks

• Outcomes/Impact

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Planningsystem

Medium termplans, e.g. three

year rolling plans

Annual budgetsDevelopment,recurrent and

revenue

Fund releaseprocedure, e.g...

warranting

Accounting forrevenue andexpenditure

Public expenditurereview Institutions

Reports andfinancial statements

Audit system

Project monitoring

Projectappraisal

Resourceallocation

Liquidity

managem

ent

Expen

ditur

e

contr

ol

Monitoring

& controlling

Post eventreview

Accountability

Expenditurereview

Financial management system boundaries

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.

Expenditure Management Cycle

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Budget and Policy Execution System in Hungary (1999)

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Public Finance Functions

MacroeconomicForecasting

Budget Formulation

Budget Execution

TreasuryRevenue Administration

Debt Management

Financial Market

RegulationProcurement

Administration

Internal Audit

Financial Asset Management

Financial Investigations

Lottery & Gambling

Fiscal Policy

Core Functions

Non-core Functions

ProcurementPolicy

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Core Tasks and OrganizationsMinistry of Finance

Treasury

SpendingMinistry

Spending Unit

- Budget Allocations- Supplemental Budgets- Virements- In-year monitoring and correction

- Warrants (cash allocations)- Cash Flow Management (forecasting, planning, sequestration)- debt management- financial asset management- accounting (policy, system management, chart of accounts)- make payments- collect revenues- account management and reconciliation- Central Bank relations

- internal control- program management- spending (commitments)- recording & reporting- payment orders- verification of receipt of goods/services- program/cash plans

Financial Management is Everyone’s Responsibility

- Macroforecasting- Fiscal Policy- Revenue administration- Debt Management

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Credibility of the Honduran Budget – In-year Deviations by Agency (percent of the executed over the approved budget)

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50.0

100.0

150.0

200.0

250.0

300.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

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Common PEM problems

• Weak links between policy, resource limits, and budgets– failure to achieve strategic objectives– abstract planning, unrelated to ways and means

• Annual focus leads to suboptimal choices– Digging a hole; inability to climb out– Complacency today, unaware of crisis tomorrow

• Separation between capital and recurrent budgets– Lower than expected returns to capital

• Non-comprehensive budget– Using other means to support favored programs– Revenues not captured in budget

• Taking piecemeal decisions without reference to over-all effect• Funds don’t reach intended beneficiaries

– Budget executed differently than approved

• Goods and services not delivered as planned

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Common Reforms

• MTEF• Treasury

– IFMIS

• Performance Budgeting• ‘Fragmentation’

– Procurement, Debt

• New Public Management• Deconcentration, decentralization• Administrative & Civil Service

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What is an MTEF?

• Conceptual framework for thinking about public finance systems– ties together multiple technical reforms– gives paradigm for understanding import of technical reforms– teaching tool

• Process, not only components of public expenditure systems– process of government decision-making– developing a “public interest” in decision-makers– Multi-year emphasis– creating a learning system

• Emphasizing policy– steering versus rowing for senior officials, organizations– linking policy, inputs, outputs, objectives

• Effort to change paradigm of actors in system

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Core elements of an MTEF

• Multi-year fiscal envelope

• Setting broad policy priorities (sectors)

• Setting multi-year sector ceilings– Sector budgets prepared under constraints– Strategy, policy and objectives under

constraints

• Delivering resources as budgeted

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HIPC expenditure tracking assessment’s 15 indicators, benchmarks of PEM system capabilities

Benchmark Description

Meets GFS definition of general government

Extra (or off) budget expenditure is not substantial

Level and composition of outturn is "quite close" to budget

Both capital and current donor funded expenditures included

Functional and/or program information provided

Identified through use of classification system

(e.g., a virtual poverty fund)

Projections are integrated into budget formulation

Low-level of arrears accumulated

Internal audit function (whether effective or not)

Tracking used on regular basis

Reconciliation of fiscal and monetary data carried out

on routine basis

Monthly expenditure reports provided within four weeks of

end of month

Timely functional reporting derived from classification system

Accounts closed within two months of year end

Audited accounts presented to legislature within one year

Comprehensiveness

1. Composition of the budget entity

2. Limitations to use of off-budget transactions

3. Reliability of budget as guide to outturn

4. Data on donor financing

Classification

5. Classification of budget transactions

6. Identification of poverty-reducing expenditure

Projection

7. Quality of multi-year expenditure projections

Internal Control

8. Level of payment arrears

9. Quality of internal audit

10. Use of tracking surveys

Reconciliation

11. Quality of fiscal/banking data reconciliation

Reporting

12. Timeliness of internal budget reports

13. Classification used for budget tracking

Final Audited Accounts

14. Timeliness of accounts closure

15. Timeliness of final audited accounts

For

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xecu

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Rep

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Budget Management

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9

15

Substantial Upgrading Required

Benin (8)Burkina Faso (9)Chad (8)Guyana (8)Honduras (8)Mali (8)Rwanda (8)Tanzania (8)Uganda (9)

Some Upgrading Required

Little Upgrading Required

Bolivia (5)Cameroon (4)Ethiopia (6)Gambia, The (5)Ghana (1)Guinea (5)Madagascar (7)Malawi (7)Mauritania (7)Mozambique (5)Nicaragua (5)Niger (3)Sao Tome & Principe (4)Senegal (4)Zambia (3)

Agreed Assessment

(8) Number of Benchmarks met

Relative need for upgrading PEM Systems

Source: “Actions to Strengthen the Tracking of Poverty Related Public Spending in Heavily Indebted Poor Countries (HIPCs), World Bank and IMF, March 22, 2002. See http://www.worldbank.org/hipc/hipc-review/tracking.pdf

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The results indicated the need to improve basic aspects of PEM systems

Source: “Actions to Strengthen the Tracking of Poverty Related Public Spending in Heavily Indebted Poor Countries (HIPCs), World Bank and IMF, March 22, 2002. See http://www.worldbank.org/hipc/hipc-review/tracking.pdf

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

(Percent of countries not meeting each benchmark)

Benchmark number:

Note: Based on 24 countries’ Final Assessments

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Comparison of selected PEM indicators for ECA PRSP countries and HIPCs

A recent draft study by the Bank’s Europe and Central Asia (ECA) region, entitled “BUDGET MANAGEMENT AND PRSP in ECA PRSP COUNTRIES” (June 2003), employed an instrument similar to the HIPC expenditure tracking assessment. The instrument was applied in 11* ECA countries. Many indicators in the ECA study are sufficiently different to prevent comparison with the HIPC expenditure tracking results, but four can be compared:

Comprehensiveness of the budget. Budget reporting follows GFS. No ECA countries met the benchmark, compared to 10 percent of HIPCs. Budget comprehensiveness challenges are a particular legacy of the former socialist countries, with the public sector still being defined in many countries.Multi-year forecasts integrated into the budget process. Ten percent of ECA countries met the benchmark, compared to 18 percent of HIPCs. Relatively more emphasis has been placed in ECA countries on budget execution during the 1990’s, and budget formulation, including medium-term forecasts and MTEFs, are a more recent phenomenon.Internal audit effectiveness. None of the ECA countries met the benchmark, compared to about 12 percent of HIPCs. Even though internal audit has generally been neglected in Africa, the function nominally existed. For ECA countries, the socialist heritage did not include internal audit functions.Audited accounts presented to the legislature. Fifty-five percent of ECA countries met the benchmark, compared to 17 percent of HIPCs. ECA countries, as noted above, have placed relatively greater emphasis on budget execution, including auditing and reporting, in the 1990’s, and this is reflected in the results. HIPCs in Africa have focused more on budget formulation (MTEFs) rather than budget reporting.

HIPC countries generally scored better than ECA PRSP countries, and these reflect the differing initial conditions, capacity for reform, and differing PEM reform emphasis in the regions.

* Albania, Armenia, Azerbaijan, Bosnia, Georgia, Kyrgyz Republic, Serbia, Macedonia, Moldova, Montenegro, and Tajikistan. Serbia and Montenegro form one country, but are reported separately in the ECA study due to significant differences between the two Republics PEM systems and capacity.

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HIPC Assessment Conclusions

• Execution and reporting relatively weaker• Institutional reforms

– require continuous engagement and monitoring: not one-off– Country commitment also fundamental

• Unless some of these addressed, other PEM reforms will have limited impact

• With limited policy space for reform, important to focus on a few key areas, rather than laundry list

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General References• SIGMA Policy Brief No. 1: Anatomy of the Expenditure Budget (1997) OECD

• Managing Government Expenditure. Schiavo-Compo and Tommasi. Asian Development Bank. 1999

• Government Budgeting and Expenditure Controls, Theory and Practice. Premchand. IMF. 1993

• Public Expenditure Management. IMF. 1993.

• Treasury Reference Model (Bank PE website)

• A Contemporary Approach to Public Expenditure Management. Schick, Allen. World Bank Institute. 1999.

• Public Expenditure Handbook. World Bank, 1998.

• “Tracking of Poverty-Reducing Public Spending in Heavily Indebted Poor Countries,” Revision 1, March 28, 2001, SM/01/16, and World Bank, March 30, 2001, IDA/SECM2001-0052/1

• “Actions to Strengthen the Tracking of Poverty-Reducing Public Spending in Heavily Indebted Poor Countries,” Revision 2, March 21, 2002, SM/02/30, and World Bank, March 22, 2002, IDA/SECM2002-30/2

• “Update on Implementation of Action Plans to Strengthen Capacity of HIPCs to Track Poverty-Reducing Spending,” March 11, 2003, SM/03/90; World Bank, March 13, 2003, IDA/R2003-0043.

All HIPC Papers available at:

http://www-wbweb.worldbank.org/prem/prmps/expenditure/hipc.htm

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Criteria for Assessing the Effectiveness of the Budget Process Element Budget Formulation Features Budget Execution Features

Aggregate Fiscal Discipline

Multiyear macrofiscal framework used to set public revenue, expenditure and debt policy within realistic economic framework, supporting anticipation of crises, measured restructuring.

The total budget envelope should be: (i) explicit and set prior to determining individ-ual spending allocations; (ii) consistent with the broader macroeconomic framework; and (iii) sustainable over the medium term.

Current policies, laws, and normatives and programs reconciled in annual budget to assure affordability.

New policies with expenditure or revenue implications adopted during year only if affordable in medium-term framework, sources of financing identified, and supplemental budget approved to finance within budget targets.

Budget is comprehensive, accurate, annual, authoritative, and transparent.

Commitment control system limits commitments to available resources, supporting avoidance of arrears during retrenchment.

Treasury cash management further supports matching of expenditures to revenues.

Treasury payment system and internal controls support proper payments.

Accounting system and Financial Management Information System (FMIS) support comprehensive, timely and accurate information on spending and revenues for government and line ministry management.

Fiscal and banking accounts regularly reconciled. Annual accounts closed in timely manner. Debt management assures sustainable debt policy,

timely issuance of debt for cash flow management and reaching the spending target.

Internal audit detects and corrects fraud, waste, and abuse; assures integrity of financial information.

External audit assures fairness and accuracy of financial reporting, effectiveness of internal audit and control systems.

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Allocative Efficiency

Expenditure allocations between and within sectors are consistent with government policies and priorities.

Sectoral ceilings set early in expenditure process to encourage ministry prioritization.

Current policies, laws, and normatives and programs reconciled in annual budget to assure prioritization of resource use, possible program restructuring.

Resources are reallocated from lesser to higher priority programs and from less to more effective programs, across and within sectors.

Commitment and Treasury controls execute the budget as approved.

Formal, transparent procedures used to amend budget if necessary.

Frequency of FMIS reporting allows management action to correct deviations from approved budget.

Technical efficiency

Budget planning (within resource ceilings and supported via execution of budget as approved) support productivity improvements and management/program development.

Budget process supports analysis and review of performance, structure, staffing and organization, policy, normatives.

Program classification structure within ministries supports focus on objectives, results.

Basic program performance information allows linking of resources with results, pressure for increased efficiency.

Program evaluation supports occasional review of program impact, effectiveness.

Budget execution (commitment and cash controls) limits critical expenditures, but supports flexible resource use at program level (e.g. across non-personnel economic classifications, with respect to seasonal spending patterns) for efficiency (controls are not excessively detailed to prevent management of program).

FMIS supports program managers. Civil service system supports quality public staff,

flexibility in reallocating staff resources, restructuring workforce.

Procurement system supports competitive, efficient, timely contracting.

Internal audit may identify options for improved economy and efficiency.

Source: From World Bank – Serbia and Montenegro Public Expenditure and Institutional Review – February 2003