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PEFA urges stronger collaboration on budget assessment and reform

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
November 2003
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IMF Survey: What led to the creation of PEFA, and what are its aims?

Allen: The World Bank, the IMF, the European Commission (EC), and other donor institutions do a huge amount of work with developing countries on public expenditure-related issues—diagnostic work, assessment of institutional capabilities, and suggested reforms—but it is not very well coordinated. This has led the Executive Boards of the IMF and the Bank to stress the importance of closer collaboration. There was also a persistent problem of overlapping and duplicating diagnostic missions by the Bank, the IMF, the EC, and other agencies that created extra work and increased costs for the governments concerned. PEFA was established to create a more integrated, coordinated approach to assessing public expenditure needs and to encourage donors to work together more closely. This is part of a wider agenda of international donor harmonization that finds its voice in many forms—for example, the Rome Declaration of February 2003; the work of the multilateral development banks to harmonize procedures on financial management, procurement, and other areas; and collaboration between the World Bank and the Development Assistance Committee of major donors.

IMF Survey: What progress have you made?

Allen: We recently completed a large report that the Bank has just published on the diagnostic instruments being used by the major donor institutions. There are a lot of them. The World Bank has its Country Financial Accountability Assessments (CFAAs), Country Procurement Assessments (CPARs), and Public Expenditure Reviews (PERs); the IMF has its fiscal Reports on the Observance of Standards and Codes (fiscal ROSCs); the Bank and the IMF are working together on the Public Expenditure Management Tracking Assessments and Action Plans for Heavily Indebted Poor Countries (HIPCs); the EC does its own assessment and audit work; and so on. The aim of PEFA was to document the coverage and scope of these instruments, identify overlaps and gaps, and assess how well these instruments are being applied in the field in operational terms.

We are also doing a lot of work on performance measurement of public expenditure management systems and developing a framework under which countries and donors can measure performance and monitor and track changes in the way these systems work. And we are funding activities in several countries to test new approaches to assessment and reform work.

IMF Survey: Are these different assessments a problem, and is a more streamlined approach practical?

Allen: The large number of diagnostic instruments is part of the problem, and there’s a need to rationalize and streamline the ways they work together. In the World Bank, for example, you have three instruments in the public expenditure field—the PER for public expenditure; the CFAA, which looks at accounting and audit; and the CPAR procurement review. All of them overlap to some degree although the last of these is a somewhat specialized instrument for one particular area. There is considerable scope for streamlining these instruments to minimize the overlap and maximize the focus. However, this is not as simple as it sounds—changes in the World Bank’s organizational structure, operational practices, and internal incentives may be required. There is also ongoing scope for strengthening the collaboration between the Bank and the IMF on public expenditure issues—a topic the two Executive Boards considered earlier this year.

IMF Survey: Are you suggesting a sort of building-block approach of cumulative information so that different institutions could share the information they get?

Allen: That is one idea being discussed. It needs a lot more work, and there may not be ultimate agreement. But one idea is to create some kind of standardized assessment, which would be a bit like the public expenditure management assessments carried out under the enhanced HIPC Initiative. It would be a relatively short report, with some high-level performance indicators, that identifies key areas of fiduciary risk and provides a framework for measuring progress. It would be a basic assessment on which a program of further work—both diagnostic analysis and support for capacity building—could be built.

IMF Survey: Who would coordinate work on the standardized assessment?

Allen: The standardized assessment would be essentially a summary of existing diagnostic information collected through the PER, the CFAA, the fiscal ROSCs, and other instruments. It could be prepared by a group of donors pooling information. The information would be updated periodically, perhaps annually. The assessment would have to include a quality review process, involving the various donors, to ensure that the information is credible, accurate, timely, and coherent. Maybe PEFA could be involved in the process in some capacity. These practical questions need to be resolved. We are proposing to do some desk reviews of the information available for one or two countries to see what the standardized assessment would look like in practice. But the essential point is, it would be a commonly available document that summarizes fiscal and fiduciary risks, with supporting performance information. Such information is not presently available in a single document.

IMF Survey: Who would use this assessment?

Allen: Recipient governments could use it to review or prepare their strategies for public expenditure reform, identify gaps, and request donor assistance. The Executive Boards of the Bank and the IMF and the equivalent management boards in other donor agencies could use it to judge countries’ fiduciary soundness, as background for making decisions on budget support. Country teams could use it to identify gaps in existing information, plan work schedules, and develop country assistance strategies (or the equivalent). Technical assistance providers and fun-ders could use it to assess progress in improving public expenditure management. And investors, civil society groups, and other stakeholders would find it a convenient source of information on public expenditure issues.

IMF Survey: How likely is it that you can get an alliance of very different donors together to use the same instrument?

Allen: Well, the PEFA steering committee endorsed this broad approach in June, so there is a commitment to it. The World Bank and the IMF are recognized as leaders in this field, and the other donor institutions are looking to the Bank and the IMF to develop the basic framework. But more work needs to be done.

IMF Survey: Why is there so much concern about the quality of budget processes in developing countries?

Allen: Increasingly, multilateral and bilateral development agencies are concerned about the risk that aid resources can be stolen, diverted to activities other than those budgeted, or wasted. More aid is now being channeled directly into adjustment lending or budget support operations. In the 2003 fiscal year, about 50 percent of the World Bank’s lending was in the form of adjustment lending, paid directly into the budget, rather than project lending. This means it is very important for the donor institutions, and indeed for the recipient countries themselves, to have confidence that the budget systems are robust and delivering reasonable-quality public services. A good budget system means a good system for preparing, executing, monitoring, controlling, reporting on, and overseeing the budget. This explains why donors place so much emphasis on helping countries assess the quality of their public expenditure management systems and reforming those systems and building up capacity.

Increasingly, multilateral and bilateral development agencies are concerned about the risk that aid resources can be stolen, diverted to activities other than those budgeted, or wasted.

—Richard Allen

The development of integrated financial management information systems is a good example of a fashionable concept in which donors invested heavily but with mixed success.

—Richard Allen

Another PEFA interest is why a budget system does or does not work well. A country may have very good regulations on financial management, but the system just doesn’t work properly, and that is usually because of deep-rooted institutional problems such as corruption, inefficient management practices, and weak incentives. For example, some African countries have had a lot of donor attention for many years and lots of aid money, but efforts to strengthen their budget systems don’t seem to have been very successful: indeed, in some countries systems may even have deteriorated in the last 20 or 30 years.

IMF Survey: You mentioned not just overlaps but gaps. What gaps have you found in the diagnostic assessments?

Allen: Some important areas that could be strengthened are the revenue side of the budget, including tax administration, debt management, the management of government records, and the management of physical assets by governments. These areas are not as systematically covered by existing instruments. Municipalities, local government, and off-budget government agencies can also be important sources of fiscal risk. So we suggest that where the donors and governments are exposed to such risk, these areas should be brought into the framework.

IMF Survey: Why is it so difficult to improve budget processes in some countries?

Allen: There are a number of reasons. For example, when the government has little or no commitment to reform and where there is a high level of corruption, you are unlikely to witness substantial improvements in that system. Even though the country may (with the assistance of aid money) invest in an ultramodern, technologically sophisticated budget system, it simply won’t work.

IMF Survey: So what you’re really saying is that lots of money has been wasted.

Allen: Donor agencies have sometimes tended to emphasize reforms that were perhaps too complex or sophisticated for the capacity of some countries to absorb. The development of integrated financial management information systems is a good example of a fashionable concept in which donors invested heavily but with mixed success. In some countries that are ready for them, they’ve been useful. In other countries, expensive technology has degraded after a few years, and there’s been little progress. The question is why.

It is possible that donors have been, to some degree, guilty of promoting blockbuster reforms. Such reforms may provide large rewards to consulting companies for work on design, implementation, and maintenance, but they have generally had a limited impact. One reason for this is that the reforms tend to give too little attention to the institutional environment and incentives or are too technocratic.

Another area where the donors may have been culpable to some extent is in promoting medium-term expenditure frameworks—another fashionable idea. In principle, these frameworks are the right way to go, but they require a participatory approach to budget making and other preconditions that require a level of development and capacity that are beyond many countries’ immediate scope. In short, a lot more thinking has to be done on sequencing reforms and carrying them out and on establishing a more basic platform on which development can take place.

This is getting rather beyond the scope of the PEFA program, but I think it’s an important point—it relates to the question of how to create a sustainable program of reform. How can the donors assist countries to build capacity and move forward with the reform agenda in a slow but sustainable way? And that is fundamentally important. The donors have not always been very good at advising on the sequencing and prioritization of reforms or on the change management process needed to deliver satisfactory outcomes. The Bank is investing heavily in learning activities to identify reasons for past successes and failures in these areas, but more work needs to be done. And the development agencies need to invest in new skills—governance, communications, change management, and so on—to equip themselves to provide such support.

Donor agencies have sometimes tended to emphasize reforms that were perhaps too complex or sophisticated for the capacity of some countries to absorbi

—Richard Allen

Assessing and Reforming Public Financial Management: A New Approach, by Richard Allen, Salvatore Schiavo-Campo, and Thomas Columkill Garrity, will be available in November from the World Bank, Washington, D.C.

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