Chapter 1. Public Financial Management in Latin America: The Key to Efficiency and Transparency
  • 1 0000000404811396 Monetary Fund


Public financial management (PFM) plays a key role in the sound allocation and use of public resources and macroeconomic management. This is why PFM modernization can have a substantive impact on the effectiveness, efficiency, and transparency of public spending. The call to upgrade institutional, functional, and technological frameworks of PFM systems in Latin American countries has been significant as governments seek to achieve greater coverage, reliability, and timeliness of financial information. There is also pressure to streamline procedures and implement more sophisticated business models and technologies in national treasuries, debt management offices, accounting departments, and budget and procurement agencies.

Overview of Public Financial Management Reforms in Latin America

Public financial management (PFM) plays a key role in the sound allocation and use of public resources and macroeconomic management. This is why PFM modernization can have a substantive impact on the effectiveness, efficiency, and transparency of public spending. The call to upgrade institutional, functional, and technological frameworks of PFM systems in Latin American countries has been significant as governments seek to achieve greater coverage, reliability, and timeliness of financial information. There is also pressure to streamline procedures and implement more sophisticated business models and technologies in national treasuries, debt management offices, accounting departments, and budget and procurement agencies.

The demand for modernization has been particularly strong in Latin American countries, as authorities pursue fiscal sustainability in a challenging international economic environment. At the same time, they are responding to increasing demands for transparency and facing tighter fiscal conditions.

This book intends to contribute to the discussion by providing an overview of good practices, as well as the experiences of some countries—with special attention to Latin America—that have implemented PFM reforms in cash and debt management (CDM), government accounting, procurement, and financial management information systems. The book does not cover other PFM areas that include budgeting and planning processes and their interactions; performance-oriented budgeting; public investment systems; Medium-term Expenditure Frameworks (MTEF); or risk analysis. Although these areas have been covered in many other publications, further research is needed to understand how Latin American countries have performed on those issues. The focus of this book, in particular, reflects the findings of the technical dialogue and technical assistance of the Inter-American Development Bank (IDB) and the International Monetary Fund (IMF) with regard to Latin America, representing some of the priorities determined by the countries in the region.

The IDB and IMF have collaborated to support the exchange of experiences of, and dissemination of good practices by, PFM practitioners, particularly in terms of treasury management and public accounting. In addition, since its inception in 2010, the Latin American Treasury Forum (Foro de Tesorerías Gubernamentales de América Latina (FOTEGAL)) has become the primary forum on treasury management in the region, prompting and facilitating discussions on the key topics and challenges that the region faces. These discussions take place through annual seminars, workshops, studies, and training.

FOTEGAL is composed of 16 national treasuries in the countries of Argentina, Bolivia, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Dominican Republic, and Uruguay.1 The recently created Latin American Government Accounting Forum (Foro de Contadores Gubernamentales de América Latina (FOCAL)) is expected to produce a similar impact with regard to government accounting, influenced significantly by a new wave of reforms relating to the implementation of accrual and cost accounting.

One remarkable trend in the region is the use of information and communication technology (ICT) to facilitate the management of large amounts of financial information. Some of the recent reforms would not be possible without the support of sophisticated integrated financial management information systems (IFMIS). This is reflected in the implementation of comprehensive treasury single accounts (TSAs), electronic systems supporting the procurement and acquisition of goods and services, consolidation and integration of financial management systems, implementation of public sector cost systems, and preparation of consolidated financial statements on an accrual basis.

Although extensive progress on those PFM issues in the region has been made in recent decades, there still remain many challenges to overcome. IFMIS are in the process of modernization aimed at greater functional integration; TSAs—as defined by Fainboim and Pattanayak (per references list) (2010)—have expanded, but coverage remains incomplete (even in relation to central government), and accrual accounting has yet to progress. Public procurement is fundamental to sound public resource management (PRM) and it has achieved great progress in the region during the past two decades; however, there is room for improvement. Cost accounting—also essential for best PRM practices—is still in its infancy and it depends on information that is not fully available. In this regard, it is important to engage decision makers with an appetite to go beyond traditional financial information.

Strong demand for efficiency and economy in the management of financial resources continues. The development of treasury indicators is vital to measure and communicate results simply and directly. This also has a bearing on the close agency coordination of CDM functions to achieve substantive financial impact, resource savings, and transparency.

The above issues are discussed in this book to influence PFM reforms and to contribute to the improved delivery of goods and services by governments. Sound PFM systems are intended to provide the preconditions for the efficient performance of public expenditure. The Latin American experience is unique, since it involves a substantive number of middle-income and emerging market economies that have similar institutional and legal traditions that derive from European countries, such as Spain, Portugal, and France. This experience can be useful for other regions that currently face similar challenges.

Four main pillars of PFM are discussed in this book. The first pillar represents the relationship between PFM and macro-fiscal affairs in general, and it includes fiscal and macroeconomic management, monetary policy, development planning, and other macro-fiscal aspects. The second pillar concerns the improvement of the efficiency and performance of PFM systems, covering the characteristics that relate to the organizational structures, methods and strategies, information systems, and indicators that measure PFM efficiency. The third pillar relates to PFM and PRM, including the use of financial information to improve decision making in the public sector, which contributes to greater efficiency in resource management, and generates value for money in public expenditure. The fourth and last pillar involves PFM and transparency, taking into consideration the quality, timeliness, availability, and public access to financial information.

PFM and Macro-Fiscal Affairs

Within the first pillar of PFM, this publication highlights the relevance of PFM to generate information that is conducive to good fiscal and macroeconomic management. As Allen, Hemming, and Potter (2014) mention, “although the objectives of PFM overlap with the goals of fiscal policy, PFM and fiscal policy are not the same. PFM has more focus on expenditure rather than on taxation and is concerned with achieving aggregate fiscal discipline and efficient government spending, while the goals of fiscal policy are to achieve macroeconomic stability and sustainable economic growth.”

In this context, the concept of PFM, which is discussed here, adopts a comprehensive and overall definition that covers a set of administrative elements, tools, and management systems. These are designed to produce information, processes, and rules that support macro-fiscal policy decisions and to provide the instruments for the implementation of these decisions.

Regarding the legal and regulatory PFM frameworks in Latin American countries, considerable improvement has been attained during the last two decades, although difficulties have been experienced in linking development strategies and plans to medium-term fiscal planning frameworks, as well as budget plans to current in-year appropriation and execution (USAID, 2014). Furthermore, increasing the quality of macro-fiscal management is essential to improve fiscal planning and forecasting capacities.

In terms of monetary policy, the treasury—understood to be the unit responsible for CDM—must communicate and coordinate with the central bank, given the macroeconomic relevance of the volume of resources controlled. As emphasized by Cangiano, Curristine, and Lazare (2013), one of the key objectives of PFM is to maintain a sustainable fiscal position. These macro issues impact economic development and its measurement.

The relationship between PFM and fiscal affairs is not the prime subject for analysis in this publication. Rather, it is a component of the general framework that relates to its importance in macro-fiscal and economic management.

PFM and its Efficiency

A more in-depth discussion is made of the efficiency of PFM—the second pillar—through the identification of common trends and opportunities that can strengthen these systems in Latin America. These include aspects that relate to organizational arrangements, methods and strategies, information systems, and PFM performance indicators.

The book dedicates special attention to the organization and coordination between treasury and debt management functions in terms of the organizational arrangements that structure PFM administration. The traditional objective of government cash management, in general, is to ensure that cash is available to execute the budget efficiently and to meet government obligations when they fall due. Modern cash management, however, has other objectives: cost-effectiveness, risk management, and support to other financial policies. It has been stated that a TSA is a prerequisite for efficient cash management. Most countries in the region have developed, or are in the process of developing, a TSA. By pooling financial resources, millions of dollars can be saved per year, given that centralization of cash liquidity reduces the need to issue treasury bills to finance short-term cash requirements. It also provides the opportunity to invest cash surpluses.

Among the key functions of cash management are the monitoring of cash inflows and outflows, access to cash, development of cash flow forecasting, and entry into the financial market. Government cash management is also related to the coordination between treasuries and central banks in terms of analyses and the management of financial risk (liquidity, credit, and operational). Furthermore, the core function of debt management is to ensure that the financing needs and payment obligations of government are met at the lowest cost in the short, medium, and long terms, consistent with prudent risk levels. Many countries associate a secondary objective to the development of the domestic financial market.

The importance of close coordination between debt and cash management is self-evident. In the first place, to finance the gross borrowing requisites of government, debt management strategies (DMS) need to be developed to enable the selection of the most adequate financial instruments that will minimize cost and risk. Simultaneously, the financial market should be developed as a means to provide stability and a measure of certainty. Good practices dictate that such choices are made by way of medium-term DMS that are supported by debt sustainability analyses, taking into account the appetite and volatility of the market, as well as interest and exchange rate predictions. Cost considerations are relevant, among other criteria, since the development of a consistent yield curve will, in turn, develop the market. Specialists within the treasuries should develop these processes.

On the expenditure side, it is essential to comprehend the significant yearly, monthly, and weekly fluctuations that impact payment flows. Most countries in Latin America have developed quarterly, monthly, and intra-monthly cash flow forecasts with sufficient precision to experience small variations in relation to effective payments, but some continue to operate under severe cash constraints with the need to ration cash, impose budget restrictions, and, ultimately, accumulate expenditure arrears.

Cash flow forecasting at the national and subnational levels tends to be incomplete in many Latin American countries. Opportunities to strengthen cash flow management include expanding the coverage of TSAs, improving its interoperability with debt and financial management systems, and strengthening cash flow forecasting at the national and subnational levels to improve the predictability of funds.

There are only three countries in Latin America that operate under an integrated debt and cash management model: Brazil, Colombia, and Peru. The other 14 countries have different arrangements, whereby the functions are distributed among the treasury office, debt management unit, central bank, and—sometimes—the budget office. There are advantages to integrated units, although there are some constraints, such as the lack, in some cases, of a professional cadre of staff, the fact that remuneration sometimes is noncompetitive, and the need for training, all of which prevent the implementation of a modern debt management unit, as exists in many advanced economies.

In some respects, the functions of debt and cash management perform well in Latin America, despite the various organizational structures in place. The historical tradition of separate units prevails at the expense of a more integrated approach. Whether or not the potential advantages of integration are recognized, reform is challenged by the need to change current legislation and administrative practices. The transition from a separate to an integrated structure takes time and the process can be more complicated than originally foreseen by ministries of finance.

Taking into account the countries that maintain separate units, those that are more effective tend to have better coordination mechanisms and superior integrated accounting and financial information systems. Nevertheless, while countries improve their CDM processes and the domestic financial markets develop, the separation of functions appears to be more disadvantageous than advantageous.

The most important instrument in Latin America that is discussed, in terms of key PFM methods and strategies, is the TSA. This is viewed as an essential tool to efficiently manage cash.

Establishing a TSA is a fundamental step toward modernization of treasury management. There is much empirical evidence to suggest that a TSA can save significant resources by avoiding unnecessary short-term borrowing or by pooling liquidity to facilitate cash management. Moreover, a TSA allows the treasury to shift from concentrating primarily on the payment of obligations (traditional passive behavior) to become more cash management-oriented (active behavior), leading to such actions as investing in the financial market and maintaining minimum liquidity to allow for timely payments. For example, the Treasurer of Guatemala reported savings in 2014 of Q$42 million (US$6 million, or 1.5 percent of interest paid on domestic debt). This was predominantly attributed to the consolidation of central government resources in the TSA. Other countries have experienced similar savings.

Three countries in the region now include the entire central government within their TSA (Argentina, Brazil, and Costa Rica). Brazil, along with Costa RIca, Ecuador, and Mexico, have incorporated their pension funds and have absorbed their external resources into this account. The remuneration of the TSA has yet to be established and, at present, most treasuries maintain their deposits at the central bank although few, in fact, are remunerated.

Most reforms aim to ensure that the TSA has comprehensive coverage to enable active investment and an adequate remuneration of balances, thus reducing the number of bank accounts and maintaining them at zero balance; automating bank reconciliation; and improving the integration of financial and accounting systems. In the case of Latin American countries, specifically, it is important to recognize that most of the advances that relate to the consolidation of the TSA were made possible due to significant enhancements of IFMIS.

Regarding PFM Information Systems, IFMIS is the key instrument to better integrate PFM functions. All countries in Latin America have implemented IFMIS, and these are continuously being upgraded in the region, which represents the largest regional concentration of IFMIS projects in the world over the past 30 years.

An IFMIS is an information system that is used in the public sector to computerize and automate key aspects of financial management, such as budgeting, treasury functions, accounting, and debt management. In general, an IFMIS promotes a single registry of revenues and expenditures from a significant number of units in the public sector in a more integrated and efficient way in relation to PFM processes. It also generates relevant in-year fiscal reports and annual financial statements.

The IFMIS that are in place in Latin American countries vary in the degree of integration in terms of key PFM functions. The chapter that discusses this topic presents the main characteristics, evolution, current status, and level of IFMIS development in the region. It also includes the conceptual aspects and capabilities of the systems, development strategies, latest upgrading trends, and challenges to implementation. After more than two decades, several countries have modernized or implemented new IFMIS. Some incentives are the result of better information technologies to enable easier connectivity, offer greater storage and data usage, have faster communication platforms, and incorporate more efficient and reliable software.

By successfully implementing or enhancing an IFMIS, it should generate timely, relevant, and reliable financial information, as well as contribute to achieving fiscal discipline, efficiency in the allocation of resources, operational effectiveness, and fiscal transparency. The chapter closes with a few success stories and general recommendations for the modernization of the IFMIS, which include aspects of project management, integration of its main functions, and technological and functional definitions of the ICT system, as well as the prioritization of activities during the various stages of development and implementation.

The adoption of IFMIS in Latin America initially took place in the 1980s and 1990s, when the region suffered fiscal crises and during which time ICT took hold, among other factors. IFMIS, in general, currently operate in Latin America and cover four principal areas: budget, treasury, accounting, and public debt. In addition, IFMIS in some countries interact with other systems of PRM (e.g., those that relate to public investment, asset management, payroll, procurement, tax administration, and project management). Therefore, it is important to define the scope and functionality of the system, given that there is no uniformity.

On a technological level, most IFMIS in the region are the result of custom-tailored software, primarily from in-house development, which may offer more than one version with subsequent updates. During the last decade, the development of systems using Web-based technology has grown as a consequence of an expanded Internet.

Despite the widespread development of IFMIS in Latin America, not all outcomes or upgraded projects have generated adequate information to strengthen fiscal transparency and accountability within a specific framework to promote fiscal solvency. The inadequacies in IFMIS implementation and operation constitute a loss of opportunity to strengthen these and, therefore, directly impact the effectiveness of fiscal policy and fiscal risk management.

International organizations have supported the implementation and shaping of IFMIS in Latin America since the 1990s. These projects, in general, aim to increase the institutional capacity of governments to control all phases of public spending transparently, integrally, and efficiently. In most cases, they include upgrading or creating IFMIS, which requires the allocation of significant financial and human resources for a long period of time—at least four to five years.2

There are many strategic aspects that relate to the successful development and implementation of an IFMIS in the case of Latin America. These include the political economy of an IFMIS project; a conceptual model, as well as governance and management of the project; definition of the development strategy; strengthening of budgetary management, financial, and accounting functions, including level of integration; implementation of a TSA as one of the core modules; prioritization of activities in project development; significance of the testing phase; warranty period and systems maintenance strategy; and change management strategy.

The main challenges that face IFMIS modernization include the updating of the chart of public accounts and defining to what extent the modifications will impact the data structure and processes. In addition, it is necessary to establish the optimal level of integration between IFMIS and the budget, in terms of a results framework, and to what extent IFMIS contributes to the generation of public service cost information.

One of the most important issues in the region is the need for more quantitative and results-based indicators to measure PFM productivity. This relates to the measurement of PFM performance.

This publication attempts to identify a set of comprehensive and quantitative indicators to demonstrate whether treasurers are adding to the benefits of resource pooling in the TSA, reducing financial and operational costs, improving efficiency, and streamlining controls. In terms of resource pooling, alone, indicators suggest that to increase the coverage of the TSA and to speed the transfer of resources to the treasury, the time it takes to collect revenues can be reduced and the control to open bank accounts can be increased, thus improving the liquidity in the TSA.

With regard to reducing financial and operational costs, relevant indicators measure the cost of collecting revenues and making payments through the banking system. In terms of efficiency, these indicators establish the average time it takes to collect revenues and pay expenditures, as well as determine the accuracy of cash flow forecasting. Another indicator quantify the accumulation of payment arrears to minimize their accumulation. Finally, this book discusses a proposed mechanism to prevent late payments by charging interest that is accrued as of 30 days from invoice date.

PFM and Public Resource Management

The third pillar of PFM, which relates to supporting PRM, is an important component in public management reform. It includes the use of financial information to improve decision making in the public sector, thus contributing to greater efficiency of resource management and generating value for money in public expenditure.

Regarding the capacity of PFM systems to support the allocation of resources in the public sector, the innovation of calculating public service costs is rarely available in Latin America. In general, cost information is obtained at the aggregated institutional and programmatic level, but not at the level of internal government providers of basic public service cost centers (e.g., schools, hospitals, and penitentiaries). This scenario also applies to the cost of per capita public services (e.g., primary education for a student, patient treatment in hospital, or maintaining a prisoner in jail).

International experience has shown that the implementation of cost systems in the public sector can be very complex, based on the kind of solutions proposed. An example is the activity-based cost system, which is very expensive and difficult to maintain, and the use of cost information to budget allocation is very limited. The challenge has been to use cost information as part of the budgetary allocation process and financial decision making in the public sector.

There have been few positive experiences in relation to public sector cost systems in Latin America. An example is that of the State of São Paulo (Brazil),3 which linked the activities of the MTEF (multiyear plan) with the services provided by cost centers. The rationale behind this approach is to give the cost system a usefulness that goes beyond the usual approach that benefits control over management. The government of São Paulo has invested in developing results-based management, in which cost information is considered essential.

The objective of this project is to improve the budget allocation of resources to generate savings and efficiency, and better inform the public about the cost of public services. The case of São Paulo was supported by IMF technical assistance over a period of more than three years. Despite the fact that the exercise has not yet been totally completed, this experience is a valuable asset to the discussion relating to some of the innovations in the approach taken.

Another innovation in the case of the State of São Paulo is to define, from inception, the public services to be costed and establish the cost centers responsible for the provision of such services. Apart from adding specific knowledge on the manner in which public services are structured and delivered, this approach has been seen to increase the commitment of the authorities and the usefulness of cost information, given that the relevant reports tend to incorporate the expectations of the main users, that is, cost center managers, and the population served by them.

Finally, and as a result of the experience, a organization strategy has been adopted that includes the creation of a dedicated unit to manage the project and serve as a reference for the development of the system. Also adopted is a common approach that can be extended to the entire government of São Paulo; that is, using all systems and gathering available information prior to the development of any ICT system, as well as garnering an extensive range of research information and documentation relating to the experience. In this respect, the case of São Paulo goes beyond what has been developed by the government of Brazil, which calculates cost at the budgetary institutional and programmatic level only (Machado and Holanda, 2010).

The project undertaken by the State of São Paulo is a relevant example for other national and subnational governments, considering the size of the state and the complexity of its public services. The main lessons learned are (i) to ensure that the scope of the project is simple and realistic; (ii) to use available systems and information as much as possible before new developments are undertaken; (iii) to use pilot projects to review current circumstances and familiarize financial analysts with cost concepts; (iv) to identify multiple users and uses of the cost information, such as program evaluation, financial control, budgeting, and performance; (v) to adopt a proof of concept phase to test the ICT solution before fully developing the ICT system; (vi) to invest time in understanding the needs of the main stakeholders and communicate in a language that is familiar to them; (vii) to create, upfront, a good structure to manage the cost project, prepare manuals, and investigate and document the local experience; and (viii) to implement the project in stages that takes in consideration the political cycle.

Cost accounting and analysis are important to improve budgeting and resource allocation decisions and to support PRM, in general. They could contribute to enhancing government performance on the basis of economy and efficiency. Spending budgets are basically the aggregation of costs to produce goods and services in certain quantities. Government officials are urged to make resource allocations on a rational basis, by comparing alternatives. These alternatives need to be identified and analyzed among other examples that relate to the general need for cost information in government.

The contribution to cost accounting and greater PRM efficiency by IFMIS currently operating in Latin America is limited, based on its capabilities and functionalities. The IFMIS in place mainly support public budgeting, accounting, and financial management, applying a single registry of administrative actions of collecting and spending. This allows for more integration between the processes of public budget, accounting, and treasury and debt management, and it generates standardized financial statements.

Procurement and additional resource planning systems are complementary to the financial management capacity of IFMIS, as well as other links to the payroll. These are valuable to improve PRM.4 Some information systems that include modules of payroll, procurement, and other resource planning functions that are beyond the traditional financial management functions of budget, accounting, treasury and public debt, are known as Enterprise Resource Planning (ERP). ERP is an information system that includes a series of integrated applications, enabling an organization to manage its entire business and finance it in an integrated way, including purchasing and human resource management activities. Some authors commonly refer to an ERP that is customized for public sector use as a government resource planning system (GRPS) (Pimenta and Farias, 2012).

The use of a single GRPS is more common at the subnational level or in a single entity and it is difficult to implement to cover an entire country. The most common strategy at the national level in Latin America is to integrate or interoperate other databases with an IFMIS (e.g., to better integrate decentralized payroll management systems to improve adherence to budgeted human resource planning and expenditure).

Public procurement is an essential tool for PRM in terms of generating value for money in public expenditure, and it is one of the most important areas of PFM. This book highlights the significant progress made by Latin American countries over the last two decades as they pay close attention to electronic procurement.

Public procurement in Latin America accounts for an average of 10 to 15 percent of gross domestic product. It is also the government activity that is most vulnerable to waste and corruption due to its complexity, size of financial flows, lack of transparency of some decisions, and close interaction between the public and private sectors.

Procurement is also an important component of public administration. Firstly, public procurement systems can facilitate spending along budget commitments, facilitate reliable and efficient resource flows and transactions, enhance accountability, and generate critical information to support prudent fiscal decision making.

ICT has been the main driver behind the reform of public procurement systems in Latin America. To increase transparency, competition (savings), and efficiency in public tendering processes, the majority of Latin American countries have developed e-procurement systems that disclose critical procurement information and provide tools to support transactional procurement. Data from the Organization for Economic Co-operation and Development (OECD) and the IDB shows that out of a list of 10 services provided, those of Latin American countries are considered to be more comprehensive, on average, than those of OECD countries (OECD and IDB, 2014).5 Data also show that countries in Latin America disclose, on average, a higher proportion of procurement information at the central government level than do OECD countries. E-procurement systems have also helped to consolidate data on government expenditure and results.

Advances in public procurement can also be attributed to the creation in many Latin American countries of specialized procurement regulatory agencies—some with institutional and financial autonomy. These agencies harmonize and standardize regulations across procuring entities, oversee the development, performance, and maintenance of e-procurement systems and information portals, provide technical capacity training and, in some cases, mitigate disputes.

Lawyers and legal experts historically have carried out procurement regulations within the region. As a result, procedural formality and compliance took precedence over economic efficiency or commercial objectives. The links between budget and procurement plans, therefore, are weak and budgetary law and financial management procedures are generally inadequate to meet procurement needs.

To improve PRM, budget planning, cash forecasting, budget allocation and procurement systems need to work in parallel. As such, the integration of e-procurement systems with other PFM systems, such as IFMIS and TSA, is critical. In many Latin American countries, however, public procurement systems are minimally integrated with PFM systems, and there is poor linkage between budget preparation, procurement planning, and execution systems. For instance, procurement systems usually do not consolidate the information relating to the contract compliance of major expenditures with budgetary systems, nor are they linked to cash management systems. The challenges of greater integration or interoperability of these systems, however, can be attributed to reasons of an institutional and political nature, as well as poor planning, as opposed to complications related to ICT.

While many countries in the region have adopted some anticorruption measures, procurement frameworks and electronic government procurement systems, nevertheless, have proved insufficient by themselves to avoid corruption, mismanagement, and waste of resources—demonstrated by the large number of related scandals in the region. Despite the fact that sanctions are usually included in such frameworks, in practice, few countries enforce them. To address this, it is essential that Latin American nations identify the businesses that have been or are engaged in corrupt practices, barring them from future bids. To do this will necessitate the improvement of other relevant systems, such as internal and external control systems and internal audits. Efforts also should be made to understand how the laws and regulations in place are able to be circumvented and how current control and sanctions mechanisms operate in practice.

To a limited extent, procurement policies in the region assist small-and medium-sized enterprises and women-owned businesses, as well as protect the environment. The use of public procurement as a tool to promote economic, social, and environmental policies, however—while respecting the fundamental principles of procurement (efficiency, value for money, and transparency)—remains a challenge in most Latin American countries.

PFM and Transparency

The fourth and last pillar relates to PFM and transparency and it synthesizes the main topics covered by this book (e.g., quality, timeliness, and public access to financial information). Access to information ensures financial accountability, although incentives and rules—in particular, the principles and standards of accounting and auditing—are critical elements, as well (Schick, 2013).

With regard to the quality of financial information, the recent reform in Latin American countries of public accounting for accruals and improved public sector asset and liability registries are essential to transparency. This move has demonstrated the relevance that inclusive identification, measurement, and publication have on government revenues, expenditures, assets and obligations.

The recent global financial crisis has exposed the weaknesses inherent of most financial information systems that were unable to produce critical information on long-term obligations and contingent liabilities. Contingent liabilities, as an example, are associated to pensions and social benefits and public-private partnership (PPP) contracts. Other instances are contingent responsibilities that relate to judicial demands against the public sector, potential impact of natural disasters, and other fiscal risks that are poorly identified and/or justified.

To respond to these challenges, countries in Latin America are implementing new accounting methods that are aligned with international accounting standards. The approach is considered prudent and realistic and is in parallel to the speed and extent of the reforms. An approach that has been adopted by Chile consists of five stages: (i) gap analysis to identify how far current accounting practices are from the international standards; (ii) development of a strategy to implement the reforms; (iii) adaptation of the accounting standards; (iv) development of guidelines and timeframes; and (v) implementation of the reforms.

This publication describes the public accounting experience and strategies adopted by Brazil, Chile, Costa Rica, and Colombia. These are particularly useful, since they showcase how countries have defined a pathway toward accounting reform in central government, some of which will take at least eight years to complete at national level. This gradual approach demonstrates the need for more realism—rather than discouragement—at the time it takes to adopt or adapt the public accounting standards, develop the necessary ICT systems, and improve the capacity of a significant number of government accounting professionals who are not familiar with the standards.

To date, no country in the region has yet completed the transition, which now stands at an average of eight to 12 years to totally complete. This does not mean, however, that results already have not been—or will not be—achieved until then. The reforms significantly impact the quality of information; coverage of main stock and flows; substantive investment in ICT systems; capacity building; and improved, more frequent, and transparent reports.

The availability and extent of PFM information varies across Latin America. Some countries provide comprehensive and public information concerning budget plans and execution, while others provide limited access to it.

Challenges remain to reduce expenditure management, procurement, and payroll corruption. It is essential that there is more transparency and that the design of internal control frameworks is improved, particularly in countries that are lagging in terms of access to information. While this book does not offer an in depth analysis of audit practices and public control, it does include numerous considerations that relate to the issue of transparency.

Concerning transparency in public procurement, the data from the OECD Methodology for Assessing Procurement Systems (MAPS) shows that some countries in Latin America currently have anti-corruption measures in place, albeit limited, to preserve the integrity of their procurement systems.

The degree of the participation of civil society organizations (CSO) in Latin America to monitor government finances is disproportionate and is generally inadequate across countries. CSOs face obstacles in the form of legal mandates and technical deficiencies. Progress in some countries has been observed, however, which is encouraging.

Structure of this Publication

This book comprises eight chapters, each with a similar structure. Each chapter begins with a discussion of advanced approaches to PFM in terms of conceptual models; this is followed by a description of the current status of a sample of Latin American countries, and concludes with an examination of good practices, conclusions, recommendations, and the identification of areas that require further investigation.

The selection of areas is based on the impact that some PFM reforms have had in Latin America in the last two decades. While there are other PFM reforms that have been implemented, the ones discussed here have specifically impacted a large number of countries. This has provided a rich pool of empirical evidence and sufficient information to examine the challenges and successes of implementation. An exception to the regional approach, however, is contained in Chapter 6, which relates to the cost system that is being developed in the State of São Paulo, Brazil. This experience will inspire other states and countries to consider the cost of public sector services, for which there are limited international experiences and results.

Figure 1.1
Figure 1.1

Relevant PFM Components Considered in this Book

Source: Authors’ elaboration.

In the first chapter, the authors have presented an overview of the book, outlining the principle components of PFM, which are examined in the following chapters. These components hinge on the four key dimensions that include the (i) relationship between PFM and macro-fiscal affairs; (ii) efficiency of PFM systems; (iii) contribution of PFM to PRM; and (iv) impact of PFM on transparency and accountability.

As previously mentioned, the relationship of PFM to fiscal affairs is not the main subject for analysis in this book; rather, it is part of a general framework to understand the importance of PFM on macro-fiscal and economic management. Chapters 2, 3, 4, and 7 directly relate to efficiency in PFM, including the indicators with which this efficiency in treasury management can be measured; organizational arrangements for CDM; methods and strategies in the use of a TSA; and the support of ICT to integrate the main PFM functions by using IFMIS. With regard to PFM supporting PRM, Chapter 6 details the experience of cost systems in the public sector, while Chapter 8 analyzes the progress of procurement management in Latin America. Finally, Chapter 5 explores the impact of PFM on transparency and accountability, analyzing the role that modern public accounting has in relation to them.

Chapter 2 provides a description by Marco Varea and Adriana Arosteguiberry on the origins of FOTEGAL, as well as a discussion on an issue that has been on the agenda of almost all annual seminars: the demand by treasurers for a definition of a set of quantitative efficiency indicators for treasuries to easily measure performance results that can be easily communicated and understood by a nonspecialized audience.

The authors offer a synopsis of the main treasury indicators that are currently available, such as Public Expenditure and Financial Accountability (PEFA), Open Budget Index, and the survey developed by FOTEGAL. They conclude that despite the richness of those indicators, they do not completely address the situations that are considered most relevant to treasury managers in the public sector. The authors also propose benchmarks for certain targets. This chapter is an important contribution, since there is insufficient literature to provide a comprehensive overview of the main treasury management indicators.

In Chapter 3, Mario Pessoa, Mike Williams, and Israel Fainboim identify the main cash management and debt management functions of a typical Ministry of Finance; explain the importance of their interaction and coordination; and describe how this can be best achieved under varying institutional structures. The chapter assesses the situation in 17 Latin American countries, based on the CDM functions discussed in an initial section. It concludes by discussing the benefits and challenges of adopting an integrated structure that encompasses CDM functions in a single unit. This chapter also mentions the coordination mechanisms that are required in case the units are maintained separately.

In Chapter 4, Israel Fainboim, Adrian Vargas, and Claudiano Albuquerque discuss the basic characteristics of TSAs and present the relevant status of 17 Latin American countries. TSAs have been a recurrent topic in the discussions organized by FOTEGAL due to their relevance. There is an evident effort by treasurers in the region to establish very comprehensive TSAs. Many legal and institutional framework reforms have been implemented and are accompanied by a significant investment in system and information technology.

In Chapter 5, Joseph Cavanagh and Almudena Fernandez discuss the main challenges to implement accrual accounting in the public sector, and they examine some countries that have already undergone reform. There is, as yet, no Latin American country that has fully implemented accrual accounting in line with international accounting standards, but many have accounting regimes that include a variety of those elements (e.g., recognition of a financial event as it occurs and not when it is paid; consolidation of financial statements with financial and nonfinancial information; registration and valuation of physical assets; depreciation of fixed assets and medium-and long-term financial liabilities, to name a few).

Furthermore, there are many elements that should be incorporated in financial statements (e.g., long-term impact of pension funds; liabilities derived from PPP contracts; incorporation of natural resource assets; provisions that are relevant to contingent liabilities; and adoption of valuation of assets based on fair value methodology, among others). As the only international standards available, the International Public Sector Accounting Standards have been the basis for reform, adopted or adapted gradually by countries, depending on their local circumstances.

Chapter 6 includes a description by James Chan and Mario Pessoa of the implementation of a public service cost system in the State of São Paulo, Brazil. Implementing cost systems worldwide has been a challenge, given that there is limited experience and a lack of appropriate incentives. Few countries have implemented cost systems that go beyond the usual budget coverage of institutions and programs. The government of São Paulo, however, has gone a step further in defining cost centers that are the main providers of public services and it has designed a cost system that uses available financial systems and information.

The first section of Chapter 6 explains the main cost concepts and describes the experience of the United States and the federal government of Brazil. The second section presents the recommended approach, which was ultimately executed in São Paulo, while it emphasizes the use of direct cost; adjustments made to the use of available financial information; use of pilot projects to test the concepts and viability of the approach; extensive applied research to the pilot cases; and a separate phase of ICT development that applied a proof-of-concept approach prior to the development of the ICT system.

In Chapter 7, Gerardo Uña and Carlos Pimenta review the evolution and key characteristics of IFMIS that are currently in operation in Latin American countries, as well as the strategies for their upgrade and the aspects of political economy; conceptual model; project management; ICT programming approach; integration of the main functions of budget management, public accounting, and treasury management; definition of ICT architecture and maintenance strategy; among other issues. The chapter analyzes recent trends across the strategies adopted to modernize IFMIS in the region, and it identifies issues to be considered in the management of these processes.

Finally, Chapter 8 provides an assessment by Carlos Pimenta and Natalia Rezai relating to the significant progress in public procurement across Latin American countries in the past two decades in comparison to OECD countries, including their regulatory agencies, technological frameworks, and new instruments (e.g., electronic reverse auctions, framework agreements, e-catalogs, and Web procurement portals). The chapter argues the case that public procurement in Latin American countries has advanced as a result of these agencies and ICT developments. It also explores some aspects of savings as a consequence of the adoption of these new instruments.

Initially, a conceptual analysis is presented of the design, goals, and functions of procurement, the relationship between procurement and PFM systems, and the importance of appropriate PRM, based on the main principles of procurement: efficiency, transparency and value for money. Subsequently, a review of some of the factors that have contributed to the recent transformation of public procurement is offered (e.g., ICT tools, the effects of commercial integration and liberalization, and the creation of specialized procurement agencies). The chapter then explores the current situation of public procurement systems in Latin America, including their legal and regulatory frameworks, institutional architecture, and their contribution to public policy, based on standardized assessment methodologies. Finally, the chapter puts forward a series of policy recommendations that take into consideration the challenges that region still faces.


The book recognizes the relevant progress of key PFM institutions in Latin American countries over the last 20 years. It also identifies remaining challenges in critical areas while, at the same time, describes good practices to benefit countries.

At the macro-fiscal level, good PFM in Latin America is a precondition for effective macroeconomic management and sustainable economic development. Financial information, processes, and rules are essential to support macro-fiscal policy decisions and to provide instruments to apply these decisions, promote fiscal discipline, and ensure efficient government spending.

At the same time, the efficiency of PFM systems is essential to improve PRM. Efficiency should generate value for money on public expenditure, as well as improve fiscal transparency.

The efficiency of PFM in Latin American countries has been enhanced during the last few years, although there are still many challenges to overcome with regard to improving organizational structures, legal frameworks, methods, strategies, and information systems. One key element is the absence of more indicators to measure PFM efficiency as a means to improve performance. To address this, the book discusses treasury indicators in some detail.

From an analysis of more than 100 countries, using the PEFA methodology (more focused on process compliance), Matt Andrews (2013) indicates that many countries seek only to “appear” that they have reformed PFM, while adopting a set of short-term signals—often unsustainable in the long term, since these actions were not aligned to the context of each country. Ultimately, these signals do not represent a realistic solution or mind set. Andrews refers to this phenomenon as “institutional isomorphism,” using the concept of isomorphism in the biological sciences, where some animals depend on “appearance” vis-à-vis others to protect themselves in the wild. Similarly, it is common that some governments wish to “appear” as if they have adopted international good practices in terms of PFM so they can gain financial credibility in the short term. An important aspect discussed in this book is the use of quantitative and results-based indicators to measure PFM efficiency, thus providing an evaluation of the real efforts of PFM reform in Latin America.

With regard to the support of PFM to improve PRM and the budget and resource allocation decisions in the public sector, the key dimension that is absent in Latin America is public sector cost accounting. Cost accounting can support the evaluation of government performance on the basis of economy and effectiveness; it can contribute to greater efficiency of PRM and promote value for money in public expenditures. The experience of São Paulo in calculating the cost of public services is an innovation in this area. There are other important issues, such as efficient public investment management and the effective integration of medium-term fiscal frameworks that define realistic and predictable budget envelopes to line ministries and programs.

PFM can also contribute to transparency in terms of quality, timeliness, and public access to financial information. This relationship highlights the relevance of inclusive identification, measurement and disclosure of government revenues, expenditures, assets and obligations. It also draws special attention to the need for new public accounting methods that embrace international standards; accruals; and more efficient and comprehensive public sector asset and liability registries. It is critical that CSOs complement public transparency by overseeing government procurement, finances, and results.

There is further work to be done, and it would be relevant to expand knowledge related to the specific PFM challenges that are at the forefront of decentralization in the Latin American region. Since the share of current expenditures in subnational governments is relatively high and continues to rise in many Latin American countries, a better understanding of these obstacles in the face of various levels of subnational governments, as well as the dissemination of relevant good practices, would contribute significantly to fiscal responsibility and sustainability.

Countries such as Bolivia, Chile, and Mexico want to expand fiscal decentralization, providing more power and capacity to subnational governments to extend goods and services to the wider population and increase public investment in infrastructure and possibly increase local taxation. It would be important, therefore, to assess the capacity of subnational governments to absorb the devolved responsibilities and maintain necessary fiscal discipline. Recent lessons from the European fiscal crisis have shown that subnational governments can be significantly prone to fiscal risk. As a consequence, central governments have a responsibility to share systems and practices and to provide capacity building and training to these entities. Unquestionably, the experience gleaned by central governments from practices of good CDM, procurement, accounting, and IFMIS systems will be very useful.

In considering past and present efforts to reform PFM in Latin American countries, this publication recognizes that there is a long way to go before complete and comprehensive integration of PFM functions within each country in the region are in place. There are, however, many positive experiences that have been drawn and good practices to learn from. In essence, countries in Latin America should establish a solid strategy to embody all PFM functionalities pragmatically and with a feasible approach, taking into consideration the local political economy context. This book intends to assist in overcoming the challenge with respect to PFM reform in Latin American countries.


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Brazil has participated in some events, although it is not a formal member.


The most remarkable exception is Brazil, which implemented an IFMIS in 1987 in only one year. Very strong political will and the existence of a public data-processing company, SERPRO (Serviço Federal de Processamento de Dados), enabled the successful and quick implementation. Continuous upgrading of the system has resulted in the availability of consolidated financial information for the budgetary process of the central government and a very comprehensive TSA—both at the forefront of the region.


The State of São Paulo is the most developed state in Brazil. Its economy is larger than most of the countries in Latin America.


Payroll and total public expenditure in human resources are important issues that are pending with regard to PFM in Latin America.


The Organisation for Economic Co-operation and Development has 34 founding member countries. It was established in 1961 to stimulate economic progress and world trade.