A. Policy, Regulatory, and Transactional Functions

Governments are responsible for performing a wide range of fiscal and financial functions, which may be carried out by the finance ministry or other governmental agencies. It is useful to divide these functions into the following broad categories (examples are shown in Table 1):¹²

• First, there are policy functions such as setting fiscal policy rules or targets, managing fiscal risks, developing a debt strategy, formulating the annual budget and the medium-term budget framework, and providing advice on alternative tax policy options. Such functions are at the core of a finance ministry’s work, and occupy a substantial part of the time of its senior officials and ministers.

• Second, there are regulatory functions, which are usually carried out by the finance ministry or an arms’-length agency of the ministry. These functions (sometimes called supervisory functions) fall into three main categories: (i) ensuring that the legal framework for budgeting and public finance is respected and enforced by the line ministries and agencies that are responsible for implementing it; (ii) supervision of banks and other financial institutions (e.g., banking regulation and supervision agencies, the stock exchange, insurance companies and pension funds); and (iii) supervision of specific economic sectors (e.g., electricity, telecommunications, water) to ensure effective competition, prevent the formation of cartels, and protect the interests of consumers. These functions are often shared with, or carried out by, the central bank or independent regulatory bodies.

• Third, there are transactional (or operational) functions such as the processing of budgetary payments, the exercise of internal control, the issuing of government securities, and the collection of taxes and other government revenues. Many transactional functions are highly automated, whereas policy functions are not. In most developed countries transactional functions such as treasury operations have been outsourced or devolved either to line ministries or to agencies operating at arm’s-length to the finance ministry.

• Finally, some functions combine both a policy and a transactional element. For example, the government’s debt strategy is implemented through operations in the T-bill and bond markets by a debt management department within the finance ministry, or by an arm’s-length agency, or in some cases by the central bank acting as the government’s agent.

Table 1.

Taxonomy of Central Finance Functions

Source. Adapted from Allen and Krause (2013).

Table 1.

Taxonomy of Central Finance Functions

Policy Functions	Regulatory Functions	Transactional Functions
1. Fiscal Policy
Fiscal policy analysis and formulation, fiscal rules	Monitoring compliance with rules, spending ceilings and performance targets	Macro-fiscal forecasting
Debt management strategy	Regulation of debt markets	Debt issuance and registry functions
Policy on taxation and other government revenues	Enforcement of tax laws	Collection of taxes, customs / excise duties, and other revenues
Policy on and management of fiscal risks, guarantees, etc.	Monitoring implementation of risk management policies	Issuance of guarantees
2. Budget Management
Formulation of the medium-term budget framework / annual budget	Coordination of budget cycle	Estimation of budget costings
Public investment strategy and planning, policies and guidelines	Monitoring policy implementation, gateway reviews	Execution of policies and guidelines, including investment appraisal
Budget execution – policies, guidelines, instructions	Monitoring/oversight of budget execution, compliance with regulations	Execution of budget by spending agencies
Cash forecasting/liquidity management /TSA	Monitoring through Cash Management Committee	TSA managed by central bank under government supervision
Policies on public procurement and PPPs	Monitoring of policy implementation, gateway reviews	Execution of procurement contracts and PPPs
3. Accounting and Reporting Policies, Internal Control and Audit
Development of accounting policies, rules and guidelines	Coordination/monitoring compliance with accounting standards	Compilation of financial reports
Application of international standards (IPSAS, GFS)	Provision of internationally comparable fiscal data and statistics	Standardized recording of transactions, assets, and liabilities of public sector
Policies on internal control and internal audit	Monitoring compliance with standards	Execution of internal controls and internal audit
4. Other Central Finance Functions
Policies on intergovernmental fiscal relations	Monitoring compliance with local government budget / finance policies and laws	Execution of local government budget / finance policies and laws
Management of government assets and liabilities	Monitoring implementation of management framework	Provision of data by spending agencies, etc.
Policies on the financial management of SOEs	Monitoring implementation of policy framework	Provision of data by line ministries and SOEs
Relations with international finance organizations	Monitoring compliance with international obligations and standards	Processing of international financial transactions

Source. Adapted from Allen and Krause (2013).

View Table

Table 1.

Taxonomy of Central Finance Functions

Policy Functions	Regulatory Functions	Transactional Functions
1. Fiscal Policy
Fiscal policy analysis and formulation, fiscal rules	Monitoring compliance with rules, spending ceilings and performance targets	Macro-fiscal forecasting
Debt management strategy	Regulation of debt markets	Debt issuance and registry functions
Policy on taxation and other government revenues	Enforcement of tax laws	Collection of taxes, customs / excise duties, and other revenues
Policy on and management of fiscal risks, guarantees, etc.	Monitoring implementation of risk management policies	Issuance of guarantees
2. Budget Management
Formulation of the medium-term budget framework / annual budget	Coordination of budget cycle	Estimation of budget costings
Public investment strategy and planning, policies and guidelines	Monitoring policy implementation, gateway reviews	Execution of policies and guidelines, including investment appraisal
Budget execution – policies, guidelines, instructions	Monitoring/oversight of budget execution, compliance with regulations	Execution of budget by spending agencies
Cash forecasting/liquidity management /TSA	Monitoring through Cash Management Committee	TSA managed by central bank under government supervision
Policies on public procurement and PPPs	Monitoring of policy implementation, gateway reviews	Execution of procurement contracts and PPPs
3. Accounting and Reporting Policies, Internal Control and Audit
Development of accounting policies, rules and guidelines	Coordination/monitoring compliance with accounting standards	Compilation of financial reports
Application of international standards (IPSAS, GFS)	Provision of internationally comparable fiscal data and statistics	Standardized recording of transactions, assets, and liabilities of public sector
Policies on internal control and internal audit	Monitoring compliance with standards	Execution of internal controls and internal audit
4. Other Central Finance Functions
Policies on intergovernmental fiscal relations	Monitoring compliance with local government budget / finance policies and laws	Execution of local government budget / finance policies and laws
Management of government assets and liabilities	Monitoring implementation of management framework	Provision of data by spending agencies, etc.
Policies on the financial management of SOEs	Monitoring implementation of policy framework	Provision of data by line ministries and SOEs
Relations with international finance organizations	Monitoring compliance with international obligations and standards	Processing of international financial transactions

Source. Adapted from Allen and Krause (2013).

The distinction between these broad categories of finance function draws on an important strand of thinking in the literature on public management, namely that public managers prefer to focus on policy issues and delegate operational work to lower levels of the bureaucracy (Dunleavy 1992). In general, it makes sense to separate policy and transactional functions since specialization tends to improve the efficiency and effectiveness with which those functions are carried out. The process of decentralizing finance functions is further discussed in Section IIB below.

Nevertheless, specialization is not the same as isolation. Efficient decision-making requires that there is adequate coordination and communication between units working on policy functions and the implementation of these policies. For example, in the U.K., after the O’Donnell review¹³ in 2004, tax policy was concentrated in the Treasury, while the Inland Revenue and Customs and Excise Departments were merged to form an independent agency. It has been argued by Alt, Preston, and Sibieta (2010) that this reform disconnected policy-making from the real world experience of tax administration, and increased the exposure of policymakers to lobbying from business corporations and other interest groups, issues that were subsequently addressed by the Treasury in a further reorganization. Hence, in countries that have separated responsibility for revenue collection from the analysis of tax policy issues—or have made a similar separation of policy and operational functions in other areas—it is important that policymakers in the finance ministry are able to consult staff in the revenue-collecting agencies about the practical implications of implementing new tax policy proposals.

In addition, many governments have put in place arrangements that prevent conflicts of interest from arising. Such safeguards are particularly important where policy and transactional functions are not separated within an organization. In France, for example, the division responsible for tax policy is integrated in the directorate for tax and accounting, but reports directly to the director-general of the finance ministry. Similarly, in many countries, work on debt management is divided into a front, middle, and back office that are responsible for the various policy and transactional functions¹⁴ with Chinese walls separating each office (Williams, 2013).

The ministry of finance’s role in relation to the above-mentioned functions varies widely from country to country. Table 2 provides a comparison of how responsibility for selected core finance functions (namely, macroeconomic forecasting, long-term fiscal projections, tax policy, budget formulation, accounting policies, and the regulation of banks and other financial institutions) is allocated within the governments of: (i) the 34 OECD countries; and (ii) a sample of 25 emerging markets and developing countries. The table shows four possible forms of allocation, namely that the function is the sole or primary responsibility of: (i) the finance ministry; (ii) another ministry of the government (for example, the ministry responsible for economic affairs or development planning); (iii) an independent agency, regulatory body or fiscal council; or (iv) that the responsibility is shared among two or more ministries or agencies.

Table 2.

Allocation of Responsibilities for Selected Finance Functions

(percent)

Source. Authors’ calculations and OECD (2014).

^1/Benin, Brazil, Cambodia, Colombia, China, Cyprus, Egypt, Ghana, Indonesia, Jordan, Kenya, Kyrgyz Republic, Malaysia, Mongolia, Moldova, Mozambique, Nicaragua, Panama, Peru, Philippines, Rwanda, South Africa, Togo, Yemen, and Zambia.

Table 2.

Allocation of Responsibilities for Selected Finance Functions

(percent)

Finance Function	Ministry of Finance	Other Ministry	Independent Agency	Shared Responsibility	Total
A. OECD Countries (34)
Macroeconomic forecasting	47	38	11	4	100
Long-term fiscal projections	55	33	12	−	100
Tax policy	82	12	6	−	100
Formulation of the budget	91	9	−	−	100
Public investment planning	50	50	−	−	100
Standards and policies on accounting	47	−	41	12	100
Regulation of financial institutions	15	6	56	23	100
B. Selected Developing Countries (25) 1/
Macroeconomic forecasting	60	24	16	−	100
Tax policy	48	8	44	−	100
Formulation of the budget	48	8	−	44	100
Public investment planning	24	60	16	−	100
Accounting policies	84	8	8	−	100
Regulation of financial institutions	−	−	45	55	100

Source. Authors’ calculations and OECD (2014).

^1/Benin, Brazil, Cambodia, Colombia, China, Cyprus, Egypt, Ghana, Indonesia, Jordan, Kenya, Kyrgyz Republic, Malaysia, Mongolia, Moldova, Mozambique, Nicaragua, Panama, Peru, Philippines, Rwanda, South Africa, Togo, Yemen, and Zambia.

View Table

Table 2.

Allocation of Responsibilities for Selected Finance Functions

(percent)

Finance Function	Ministry of Finance	Other Ministry	Independent Agency	Shared Responsibility	Total
A. OECD Countries (34)
Macroeconomic forecasting	47	38	11	4	100
Long-term fiscal projections	55	33	12	−	100
Tax policy	82	12	6	−	100
Formulation of the budget	91	9	−	−	100
Public investment planning	50	50	−	−	100
Standards and policies on accounting	47	−	41	12	100
Regulation of financial institutions	15	6	56	23	100
B. Selected Developing Countries (25) 1/
Macroeconomic forecasting	60	24	16	−	100
Tax policy	48	8	44	−	100
Formulation of the budget	48	8	−	44	100
Public investment planning	24	60	16	−	100
Accounting policies	84	8	8	−	100
Regulation of financial institutions	−	−	45	55	100

Source. Authors’ calculations and OECD (2014).

^1/Benin, Brazil, Cambodia, Colombia, China, Cyprus, Egypt, Ghana, Indonesia, Jordan, Kenya, Kyrgyz Republic, Malaysia, Mongolia, Moldova, Mozambique, Nicaragua, Panama, Peru, Philippines, Rwanda, South Africa, Togo, Yemen, and Zambia.

The following conclusions emerge from this analysis.

In the case of advanced countries, there are surprisingly mixed results: the finance ministry is the dominant player for functions such as budget preparation and tax policy, but is much less dominant in other areas, for example the regulation of financial institutions and accounting policies (in which many advanced countries have established an independent standard-setting body). Another trend, especially in Europe, has been the establishment of independent fiscal councils which, in some cases, has removed or diluted the role of the finance ministry in the area of macroeconomic and fiscal forecasting, and the preparation of long-term fiscal projections. According to a recent survey (OECD, 2014), 14 OECD countries had established such a council by 2012. The same survey shows that 48 percent of OECD countries had established a dedicated public-private partnership (PPP) unit but in nearly half of these countries, the unit is located in a ministry other than the finance ministry.

It follows that there is not an exact correspondence between the core finance functions of government and the organizational structure of the finance ministry. In some countries (e.g., Australia, Brazil, Canada, Ireland, France, the Philippines, Turkey, and the United States) central finance functions have been divided among two or three ministries,¹⁵ often for political reasons—to reduce the perceived power of the finance minister, or in coalition governments to share power among the political parties (Allen and Kohnert, 2012).¹⁶ In Finland, by contrast, the reverse situation applies: since the mid-1990s the Minister of Finance has also assumed the role of Deputy Prime Minister and has a “super-minister” status (Tiihonen, 2012). The finance ministry in some countries is responsible for non-finance issues such as civil service personnel management and local government administration, as in Finland.¹⁷ In some countries, the collection and dissemination of national statistics is under the authority of the finance ministry, though the international trend is for such agencies to be made independent of the executive branch.¹⁸

In the case of developing countries, Table 2 also displays a wide dispersion of results but it should be noted that in some of these countries the functions analyzed have only been developed in a rudimentary way. Given the shortage of capacity in many finance ministries, the analysis of tax policy issues, for example, is often carried out (de facto if not de jure) by the department or agency responsible for revenue collection. Similarly, in many developing countries, the financial sector is under-developed and its oversight and supervision managed largely through the central bank. In addition, the ministry of planning (or equivalent) frequently assumes responsibility for the preparation of the capital investment budget, with the result that in nearly one-half of the countries surveyed, overall responsibility for budget formulation is shared with the finance ministry. Further, there are many countries where macroeconomic forecasts are prepared both by a central agency (usually the finance ministry) and the central bank, often working cooperatively.¹⁹

It should also be noted that there are differences in the organization of core finance functions between Anglophone and Francophone countries, as well as countries with other models of governance, ²⁰ though such differences may be lessening over time (Chevauchez, 2014). These differences have implications for the organization of the finance ministry. For example, in many Francophone countries, elements of the budget process are centrally controlled by the finance ministry,²¹ and responsibility for accounting and cash management functions, as well as tax policy and revenue administration, are also centralized within the ministry of finance. In France, however, since the enactment of the new organic budget law in 2001²² the organization of the finance ministry has changed substantially; some powers of budget execution have been devolved to line ministries, and arms-length structures created within the finance ministry. Some of these changes resemble those in countries such as Australia, Canada, New Zealand, Sweden, and the U.K., albeit with a Gallic twist. In addition, the relationship between the finance ministry, the legislature and the supreme audit institution differs substantially among countries with different models of public administration. Germany is one of the few Continental European countries whose organizational structure has largely retained its traditional form over the last 30 years (Allen and Kohnert, 2012). This classical organization may have helped Germany withstand the impact of the global financial crisis better than countries with a more fragmented and diversified structure.

Finally, to further complicate the picture, it should be emphasized that the central bank used to have an important fiscal role, and still does in many countries. As a fiscal agent for the government, central banks have traditionally run bond and treasury bills auctions, but also influenced the government financing policies, and even directly financed the government’s cash requirements.²³ They have also provided a range of services to the government such as managing the government’s bank accounts, processing payments, or supplying a registry and records-keeping service for managing public debt. Since the 1980s, good practice calls for a stricter separation between fiscal and monetary policies, thus limiting the fiscal role of central banks in many countries to operations such as providing banking services to the government. But central banks still have a cashier function in former Belgium colonies (Burundi, Democratic Republic of Congo), control and collect tax revenue, as well as make budget payments (Haïti), and play an important role in debt management for some countries in South America (for example, Colombia and Uruguay). In Yemen, most treasury functions are provided by the Central Bank of Yemen. In addition, the central bank still performs quasi-fiscal activities in some countries to support the government’s fiscal policy goals, such as providing interest rate subsidies to state enterprises and the private sector.

To summarize, what is important to stress is that the functions and organizational structure of a finance ministry are not static and develop over time in response to changes in the economic, financial, and political environment, as well as the evolving characteristics of the finance functions themselves.²⁴ Given the importance of local context, it is not surprising that no simple pattern can be discerned among countries in the allocation of roles and responsibilities for core fiscal functions.

B. Centralization vs. Devolution of Functions

Two major trends have emerged in the last 30 years in the role and functions of finance ministries. First, in many countries there has been a progressive move from the centralization of functions within the finance ministry to a broad-based devolution of transactional or operational functions to line ministries and agencies.²⁵ Second, the role of finance ministries has shifted strongly in the direction of greater emphasis on policy-making functions. These trends are interrelated, and have had an impact on the staffing of finance ministries, with less numerous and more specialized staff being employed. To some extent the trends reflect the influence of the New Public Management (NPM) theories of the 1990s (Hood, 1991; Dunleavy and Hood, 1994), but these theories are being reconsidered in light of new fiscal challenges arising from the recent economic and financial crisis, including the need to better monitor fiscal risks and consolidate public sector financial operations.²⁶

The transfer of responsibility for transactional functions from finance ministries to line ministries reflects an important change of emphasis in budgetary practices from controlling inputs to managing systems, outputs, and outcomes. Budget entities are allowed greater flexibility in deciding the resource mix they want to deploy in producing their outputs. This arrangement begins to resemble the “network” organization discussed below, in which mechanisms for exchanging reliable and timely financial information among the various stakeholders in the budget process are strengthened. The development of such networks assumes that the finance ministry’s main role becomes one of regulating financial systems and information, and monitoring the performance of the agencies responsible for delivering public services.

In addition, many countries have established autonomous or semi-autonomous agencies to which some of the (mainly transactional) functions and powers of finance ministries are transferred. These functions include macro-fiscal forecasting, debt management, revenue collection and public procurement, together with the direct delivery of public services such as payment of social welfare benefits. The establishment of agencies has been a particularly strong trend since the 1970s in countries such as Australia, Canada, New Zealand, and the United Kingdom, as well as the Nordic region.²⁷ Examples include the executive (or “Next Steps”) agencies created in the U.K. and the special operating agencies (SOAs) in Canada (Wanna, Jensen, and de Vries, 2003; Halligan, 2013). In Finland, similarly, many administrative units were under the control of the finance ministry in 1980 but 30 years later had been converted into companies or state enterprises and then privatized (Tiihonen, 2012).

A similar trend can be observed with the devolution of regulatory responsibilities by the finance ministry to independent agencies in charge of overseeing specific sectors. Starting in the early 1970s, governments have progressively withdrawn from regulating certain sectors, to avoid being considered as “both judge and jury.”²⁸ Instead, they have put in place independent agencies for regulating financial markets, energy, telecommunications, and public transportation. Some governments have also created specific agencies with sanctioning powers, for enforcing European competition policies, for example. In the EU, a new institutional framework for regulating banks and non-bank financial institutions was created after the global financial crisis,²⁹ with member states required to establish national supervisory bodies to implement the new legislation.

The potential efficiency gains and other microeconomic benefits of establishing agencies (closeness to users of public services, responsiveness of decision-making, etc.) can be contrasted with potentially negative fiscal implications. There is a tension between transferring more powers to arms-length agencies, and the need to strengthen central control of spending and other fiscal aggregates, and to consolidate the collection of fiscal data. In countries that face challenges in terms of bringing their fiscal policies and management of fiscal risks under greater control, the fragmentation of central finance functions that result from the creation of agencies and other forms of fiscal devolution³⁰ can be dangerous. The global financial crisis may have weakened governments’ confidence in the robustness of their budget institutions, and in some countries, steps have been taken to recentralize control in the hands of the finance ministry, partially reversing a trend that started in the 1980s.³¹ A recent survey of 33 OECD countries (OECD, 2014), for example, indicates a sharpening of the central controls exercised by finance ministries between 2007 and 2012 in relation, for example, to the approval of in-year reallocations of budget appropriations by line ministries and the end-year carryover of unspent appropriations.

At the same time, many governments have renewed their commitment to sustainable public finances. Public interest in the impact and effectiveness of fiscal policy decisions taken by the executive branch has also grown. Reflecting these trends, public agencies known as “fiscal councils” have been established in many countries, especially in the EU.³² Fiscal councils are independent public institutions aimed at promoting sustainable public finances through various functions, including public assessments of fiscal plans and performance, and the evaluation (and sometimes the production) of macroeconomic and budgetary forecasts. However, while many fiscal councils have the discretion to review the performance of fiscal policy, the setting of fiscal policy goals and targets and the execution of fiscal policy remain core functions of the executive branch. For example, the U.K.’s Office for Budget Responsibility (OBR) has the responsibility to make projections of macroeconomic and fiscal indicators, but the finance ministry (H.M. Treasury) has retained a unit working on different macro-fiscal policy scenarios.

A case study of devolution: treasury functions

An interesting example of how ministries of finance have taken decisions on devolution in respect of so-called treasury functions in member states of the European Union (EU) is provided in Box 1. These decisions balance the need for the finance ministry to retain control of core policy functions, against the need for line ministries to exercise management control of their programs and resources, and to be held accountable for these resources. Application of this general principle, however, varies widely from country to country. Several different sub-regional models may be distinguished within the EU, as well as variations within these sub-regions themselves. The number of staff employed by these national treasuries also differs widely, from less than 20 in some small countries to many thousands in others.

Box 1.

A Comparison of Treasury Systems across the EU

The Treasury comprises an important sub-set of public finance functions that includes the preparation of accounts (“book-keeping”), the setting of accounting standards and policies, the application of internal controls and the processing of payments on behalf of the government, the forecasting and management of the government’s cash requirement, the preparation of annual financial statements, oversight of the government’s bank accounts, and the management of public assets, liabilities and guarantees.

There is no single model of “the Treasury” that applies universally across the EU, rather a wide diversity of practices and organizational structures. These practices and structures reflect factors including the country’s size, together with its administrative culture and institutional arrangements. The design of a country’s Treasury is determined by the range of functions it carries out, the control framework, the degree of centralization and decentralization, and whether it is organized as a directorate or department of the finance ministry or as an arms’ - length agency with operational independence from the finance ministry but often subject to its oversight and supervision. The trend in much of Europe over the past twenty-thirty years has been: (i) to decentralize most operational functions of the Treasury (e.g., internal control and payment processing); and (ii) to establish autonomous agencies to manage the remaining centralized functions.

Within the EU, several sub-regional variations of the Treasury system can be distinguished, in particular:

The British/Irish/Scandinavian system—in which payment and control functions are decentralized to line ministries but where central policy and oversight functions are located either in the finance ministry or an arms’ - length agency (e.g., the Treasury Management Agency, NTMA, in Ireland).

The Francophone system—in which payment and control functions were heavily centralized in the finance ministry, whose controls extend down even into local governments and state enterprises. Many processing functions have been transferred to line ministries under the modernizing LOLF of 2001, and a specialized agency set up to pay public service salaries.

The Belgian system—a variant of the French model in which the central bank plays and important role, especially for payments.

The Spanish /Portuguese system—which is also similar to the Francophone model but less centralized; in the case of Spain, an autonomous treasury agency is responsible for the processing of payments and managing the treasury single account (TSA).

The former Yugoslav system—which retains the characteristic of a powerful, centralized Treasury agency, largely independent of the finance ministry, but also includes more decentralized versions of this model (e.g., Bulgaria).

Within each of these broad categories, there are substantial country-by-country variations. The Swedish National Financial Management Authority (ESV), for example, an independent agency, in addition to setting accounting policies and rules and producing the government’s annual financial statements, also compiles ratings of the financial management performance of spending agencies for publication, and prepares forecasts of government spending. In Cyprus, the Accountant General’s Department is also responsible for policy on public procurement, an issue that in other EU countries is usually managed by the finance ministry or an arm’s-length procurement agency. What is important is not so much the specific organizational design of the Treasury but to ensure that all of its core functions are: (i) assigned to some specific directorate or agency to manage on behalf of the government, and (ii) are carried our efficiently and effectively.

It is also interesting to map the degree of devolution of treasury functions against the organizational structure of the finance ministry. In Table 3, four levels of decentralization are shown: a centralized model where all treasury functions are retained by the finance ministry; a deconcentrated model in which some functions are devolved to line ministries but operated by officials of the finance ministry posted to the line ministry (as in France, for example, through the financial controllers); a decentralized model in which controls are fully delegated to the line ministries; and a hybrid model representing a mixture of deconcentrated and decentralized characteristics. Various organizational arrangements for the central ministry may be combined with these models, as illustrated in the table. In some countries, treasury functions are assigned to a department or directorate within the ministry of finance, and in other countries to a separate ministry. In a few countries with highly decentralized arrangements, virtually all treasury functions have been devolved out of the central ministry, leaving only a residual monitoring role for the budget department of the finance ministry.

Table 3.

Treasury Models and Organizational Structures-Country Examples

Table 3.

Treasury Models and Organizational Structures-Country Examples

Treasury Models	Organizational Structure of the Ministry of Finance
	Separate Ministry	Department or Directorate of Finance Ministry	Division of Budget Department	Autonomous Agency under Finance Ministry
Centralized	China, Philippines, Turkey	Egypt, Iceland, Kenya, Malaysia,
Deconcentrated		France, Indonesia, India, Iran, Russia, Serbia		Cyprus
Decentralized	Australia	South Africa	New Zealand, Ireland, U.K.	Finland, Sweden
Hybrid	Brazil	Belgium		Estonia, Spain

View Table

Table 3.

Treasury Models and Organizational Structures-Country Examples

Treasury Models	Organizational Structure of the Ministry of Finance
	Separate Ministry	Department or Directorate of Finance Ministry	Division of Budget Department	Autonomous Agency under Finance Ministry
Centralized	China, Philippines, Turkey	Egypt, Iceland, Kenya, Malaysia,
Deconcentrated		France, Indonesia, India, Iran, Russia, Serbia		Cyprus
Decentralized	Australia	South Africa	New Zealand, Ireland, U.K.	Finland, Sweden
Hybrid	Brazil	Belgium		Estonia, Spain

Which of the various models described in the table is the most efficient in terms of delivering good fiscal outcomes? There is no simple answer to this question, which depends both on policy trade-offs and country context. The centralized and deconcentrated models are likely to be effective in achieving overall financial control by the ministry of finance, and consolidating fiscal information. The deconcentrated model, however, tends to be heavy on staff resources. Decentralized models are the most efficient in terms of promoting efficient business processes and accountability at the spending agency level, but may weaken control by the finance ministry and increase a country’s exposure to fiscal risk.

C. Organizational Structure of Ministries of Finance

Important forms of organizational structure include a hierarchical bureaucracy, a matrix organization, a structure comprising project units or teams, an organic structure built around a network of linked organizations, or a mixture of these forms. A useful summary of the literature on organizational structures is provided by Mintzberg (1979). Traditionally, finance ministries have a bureaucratic structure, in the sense defined in Figure 1. In such a structure, work is divided among well-defined and specialized roles, and a hierarchical structure of departments, divisions and units is established. Separate cadres of managers, administrators, specialists and support staff are defined. Variations of the bureaucratic structure may be found across countries, with varying degrees of flexibility and cross-cutting arrangements to enhance vertical and horizontal cooperation within the organization. These variations (examples of which can be found in many advanced countries) are illustrated in Figure 1, models 2 and 3. Allen (2013) provides an example from the U.K. of how the organization of the finance ministry (H.M. Treasury) has evolved from a traditional bureaucracy in the 1980s to a much more organic and flexible structure. As in other countries, for example, the Treasury has introduced a senior management board (sometimes including non-executive directors from outside government) to coordinate the ministry’s overall strategy, set work priorities, and manage external relations.

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Alternative Models of an Organizational Structure

Citation: IMF Working Papers 2015, 232; 10.5089/9781513543895.001.A001

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Other organizational models seem less relevant for finance ministries. They include: (i) a matrix organization, which is defined as a set of departments or units superimposed horizontally across a traditional hierarchically-organized structure; (ii) a project organization, in which activities are broken down into projects that are carried out by individual teams;³³ and (iii) a network organization, in which the “parent” entity creates “businesses within a business” which operate independently or at arm’s length, but are still owned by the parent entity. Some aspects of a network organization may be added to the traditional bureaucratic structure of a finance ministry—for example, arms’-length agencies that operate on a semi-autonomous basis. In addition, finance ministries sometimes create stand-alone departments or units to manage specific areas of government business on a time-limited basis, as in the “project organization.” An example from France was the temporary department set up in the finance ministry to support implementation of the new organic budget law in the early 2000s. In addition, project management units based in the finance ministry are used extensively in emerging and developing countries to pursue their PFM reform agenda.

Finally, formal linkages and communications, both horizontal and vertical, among the various divisions and units comprising the organization have been strengthened in many countries, using IT systems as a facilitator together with the creation of cross-cutting committees and task forces. Initiatives such as these can be seen as an attempt to break down the “silo” culture that is present in many finance ministries by working toward achieving common goals, communicating these goals across the organization, and encouraging divisions and units to share information and knowledge.

D. Formal and Informal Rules of Behavior within an Organization

Organizations comprise both “formal” aspects such as laws, regulations, operational manuals and IT systems, and the “informal” rules, procedures and incentives (or internal organizational culture) that determine the behavior of the politicians, staff and other stakeholders who make up the organization. This important distinction originates from the pioneering work of North and Williamson, linked to the development of the New Institutional Economics (see, for example, North, 1990; Williamson, 1975). Andrews (2013) has argued that informal rules are the most important determinant of the overall behavior and performance of an organization; the formal rules thus representing the tip of an iceberg in French and Bell’s (1999) striking metaphor (see also Schiavo-Campo, 1999 who draws on the image of the sinking Titanic). Practitioners, however, tend to focus primarily on the formal rules because, by definition, they are more visible and quantifiable. But the efficiency of an organization depends on both kinds of rule.

Formal rules and procedures that are highly rigid can reduce the efficiency of a finance ministry’s operations. For example, inflexible or highly centralized human resource management and remuneration systems are familiar in many countries.³⁴ A central agency (such as a public service commission or civil service ministry) determines the overall staffing complement of each ministry and government agency, the number of employees in each professional grade or cadre, each ministry’s organizational structure, the hiring, firing, and promotion of individual staff members, and the salary and other benefits of staff. In such circumstances, individual ministries and agencies may have limited flexibility to determine their own organizational structure and staffing needs. When facing competition in the jobs market, it may be difficult for the finance ministry to recruit and retain staff with requisite professional skills in critically important areas such as economics, accountancy, law and finance by varying the terms and conditions of employment.

The informal or “soft” aspects of organizational behavior, on the other hand, can also affect the efficiency of services delivered by a finance ministry, either in a positive or negative direction. Thus, efficiency may increase if effective channels of communication and coordination are established linking together departments or units that previously were isolated. On the other hand, inefficiencies may be created if the recruitment system is subject to patronage; if there is an absence of effective leadership within the organization; if elite or vested interests that capture revenue mobilization and resource allocation mechanisms are present; or if there are poor communications both vertically and horizontally that prevent the efficient transmission of information among managers and staff. Such informal rules tend to be strongly associated with the prevailing national culture. Heclo and Wildavsky (1974), for example, provide a classic account of how these relationships (described by the authors in anthropological terms—the “village culture”) have developed and work in the case of the British Treasury, particularly in relation to the control of public spending.

E. Staffing of Finance Ministries

The number of staff employed by the finance ministry is influenced by many other factors including the mandate and role of the ministry, economic performance, historic and cultural influences, as well as the size of the country. Political structure is also an important factor: for example, a federal country would be expected to have a higher degree of regional budgetary autonomy and, therefore, relatively less staff in the federal finance ministry compared to a country that is politically centralized. Although the data set out in Table 4 and Box 2, Figures 2–4 suggests there is no simple relationship between the size of a finance ministry and its capability or performance,³⁵ it indicates that in many advanced and middle-income countries, for example, the move to more policy-oriented functions has progressively reduced the overall staffing level while increasing the number of specialized staff, in particular economists, lawyers, and accountants. In the case of core finance policy functions, little comparative data are available but a provisional analysis of EU member states indicates a broad range of staff numbers (Table 5). There also appears to be a correlation between the number of employees in these functions and the size of a country and its civil service.

Table 4.

Number of Staff Employed by Finance Ministries in Selected Countries

Source. FAD staff. Figures exclude revenue collection and customs authorities. * Comprising the Treasury and Department of Finance **Comprising the Treasury Department and the Office of Management and Budget. ***Comprising three entities—the Ministry of Finance, the Ministry of Development, and the Treasury. **** Comprising the Accounting and Tax General Directorate, and the Customs General Directorate.

Table 4.

Number of Staff Employed by Finance Ministries in Selected Countries

Size of Finance Ministry	Advanced Countries	Emerging Markets and Low-Income Countries
Less than 200	Estonia, Iceland	Mongolia, Rwanda, Swaziland
201-500	Cyprus, Denmark, Finland,	Chile, Maldives, Moldova,
	Sweden, Ireland, Latvia, New	Nicaragua, Solomon Islands
	Zealand, Norway, Slovenia
501-1,000	Australia,* Canada	Ghana, Jamaica, Mozambique, Uganda
1,001-2,000	U.K., Germany, Japan	Cambodia, Kenya, Niger, South Africa, Tajikistan
2,001-5,000	U.S.A**	Chad, Mauritania, Mexico, Philippines, Poland, Togo
Greater than 5,000	France,**** Spain	Brazil, India, Indonesia, Turkey,*** Yemen

Source. FAD staff. Figures exclude revenue collection and customs authorities. * Comprising the Treasury and Department of Finance **Comprising the Treasury Department and the Office of Management and Budget. ***Comprising three entities—the Ministry of Finance, the Ministry of Development, and the Treasury. **** Comprising the Accounting and Tax General Directorate, and the Customs General Directorate.

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Table 4.

Number of Staff Employed by Finance Ministries in Selected Countries

Size of Finance Ministry	Advanced Countries	Emerging Markets and Low-Income Countries
Less than 200	Estonia, Iceland	Mongolia, Rwanda, Swaziland
201-500	Cyprus, Denmark, Finland,	Chile, Maldives, Moldova,
	Sweden, Ireland, Latvia, New	Nicaragua, Solomon Islands
	Zealand, Norway, Slovenia
501-1,000	Australia,* Canada	Ghana, Jamaica, Mozambique, Uganda
1,001-2,000	U.K., Germany, Japan	Cambodia, Kenya, Niger, South Africa, Tajikistan
2,001-5,000	U.S.A**	Chad, Mauritania, Mexico, Philippines, Poland, Togo
Greater than 5,000	France,**** Spain	Brazil, India, Indonesia, Turkey,*** Yemen

Source. FAD staff. Figures exclude revenue collection and customs authorities. * Comprising the Treasury and Department of Finance **Comprising the Treasury Department and the Office of Management and Budget. ***Comprising three entities—the Ministry of Finance, the Ministry of Development, and the Treasury. **** Comprising the Accounting and Tax General Directorate, and the Customs General Directorate.

Table 5.

Estimated Staff Numbers for Selected Functions, EU Member States

Source: FAD staff.

Table 5.

Estimated Staff Numbers for Selected Functions, EU Member States

Function	Small Countries	Medium Countries	Large Countries
Macro-fiscal analysis and forecasting	3-15	20-50	c. 100
Tax policy	3-20	30-80	150-200
Budget preparation	7-20	30-80	c. 200

Source: FAD staff.

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Table 5.

Estimated Staff Numbers for Selected Functions, EU Member States

Function	Small Countries	Medium Countries	Large Countries
Macro-fiscal analysis and forecasting	3-15	20-50	c. 100
Tax policy	3-20	30-80	150-200
Budget preparation	7-20	30-80	c. 200

Source: FAD staff.

Technological developments, especially computerization, reduce or eliminate the need for manual procedures to carry out bulk transactions such as the processing of payments or payroll and the application of internal controls. As a consequence, the number of staff required to manage these transactions falls substantially. Computerization has also had a major effect on the staffing of the finance ministry by replacing the need for large, centralized transactional functions.³⁶ Many finance ministries in less developed countries have not fully reaped the benefit of IT and software management, and the ratio of staff engaged in policymaking functions is typically smaller.³⁷

Many Continental European and Francophone countries employ significantly larger numbers of staff because PFM functions are both more centralized within the finance ministry and the work has a strong legal and regulatory form. A general conclusion is also that in most countries ministries of finance are large or small depending on whether the overall number of public servants is large or small. For example, the public service in many Middle Eastern and Central Asian countries has become bloated (partly to provide jobs as a surrogate for social insurance), and finance ministries are correspondingly large (Box 2).

Box 2.

Comparative Size of Central Finance Agencies by Income and Region

A database was compiled including the number of employees of the central finance agency (CFA) in 43 countries, which was used as a proxy for the size of finance ministries. The functions of collecting taxes and customs duties were excluded. The size of finance ministries varied widely. The average size of the finance ministry was between 1,600 and 1,700 employees.

There is some evidence that the size of finance ministries tends to expand as countries move from low-income to emerging status, then decreases as countries achieve advanced income status. See Figure 2, which shows the size of finance ministry by different income groups.

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CFA Staff Numbers by Development Status

Citation: IMF Working Papers 2015, 232; 10.5089/9781513543895.001.A001

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To account for population, the size of each country’s finance ministry was also calculated as a percentage of population. Figure 3 shows that the size of the ministries relative to population decreases as a country achieves higher income status.

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Size of CFA by Development Status

(Percent of Population)

Citation: IMF Working Papers 2015, 232; 10.5089/9781513543895.001.A001

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Regional differences also emerge. Figure 4 shows that on average, Middle Eastern and Central Asian countries have larger finance ministries than African and Asian countries. Countries in Europe and the Western Hemisphere (North America, Latin America, etc.) have the smallest as a percent of population.

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Size of CFA by Region

(Percent of Population)

Citation: IMF Working Papers 2015, 232; 10.5089/9781513543895.001.A001

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Source: Database described in World Bank (2013), government websites, and FAD TA reports.

A. Traditional vs. Emerging Models of Finance Ministries

Box 3 sets out two models (or states) of the organization of a finance ministry: the “traditional” model and the “emerging” model. Krause has described a similar approach to the macro and micro control of public spending.³⁸ These two models or states represent opposite ends of a spectrum, and most countries occupy a position somewhere in the middle ground. The important point to emphasize is that the direction of change is almost invariably from left to right in the diagram, and only rarely in the opposite direction. It is also important to note that the process of transition from one state to another is not linear and may be complicated by policy trade-offs: the transparency of fiscal reporting, for example, may be diminished at the same time as controls on spending are decentralized.

The traditional model of a finance ministry is still found in many developing countries, and some advanced economies. The evolution from the traditional model to the emerging model can take many years. A large literature has developed describing the characteristics of the two models, and how the change between one model and the other can be managed (see, for example, Dunphy, and Stace, 1983; Kanter, Stein, and Jick, 1992; and By, 2005).

Box 3.

Emerging Role and Culture of Finance Ministries

Traditional Model		Emerging Model
Segmentalist culture		Integrative culture
Hierarchical, organizational silos		Horizontal coordination mechanisms, devolution of decision making
Closed, introspective (budget secrecy)		Open, communicative and consultative
Low accountability and transparency		More accountability and transparency
Inward-looking		Outward-looking, inter-ministerial
Centralized control environment		Decentralized control environment
Direct control of expenditure, rules based organization		Monitoring of fiscal developments and risks Risk-based and performance oriented control systems
Narrow strategic perspective		Broad strategic perspective
Primary focus on central government Short-term perspective to policymaking		Holistic view of public finances Medium-term perspective to policymaking
Process oriented		Policy oriented
Centralization of functions within the finance ministry		Many tasks devolved to line ministries and spending agencies
Multiple and non-integrated financial information systems		Integrated financial information system (IFMIS)
Each function/agency has its own system, with limited interfaces		Coverage of core financial functions and agencies, interfaced with other noncore IT systems (e.g., payroll management, procurement)

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Traditional Model		Emerging Model
Segmentalist culture		Integrative culture
Hierarchical, organizational silos		Horizontal coordination mechanisms, devolution of decision making
Closed, introspective (budget secrecy)		Open, communicative and consultative
Low accountability and transparency		More accountability and transparency
Inward-looking	View Expanded	Outward-looking, inter-ministerial
Centralized control environment		Decentralized control environment
Direct control of expenditure, rules based organization		Monitoring of fiscal developments and risks Risk-based and performance oriented control systems
Narrow strategic perspective		Broad strategic perspective
Primary focus on central government Short-term perspective to policymaking		Holistic view of public finances Medium-term perspective to policymaking
Process oriented		Policy oriented
Centralization of functions within the finance ministry		Many tasks devolved to line ministries and spending agencies
Multiple and non-integrated financial information systems		Integrated financial information system (IFMIS)
Each function/agency has its own system, with limited interfaces		Coverage of core financial functions and agencies, interfaced with other noncore IT systems (e.g., payroll management, procurement)

The main differences between the traditional and emerging models may be summarized as follows.

• First, traditional structures tend to be “segmentalist,” namely that the organizational culture is characterized by the segregation or compartmentalization of functions and weak horizontal and vertical coordination (Kanter, 1983). Finance ministries with a segmentalist culture generally have a short-term perspective in their approach to strategic development and business planning. Managers tend to be cautious, resistant to change and risk averse, demonstrating “inertia without accountability” (Peterson, 2015).³⁹ In contrast, finance ministries with an “integrative” culture tend to encourage cooperation among organizational units and staff, and have flexible business processes that strive for solutions to problems rather than emphasizing the importance of adherence to formal rules and procedures. Such ministries also give importance to improving the efficiency and effectiveness with which services are delivered, establishing frameworks for monitoring and evaluating the impact of policies, and developing strategies for managing and mitigating risks.

• Second, finance ministries designed according to the traditional model tend to be inward-looking, secretive, and display a narrow tactical perspective and short-term time horizon. Many traditional finance ministries are large transactions-based organizations with a narrow strategic perspective that focus mainly on the operations of the central government, taking little account of the activities of local governments and public enterprises, and of the fiscal risks generated by off-budget spending, contingent liabilities, and quasi-fiscal activities. In contrast, the emerging model for finance ministries tends to be more open and communicative, smaller in size, with a focus on policy functions with a wider public sector perspective, a medium- to long-term orientation, and substantial delegation of financial management powers to line ministries and agencies that deliver public services. These finance ministries place a strong emphasis on the accountability and transparency of policies and procedures, realization of desired economic and social outcomes, and the development of analytical tools and skills to understand the most efficient means of delivering those outcomes.

As countries develop, it has been argued that the concentration of central finance functions is likely to exhibit an inverted-U shape pattern (Allen and Grigoli, 2011; World Bank, 2013). According to this theory, finance ministries start small, expand in size as they reach middle-income status, and then contract again as further development takes place. There is some empirical support for this proposition (see also Box 2, Figure 3). Dispersed manual systems of accounting, reporting, and budgeting tend to reinforce this phenomenon in developing countries. As countries move from middle-income to advanced development status, it is further argued that PFM reforms may lead to less concentration and a broader distribution of functions as part of a growing demand for organizational autonomy, and further computerization of PFM processes, thus allowing many transactional functions to be transferred to line ministries or agencies.

Table 6 presents evidence of the institutional and cultural characteristics of finance ministries in selected countries, based on the models discussed above. The countries selected are representative of the OECD region, together with a middle-income country (South Africa) that has adopted many of the organizational characteristics of more advanced countries.

Table 6.

Institutional and Cultural Characteristics of Finance Ministries in Selected Countries

^1/The scoring is derived from the models of organizational structure shown in Figure 1, based on analysis of the organizational chart of each country’s finance ministry: “flexible” = a project- or network-based organization; “traditional = a bureaucratic structure; and “mixed” = some combination of these elements.

^2/Source for scoring: 2012 Open Budget Index (score on a 0 to 100 scale, ranking of 100 countries): France (Score: 83, ranking: 5), Spain (score: 63, ranking: 19), South Africa (score: 90, ranking: 2), Turkey (score: 50, ranking: 45), U.K. (88, ranking: 3), U.S.A. (score: 79, ranking: 7).

^3/Source for scoring: France: Court of Accounts. Public Report on the Chorus System, 2011. Turkey: The World Bank, 2011. FMIS – 25 years of World Bank Experience. U.K.: National Audit Office, 2011. Information and Communications Technology in Government, Landscape Review. U.S.A.: Government Accountability Office, 14/671T, 2014. Information Technology. Reform Initiatives Can Help Improve Efficiency and Effectiveness.

^4/Source of scoring: IMF, G-20 Budget Institutions Board Paper, 2014, IMF; and Budget Practices and Procedures Survey, OECD, 2014.

^5/Source of scoring: IMF, G-20 Budget Institutions Board Paper, 2014, IMF; and Budget Practices and Procedures Survey, OECD, 2014.

^6/France: Devolution of budget execution authority to line ministries; accounting, cash management and revenue administration centralized within the finance ministry; U.K.: devolution of budget execution, accounting to line ministries, and revenue administration to an autonomous agency; Turkey: Accounting is decentralized in line ministries, cash management belongs to the Treasury and revenue administration is managed by an autonomous agency.

Table 6.

Institutional and Cultural Characteristics of Finance Ministries in Selected Countries

Institutional characteristics	Finland	France	Spain	South Africa	Turkey	U.K.	U.S.A.
Number of ministries	Single	Multiple	Multiple	Single	Multiple	Single	Multiple
Form of bureaucracy 1/	Mixed	Mixed	Mixed	Mixed	Traditional	Flexible	Mixed
Open/communicative culture 2/	High	High	Medium	High	Medium	High	High
Use of integrated ICT systems 3/	High	High	High	High	High	Low	Low
Decentralize controls of budget expenditure 4/	High	Medium	Medium	Medium	Low	High	High
Broad strategic perspective 5/	High	High	Medium	Medium	Medium	High	High
Coverage of core policy functions	High	High	Low	High	Medium	High	Medium
Devolution of transactional functions 6/	High	Medium	Low	High	Medium	High	Medium

^1/The scoring is derived from the models of organizational structure shown in Figure 1, based on analysis of the organizational chart of each country’s finance ministry: “flexible” = a project- or network-based organization; “traditional = a bureaucratic structure; and “mixed” = some combination of these elements.

^2/Source for scoring: 2012 Open Budget Index (score on a 0 to 100 scale, ranking of 100 countries): France (Score: 83, ranking: 5), Spain (score: 63, ranking: 19), South Africa (score: 90, ranking: 2), Turkey (score: 50, ranking: 45), U.K. (88, ranking: 3), U.S.A. (score: 79, ranking: 7).

^3/Source for scoring: France: Court of Accounts. Public Report on the Chorus System, 2011. Turkey: The World Bank, 2011. FMIS – 25 years of World Bank Experience. U.K.: National Audit Office, 2011. Information and Communications Technology in Government, Landscape Review. U.S.A.: Government Accountability Office, 14/671T, 2014. Information Technology. Reform Initiatives Can Help Improve Efficiency and Effectiveness.

^4/Source of scoring: IMF, G-20 Budget Institutions Board Paper, 2014, IMF; and Budget Practices and Procedures Survey, OECD, 2014.

^5/Source of scoring: IMF, G-20 Budget Institutions Board Paper, 2014, IMF; and Budget Practices and Procedures Survey, OECD, 2014.

^6/France: Devolution of budget execution authority to line ministries; accounting, cash management and revenue administration centralized within the finance ministry; U.K.: devolution of budget execution, accounting to line ministries, and revenue administration to an autonomous agency; Turkey: Accounting is decentralized in line ministries, cash management belongs to the Treasury and revenue administration is managed by an autonomous agency.

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Table 6.

Institutional and Cultural Characteristics of Finance Ministries in Selected Countries

Institutional characteristics	Finland	France	Spain	South Africa	Turkey	U.K.	U.S.A.
Number of ministries	Single	Multiple	Multiple	Single	Multiple	Single	Multiple
Form of bureaucracy 1/	Mixed	Mixed	Mixed	Mixed	Traditional	Flexible	Mixed
Open/communicative culture 2/	High	High	Medium	High	Medium	High	High
Use of integrated ICT systems 3/	High	High	High	High	High	Low	Low
Decentralize controls of budget expenditure 4/	High	Medium	Medium	Medium	Low	High	High
Broad strategic perspective 5/	High	High	Medium	Medium	Medium	High	High
Coverage of core policy functions	High	High	Low	High	Medium	High	Medium
Devolution of transactional functions 6/	High	Medium	Low	High	Medium	High	Medium

^1/The scoring is derived from the models of organizational structure shown in Figure 1, based on analysis of the organizational chart of each country’s finance ministry: “flexible” = a project- or network-based organization; “traditional = a bureaucratic structure; and “mixed” = some combination of these elements.

^2/Source for scoring: 2012 Open Budget Index (score on a 0 to 100 scale, ranking of 100 countries): France (Score: 83, ranking: 5), Spain (score: 63, ranking: 19), South Africa (score: 90, ranking: 2), Turkey (score: 50, ranking: 45), U.K. (88, ranking: 3), U.S.A. (score: 79, ranking: 7).

^3/Source for scoring: France: Court of Accounts. Public Report on the Chorus System, 2011. Turkey: The World Bank, 2011. FMIS – 25 years of World Bank Experience. U.K.: National Audit Office, 2011. Information and Communications Technology in Government, Landscape Review. U.S.A.: Government Accountability Office, 14/671T, 2014. Information Technology. Reform Initiatives Can Help Improve Efficiency and Effectiveness.

^4/Source of scoring: IMF, G-20 Budget Institutions Board Paper, 2014, IMF; and Budget Practices and Procedures Survey, OECD, 2014.

^5/Source of scoring: IMF, G-20 Budget Institutions Board Paper, 2014, IMF; and Budget Practices and Procedures Survey, OECD, 2014.

^6/France: Devolution of budget execution authority to line ministries; accounting, cash management and revenue administration centralized within the finance ministry; U.K.: devolution of budget execution, accounting to line ministries, and revenue administration to an autonomous agency; Turkey: Accounting is decentralized in line ministries, cash management belongs to the Treasury and revenue administration is managed by an autonomous agency.

However, as noted earlier these institutional and cultural characteristics of finance ministries are not static, and strongly influenced by their political, socio-economic, and technical environment. Countries may also be influenced by developments elsewhere in their region or in countries that are regarded as benchmarks of good practice in public administration. For example, some countries have adapted their constitutions and legal frameworks to the U.S. model of governance which has implications for the design of their PFM practices and the organization of their finance ministry—examples include Korea, Liberia, Nigeria, and the Philippines. The recently adopted Constitution in Kenya (2011) also adopts aspects of the American system of financial governance, for example, by creating a parliamentary budget office, a National Treasury, and ministries headed by Cabinet Secretaries appointed by the President.

B. Reorganizing Ministries of Finance

Organizational restructuring may take a variety of forms (Dunphy and Stace, 1993; Kanter, Stein, and Jack, 1992), including the following:

• Fine tuning: Organizational change that is a continuing process characterized by fine tuning of the “fit” or match between an organization’s functions and its structure, staffing and business processes. Such a change process is typically applied at the level of individual departments, divisions, or units rather than across the organization as a whole.

• Incremental adjustment: Change that is characterized by progressive adjustments of limited scope to align business strategies, structures, and management processes to new procedures and technologies, or modifications to the external political and economic environment.

• Modular transformation: Change that is characterized by a major realignment of one or more departments/divisions.

• Corporate transformation: Change that involves the whole of the organization and is characterized by substantial shifts in the business strategy, together with major adjustments to the structure of departments and other business units, decision-making procedures, senior management alignments, human resource management practices and organization-wide IT systems.

In practice, countries follow a mixture of these approaches, as illustrated in Box 4.

Important drivers of organizational change in finance ministries include the following:

A. Principles for Reorganizing a Finance Ministry

Box 5 presents seven general principles of organizational structure that may serve as broad guidelines for countries seeking to modernize their finance ministries, adapted to the local cultural, administrative, and political context. These guidelines are derived from the “emerging model” discussed earlier in this paper (Box 3), together with FAD’s experience of providing technical assistance to improve the efficiency and effectiveness of finance ministries’ operations in a range of countries.

In considering these principles, two important caveats should be borne in mind. First, the “emerging model” describes historic trends or patterns of development. It does not imply that the organizational structure of a finance ministry depicted by the emerging model necessarily produces “better” fiscal and budgetary outputs or outcomes than the “traditional” model. Such outcomes provide the ultimate test of whether the finance ministry as an organization is effective or capable (see Andrews, Cangiano, de Renzio, Krause, and Seligmann, 2014). This argument should not be taken to mean that comparing organizational structures between countries is a meaningless activity. Much useful information and guidance can be derived from such comparisons, but the information needs to be properly contextualized, and adapted to the local circumstances.

Second, there is some evidence that fiscal performance is enhanced if modern budgetary institutions are put in place (IMF, 2014) and if budgetary procedures give a strong role to the prime minister or finance minister (von Hagen, 1992, and von Hagen and Harden, 1994). These results do not suggest, however, any particular organizational form for the finance ministry, but rather that the government’s capacity and capability needs to be developed in functional areas such as macro-fiscal forecasting,⁴⁸ debt management, and budget preparation. Similarly, the available empirical evidence that the establishment of government agencies leads to improved performance in carrying our finance functions or delivering public services is also inconclusive (Baldwin, Cave, and Lodge, 2010; Pollitt, Talbot, Caulfield, and Smullen, 2004).

The principles set out below may nevertheless be helpful as benchmarks in guiding the organizational restructuring of finance ministries in the medium term or long term, and improving their operational efficiency and effectiveness. In the short term, however, second-best solutions may lead to better fiscal results. For example, a merger of the finance ministry and the planning commission in a developing country may be impracticable for constitutional or political reasons, at least in the short term. Nevertheless, it may be possible to achieve valuable improvements in fiscal and developmental outcomes by strengthening cooperation between the two agencies, building a common platform of methodologies and timelines for preparing the national development plan and the budget, and enhancing technical skills and databases in these two areas.

B. Challenges and Risks of Reorganizing Finance Functions

The reorganization of finance ministries creates challenges and risks that may be sub-divided into several categories which are discussed below. Lessons learned from advanced countries are summarized in Box 6.

C. Approaches and Tools for Reorganizing a Finance Ministry

A range of survey techniques and other tools have been developed to help finance prepare for and implement an organizational restructuring. These tools are summarized below.

Functional reviews

A functional review may be carried out to assess: (i) whether the finance ministry is conducting all relevant finance functions (as defined in Table 1); and (ii) whether any of the functions it carries out are not essential to its mandate and could be transferred to another agency of government, or outsourced to the private sector. A functional chart should be prepared so that discussions can be arranged with all the departments and units that participate in these functions. Figure 5 provides an example for a hypothetical developing country. A further step should be to consider how there functions could be grouped together in a way that maximizes synergies and communication within the organization, and to prepare a new organizational chart. Key functions that support the policy-making role of the finance ministry—in particular, human resource management, preparing and executing the finance ministry’s own budget, and the organization’s IT systems, as well as legal advice and communications strategy (internal and external)—should also be defined and adequately resourced within the new structure.

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Functional Chart of a Finance Ministry

Citation: IMF Working Papers 2015, 232; 10.5089/9781513543895.001.A001

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