Public Financial Management Public Financial Management ReformsReforms

Trends and lessonsTrends and lessons

Bill Dorotinsky The World Bank

IstanbulJune 6, 2005

22The World Bank

Three Objectives of Public Expenditure Three Objectives of Public Expenditure Management SystemsManagement Systems

Macrofiscal discipline and stabilityMacrofiscal discipline and stability– Avoid public finance crisesAvoid public finance crises– Support economic growth and stabilitySupport economic growth and stability

Strategic allocation of resourcesStrategic allocation of resources– Match government policy with programs, Match government policy with programs,

objectivesobjectives Technical efficiencyTechnical efficiency

– Getting the most from each lira spentGetting the most from each lira spent

33The World Bank

Popular ReformsPopular Reforms

Macrofiscal Macrofiscal DisciplineDiscipline

Strategic Strategic AllocationAllocation

Operational Operational EfficiencyEfficiency

MTEFMTEF

Performance, Program budgetingPerformance, Program budgeting

IFMIS, automationIFMIS, automation

Fiscal Responsibility LawsFiscal Responsibility Laws

Treasury Single AccountTreasury Single Account

Budget classification, chart of accountBudget classification, chart of account

Reporting/ TransparencyReporting/ Transparency

ProcurementProcurement

Internal control/auditInternal control/audit

External auditExternal audit

Reforms generally try to change incentives to better meet objectives by changing rules, roles and information

44The World Bank

Recent trendsRecent trends Fragmenting MoFFragmenting MoF

– Separate debt agencySeparate debt agency– Separate procurement functionSeparate procurement function– Separate treasurySeparate treasury– Separate budgetSeparate budget– Separate revenue authoritySeparate revenue authority– Separate planning and policy processes (persistent state Separate planning and policy processes (persistent state

rather than trend)rather than trend) All tend to weaken the MoFAll tend to weaken the MoF

– Effect on financial management unclearEffect on financial management unclear– Frequently done to improve pay or improve independenceFrequently done to improve pay or improve independence

55The World Bank

Longer-term TrendsLonger-term Trends

Changing role of MoF, central budget officeChanging role of MoF, central budget office– Control to monitoring/oversightControl to monitoring/oversight– Policy analysis and development over excessive Policy analysis and development over excessive

budget detailbudget detail– Shifting authority towards line ministriesShifting authority towards line ministries

Emphasizing training and guidanceEmphasizing training and guidance Performance over compliancePerformance over compliance

– Analysis of emerging issues, problems, and health Analysis of emerging issues, problems, and health of decision-making and finance systemof decision-making and finance system

Integration of planning into budget processIntegration of planning into budget process– Integration of capital and recurrent budgetsIntegration of capital and recurrent budgets

66The World Bank

““Benchmarking”Benchmarking”Recent McKinsey Study looked at 7 dimensions of 7 Recent McKinsey Study looked at 7 dimensions of 7

country Finance Ministriescountry Finance Ministries Australia, Brazil, Malaysia, Singapore, Thailand, UK, USAustralia, Brazil, Malaysia, Singapore, Thailand, UK, US

All had taken steps to ‘empower’ line ministries and All had taken steps to ‘empower’ line ministries and professional managersprofessional managers

All had made substantial efforts to strengthen external All had made substantial efforts to strengthen external auditaudit

All had taken measures to move away from input All had taken measures to move away from input budgeting towards performance or output budgetsbudgeting towards performance or output budgets

Most had taken measures to improve transparency of Most had taken measures to improve transparency of processes and informationprocesses and information

Source: Transforming MOF: Organizational Recommendations and Implementation. Confidential report to Indonesian Ministry of Finance. June 18, 2003.

77The World Bank

““Benchmarking” (continued)Benchmarking” (continued)

Six had made substantial effort to separate Six had made substantial effort to separate policy development and oversight from policy development and oversight from implementationimplementation

All had taken strong measures to consolidate All had taken strong measures to consolidate similar functions, especially cash and debt similar functions, especially cash and debt managementmanagement

Most had taken some measures towards Most had taken some measures towards greater checks and balances to MoF greater checks and balances to MoF functionsfunctions

Source: Transforming MOF: Organizational Recommendations and Implementation. Confidential report to Indonesian Ministry of Finance. June 18, 2003.

88The World Bank

Broad LessonsBroad Lessons How reform undertaken, organized mattersHow reform undertaken, organized matters

– Stakeholder, user involvementStakeholder, user involvement– Clear change sought, clear problem to fixClear change sought, clear problem to fix

Measureable resultsMeasureable results Focused objectivesFocused objectives

Proper sequencingProper sequencing– MTEFs fail if accounting, execution weakMTEFs fail if accounting, execution weak– Too many reforms at one time tend to failToo many reforms at one time tend to fail– Narrow reforms, well sequenced, may have more Narrow reforms, well sequenced, may have more

impact than comprehensive, government-wide reformsimpact than comprehensive, government-wide reforms