the world bank governance & anticorruption core course, page 1 public financial management...

The World BankGovernance & Anticorruption Core Course, page 1

PUBLIC FINANCIAL MANAGEMENT ISSUES IN GOVERNANCE AND

ANTI-CORRUPTION David Shand

PFM Consultant

[email protected]

February 14-16, 2006

Washington, DC


INTRODUCTION

• SOUND PFM PRACTICES ARE A SIGNIFICANT ANTI-CORRUPTION TOOL - POOR PFM PRACTICES MAY FACILITATE CORRUPTION

• MAJOR COMPONENTS OF SOUND PFM

– Comprehensive and realistic budget

– Clear allocations of responsibilities and accountabilities across all levels of management

– Well designed and functioning systems of internal control

– Reliable, relevant and timely flows of financial information to all levels of management

– Sound revenue administration

– Sound procurement practices

– Independent, timely and competent external auditing and follow up


SOUND PFM COUNTERACTS CORRUPTION BY

• Imposing discipline by setting out requirements of actors

• Strengthening the probability of detection through information flows (audit trails) and review mechanisms

• Creating a disadvantage for the corrupt – exceptions are needed for corruption to occur and this increases fear of detection

• Protecting vulnerable areas – through identifying areas of higher risk (e.g. procurement, major capital projects are typically seen as higher risk areas) for particular attention

• Facilitating auditing – by providing a system and information to audit

• Permitting proper management and oversight through providing the necessary management information


BUT THERE NEEDS TO BE SIGNALS AND INCENTIVES

• Observance of the rules and requirements

• Consistent enforcement of the rules

• Consequences of non-compliance


“FIDUCIARY” ISSUES

• Fiduciary risk – important to demystify the concept

• Best assurance that donor funds are well managed is the existence of a sound PFM system

• Therefore developmental (helping improve PFM) and fiduciary concerns are complementary or inseparable– and using the same PFM diagnostic information

• Donors need ex ante assessment and documentation of quality of PFM and procurement systems to inform decisions on financial support

• Note that there are separate governance and anti-corruption diagnostic tools


“FIDUCIARY” ISSUES (cont’d)

• Going in to financial assistance with “eyes open” – no assistance is risk free (just as there is never zero corruption)

• Need to compare costs and benefits of the assistance, and determine our “risk appetite” or threshold

• Fiduciary risk has been seen as a donor issue – but the country is equally concerned with the management of its funds

• Just as good governance and anti-corruption activities are primarily the responsibility of the country , countries are committed to take the lead on PFM and procurement reform (Paris HLF etc)


RISK OF WHAT?• That donor funds may not reach the budget – diverted for

unknown or unknown purposes (oil revenues ?)

• That donor funds reach the budget but it is not known how they are spent because of lack of reliable and timely information on budget execution

• That funds reach the budget but are not spent according to the budget – the budget is not executed

• And/or are misspent on corrupt, wasteful or otherwise inappropriate purposes

• Budget system may not focus adequately on poverty (PREM territory, not FM)

• Note that issues other than PFM issues also influence these risks

• Therefore the term “financial management risk” is increasingly used to indicate that PFM is only part of fiduciary risk


PAUSE FOR THOUGHT

• Bank requirement that our funds are spent on the purposes for which they are intended?

• What is meant by “intended purposes”?

• If we mean the government’s budget, what if it is poorly constructed – inadequately prioritized and/or unrealistic?

• How can we track funds in a budget support environment?


OTHER RISK CONCEPTS

• Sovereign financial risk – risk of non payment

• Development risk – assistance will not achieve the objective of poverty reduction

• Reputational risk – perceptions may be real or otherwise of waste or corruption


POSSIBLE RISK MITIGATION MEASURES

• Flow of funds issues – the funds reaching the budget

– Review of the control environment of the central bank, through which Bank funds flow (IMF does this)

– Audit of the deposit account

• Quality of PFM issues

– PFM improvement plans, technical assistance – the developmental objective (issues of realism, sequencing and country ownership are important)


• Requirement for timely, reliable and audited financial statements covering budget execution (frequently a major failing) – but rejected by the World Bank board in 2000 as a requirement for adjustment lending

• Issues Concerning “appropriateness” of expenditures

– Deeming or earmarking assistance to particular budget items (positive list) – virtual poverty funds

– Requiring the funds to be deposited into a dedicated account, to be used only for designated purposes (again, a positive list) - real poverty funds

POSSIBLE RISK MITIGATION MEASURES (Cont’d)


Possible Risk Mitigation (Cont’d)

• Adopting a negative list - (defense, luxury items, nuclear reactors, jewelry, alcohol ) c.f. OP 8.60 Development Policy Lending

• Given fungibility of budget resources, positive and negative lists are really “fig-leafs” , but may be important to lessen reputational risks

• Both positive and negative lists may involve audit verification • Public expenditure tracking surveys (PETS) – did the funds

reach the point of service delivery (assuming this was specified)

On all risk mitigation measures it is desirable for donors to coordinate and avoid short-term fragmented measures


USING THE PFM INFORMATION IN DECISION MAKING ON BUDGET

SUPPORT

• No minimum PFM standard established by the Bank for DPL

• DPL may be supported in a weak PFM environment where there is country commitment to PFM reform, and PFM is improving

• Therefore PFM improvements may be a result of rather than a precondition for DPL

• PFM conditionality in adjustment lending – same issues as other conditionality, moving to prior actions rather than ex post conditions, fewer and more results oriented etc , using programmatic DPLs recognizing the long-term nature of needed reforms


KEY PFM ISSUES IN ANTI-CORRUPTION

• PEFA PFM Performance Measurement Framework and CFAA Guidelines provide useful PFM framework

• Comprehensive Budget

– Limited off-budget accounts– What is “off-budget” ?– Transparency concerning off-budget activities

• Realistic Budget

– Unrealistic budgets cannot be implemented– Therefore in budget execution the formal budget may be replaced by a

non-transparent system, of cash rationing – deciding who gets paid


KEY PFM ISSUES (Cont’d)

Clear Allocation of Responsibilities

– Budgets should be allocated to service delivery units

– As opposed to being centrally controlled by an all-powerful finance director

– In the latter case “intended purposes” is less clear

– Authority should be clearly designated – whose approval is required for what?

– But should not be overly complex – too many layers of approval may facilitate corruption



• Internal Control Systems

– Is the system adequate? (control risk)

– Does it operate as intended ? (inherent risk)

– Should include appropriate segregation of duties

– Should be clearly documented, with appropriate training for all actors

– Should include internal audit

– Mechanisms should not be overly complex - complexity may facilitate corruption

– Staffing/payroll controls may be an important aspect (ghost workers, nepotism, etc


KEY PFM ISSUES (Cont’d)• Information Systems

– Timely, reliable and relevant financial reporting is needed for management as well as for accountability

– Computerized IFMIS assists in information integrity – but no need to over-design

• Sound Revenue Administration

– limited official discretion

– clear and non-complex laws

– transparency of tax-payer obligations

– provision for review/ appeal



• Sound Procurement Procedures

– Competitive bidding and transparent procedures

– Avoiding excessive complexity

– Provision for review/appeal

• External Auditing and Follow Up

– An external audit institution which has independence and capacity



• Focusing on systems as well as substantive cases “road conditions, not just traffic accidents”

• And impact, through follow up of recommendations by Executive and legislature

• But audit is not a magic bullet – cannot provide absolute assurance, and is not specifically tasked with uncovering corruption

• And audit institutions may be corrupt, too


GENERAL ISSUE

• What if requirements are simply not observed e.g. required approvals, submission of required reports etc

• PFM therefore involves institutional issues (incentives etc), not just “technical” fixes

• Do we adequately understand these institutional issues?


CONSIDER NOW THE PARALLELS WITH FINANCIAL MANAGEMENT IN

INVESTMENT LENDING

• Requirement for reasonable (acceptable) assurance that funds are spent on intended purposes - tracking the use of funds is possible

• Prime responsibility for maintaining an adequate control framework rests with the country

• Upstream diagnosis of the project financial management system, (FM Assessment Report) identifying risk areas and overall level of risk country, organizational and project specific

• Importance of realistic budget, financial reporting for management and external monitoring (FMRs) and competent and timely auditing


PARALLELS WITH INVESTMENT LENDING (Cont’d)

• Simplification of procedures – complexity may promote corruption

• Use of country systems (i.e. the PFM system) is the preferred option where the system is acceptable

• Desirable harmonization with other donors (sharing the risk ?)

• Under SWAps, acceptance of pooling and no need to trace Bank funds to individual items

• Note role of Department of Institutional Integrity (INT) – forensic auditing


PERFORMANCE MANAGEMENT INITIATIVES

• Many performance management reform initiatives – results based management/budgeting, performance budgeting, etc.

• This is PREM rather than FM territory (PERs, not CFAAs)

• Corruption/poor governance will reduce reported performance levels

• Reductions in performance over time or poor performance compared with other relevant areas (benchmarking) may indicate corruption

• But be aware of the limitations of performance measures and of benchmarking

The World BankGovernance & Anticorruption Core Course, page 24DiscussionDiscussion

the world bank governance & anticorruption core course, page 1 public financial management...

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