1. What is Public Financial Management?

Marco Cangiano

Rome, February 6-8, 2017

Outline

1. IntroductionandDefinition(s)

2. ComplexityinthePFMsystems

3. Functionality

4. Preliminaryconclusions

Introduction

3

Interestincreasedinthelasttwodecades

• PFMreceiveditsmostrecentimpetusfromthe“NewPublicManagement”reformsinNewZealand,Australia,andtheUKinthe1980s.

• Reformswerelargelysuccessfulinthesecountries.Aimwastotransforminput-oriented,controlandcompliancefocusedbureaucraciesintoflexible,responsive,efficientservicedeliveryunitsfocusedonoutputsandoutcomes.

• ReformsweretranslatedinNorthernEurope,USandAdvancedAsiancountries.Somecountriesdidbetterthanothers.

• Frommid-nineties,emergingmarketanddevelopingcountriestriedtocopyadvancedcountryPFMreforms

• Surgeintechnicalassistance,oftensupportedbyinternationalfinancialinstitutions

4

KeyInnovations• Thenumberofcountrieswithsomesortoffiscalrulehasrisenfrom5

in1990to76in2012.• Thenumberofcountrieswithasortofmedium-termbudget

frameworkhasincreasedfrom20in1990toabout130in2008.• Therearenow25fiscalcouncilscomparedwith6in1990.• 41countriesarereportingtotheIMFatleastafinancialbalance

sheet,twiceasmanyasin2004.• Since2007,80%percentofOECDcountriesproduceperformance

information,andin2011about2/3haveaperformancebudgetingframework.

• Since1999,111countrieshaveundergonea“FiscalTransparencyROSC,”andbytheendof2011,126countrieshadundertakenaPFMdiagnosticassessment,suchasPEFA.

5

Commonproblems• Deficitbias

ü informationasymmetry/principal-agentrelationshipsü commonpoolresourceproblem(Weingast etal,1981)ü prisoners’dilemma(Hallerberg andvonHagen,1997)ü timeinconsistency(Kydland andPrescott,1977)ü Wagner’sLaw:demandforpublicgoodsrisesmorethan

proportionatelywithincomeü Baumol’s disease:lowerproductivitygrowthofthepublicsectorleads

toanincreasingshareofgovernmentintheeconomytokeeprelativeactivitylevelsinbothsectorsequal.

• Disappearinggovernment:updatedtaxonomy(Irwin,2012)ü Hiddenborrowing:loanproceeds,saleandlease-back,asymmetric

treatmentofpensionassetsandliabilitiesü Deferredspending:operationalvs.financiallease,PPPsü Disinvestment:Sellingofassets,butnoreflectionoffuture(+/-)flows,

securitizationü SpecialpurposevehiclesandoperationsordisappearinggovernmentüMorewhenwediscussfiscaltransparency…..

6

Expendituredrift

7

05101520253035404550PercentofGDP

ExpendituretoGDP,OECDaverage1970-2012

32

42.5

-9.0-8.0-7.0-6.0-5.0-4.0-3.0-2.0-1.00.01.0

PercentofGDP

BalancetoGDP,OECDaverage1960-2012

020406080100120

1970 1975 1980 1985 1990 1995 2000 2005 2010

PercentofGDP

DebttoGDP,OECDaverage1970-2012

HowtoaddressthemDeficitbiasü information

fragmentationü commonpoolü prisoners’dilemmaü timeinconsistency

DisappearinggovernmentüHiddenborrowingüDeferredspendingüDisinvestmentüSpecialpurposevehiclesandoperations

üTop-down,TSA,GFSüFiscalresponsibility/rulesü IndependentagenciesüMTBFs/long-termforecasts/DSA

üEntity/transactioncoverage

üAccountingandreportingü Independentoversight

8

Fiscalrules

9

Numberofcountrieswithfiscalrules Nationalfiscalrulesbytypeofeconomy

0

10

20

30

40

50

60

70

80

1990 1995 2000 2005 2010

All rules

National rules

Supranational rules

0

10

20

30

1990 1995 2000 2005 2010

Advanced Economies

Emerging Market Economies

Medium-termbudgeting

10

Growthofmedium-termframeworksworldwide1990-2008

0

20

40

60

80

100

120

140

1990 1995 2000 2005 2010

Num

bero

fcou

ntrie

s

Medium-termfiscalframework Medium-termbudgetframework

Commitmentcontrols

11

AverageannualoverspendinGreece2005-2009(% oftotalspending)

2.2

15.1

3.2

9.7

0

2

4

6

8

10

12

14

16

FiscalPlanning BudgetPreparation BudgetExecution TotalOverspend

Long-termprojections

12

-5 0 5 10 15 20 25

KORFIN

CHESWEDNKESTDEUAUTISR

CZEISL

SVNSVKAUSCANNLDBELITA

FRANZLPRTGBRGRCESPIRL

USAJPN

Required adjustment between 2011 and 2020

Increase in age-related spending, 2011–30

Riskassessment

13

FiscalRiskDisclosurein2012

0

5

10

15

20

25

30

35

40

45

50

Alternativemacro-fiscalscenario

Qualitativefiscalriskstatement

Quantifiedfiscalriskstatement

Other

AdvancedEconomies EmergingMarketEconomies

Accrualaccounting

14

CountriesPreparingAccrualBasedFinancialStatementsforCentralGovernment1980-2012

0

5

10

15

20

25

30

1990 1995 2000 2005 2010 2012

AdvancedEconomies EmergingMarketEconomies

Independentfiscalagencies

15

CountrieswithIndependentFiscalCouncils1960-2012

0

5

10

15

20

25

1960 1980 1995 2005 2012

Advanced Economies Emerging Market Economies

Performancebudgeting

16

PerformanceOrientedBudgeting1990and2012

StrengthofPerformanceOrientedBudgetinginAdvanceCountries

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

FINLAND

AUSTRA

LIA

KORE

ANETHE

RLAN

DSNORW

AYPO

LAND

USA

CANAD

A UKSW

EDEN

TURK

EYSLOVA

KRE

P.JAPA

NNEW

ZEA

LAND

AUSTRIA

DENMAR

KIRELAN

DMEXICO

GREECE

LUXEMBO

URG

FRAN

CEITALY

ICELAN

DSW

ITZERLAN

DPO

RTUG

ALGE

RMAN

YHU

NGA

RYSPAIN

BELG

IUM

CEZCHRE

P.

0

5

10

15

20

25

30

35

1990 2012

Advanced Emerging

Internalfinancialcontrol

1. Devolutionoffinancialmanagementresponsibilities

2. Limitstowhatcanbedetectedbycentralizedcontrolorgans

3. EmphasisintheEuropeanUnion

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Treasurysingleaccount

• Centralizationofcashbalances• Lowersborrowingcostandreducestheneedforcashrationing

• Enhancedpotentialwithelectronictransfers• Majorityofcountrieshave—orareintheprocessofintroducingTSAs.

• Coverageisgraduallybeingexpanded.

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Growthoftechnicalassistance

• Between1990and2005thenumberofWBprojectswithasignificantPublicSectorReformcomponentquadrupled.

• OECDdatashowthatdonorfundingforPFMreformrosefromUS$85millionin1995toUS$931millionin2007

• IMFPFMTAalmosttripledfrom2006to2014

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ButImprovementshavebeenmixed

20

1.5%

-9.8%

5.4% 5.1%

-1.9%

25.5%

2.9%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

LatinAmericaandCaribbean

(LCR)

SouthAsia(SAR) EastAsiaandPacific(EAP)

Africa(AFR) MiddleEast andNorthernAfrica

(MNA)

EuropeamdCentralAsia

(ECA)

Total

%Increase/D

ecrease

GrowthChangeintheAverageCPIARatingforPFMfortheperiod2001-2011

Definition(s):WhatisPFM?

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Startwithabudget

• Abudgetisaquintessentialpoliticalprocesswherebyscarceresourcesareallocatedtomeetsociallydesirableobjectives—ameanstoanend:

– Asetofprocessesandproceduresthatrelatetheexpenditureoffundstotheaccomplishmentofplannedobjectives(Schick).

– Attemptstoallocatefinancialresourcesthroughpoliticalprocessestoservedifferenthumanpurposes(Wildavski).

• Thisrelativelysimpledefinitionhidesacomplexityandmultidimensionalitythatneedtobedisentangledtounderstanditsvariousphases,components,keyfunctions,andactors.

MoveontoPublicFinancialManagement

• PFMgoesbeyondtraditionalbudget:formulation,preparationtoexecutionandcontrolandvalidation

• Includesafocusonmanagingpublicresources:– directlythroughthebudget;or– indirectlythroughlowerlevelsofgovernments,state-owned

enterprises,quasi-fiscalactivities,andprivatesectorpartnerships.

• Itisthusan“umbrella”definition:– anintegratedframeworkcoveringasetofsystems– aimedatproducinginformation,processes,andrules– thatsupportfiscalpolicymakingandprovideinstrumentsforits

implementation.23

WhatisPFM?• IMF,2013:“PFM….isconcernedwithhowgovernmentsmanage…..

allaspectsofresourcemobilizationandexpendituremanagement.....withaprogressiveextensiontothemedium- tolong-termimplicationsandrisksforpublicfinancesoftoday’spolicydecisions.”

• Morerecently,Andrewsetal,definePFMas“thewaygovernmentsmanagepublicresources(bothrevenueandexpenditure)andtheimmediateandmedium-to-long-termimpactofsuchresourcesontheeconomyorsociety.”

• Assuch,“PFMhastodowithbothprocesses(howgovernmentsmanage)andresults(short,medium,andlongtermimplicationsoffinancialflows).”

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ObjectivesofPFM• Threebasicobjectives:

– Aggregatefiscaldiscipline– througheffectivecontrolofthebudgettotalsatallstagesintheresourcesmanagementcycle[Spendinginafiscallysustainablemanner]

– StrategicAllocation– abilitytoallocateresourcestostrategicprioritiesandonthebasisofprogrameffectiveness,andtoshiftresourcesfromoldtonewprioritiesandfromlesstomoreproductiveactivities,inaccordancewithpolicyobjectives[Spendingontherightsetofactivities]

– OperationalEfficiency– abilitytoachievecost-efficiencyinservicedelivery[GettingmoreoutofeachtaxdollarsorVFM]

• Theobjectivesarecomplementaryandinterdependent.• Beyondthethreebasicobjectives,asoundPFMsystemshouldtakeinto

considerationthewidersocietalvaluesandneeds.– Accountability,transparency,predictability,andparticipationtogetherformthe

pillarsofgoodgovernance.

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Asimplifiedview

Complexities

27

• Threemaininstruments–information,processesandrules—toaffectbehaviorofpoliticiansandcivilservice(i.e.,keyactors)andachievedesiredoutcomes.

• Thethreeinstrumentsformalogicalsequence:

Ø Informationistheessentialfirststep—betterinformationwillproducebetteroutcomes.

Ø Processesprovideincentivesforpolicymakerstomakeprudent,effectivedecisions.

Ø Rulesprescribeactionsbypolicymakersandpublicservants.

• Buteachinstrumenthasitslimitations:

– Information,whileessential,canbecostly,anendbyitself,andstirconflict.– Processestendtobedominatedbyroutineandbureaucraticinertiathatwork

againstinnovations.– Rulescanbeproceduraland/orrestrictive.

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ConceptualFramework

Roleofinformation

• Governmentoftendonotknowtheirtruefinancialpositionorthefutureimplicationsoftoday’sdecisionortheriskstheymaybefacing.

• Toaffectbehaviors,governmentsmustchangetheinformationavailabletoparticipantsandhowitisprocessed.

• Butinformationmeansclarity,reliability,frequency,timeliness,andrelevanceofpublicfiscalreportingonpast,current,andfuturefiscaldevelopments—moreonthiswhenwediscussfiscaltransparency.

• Notallinformationisessential,someisuseful,somelessso,butinanyeventitiscostly,mayleadtooveraload oranendbyitselfratherthanameanstoanend,andmaygenerateconflict.

• Limitedcapacitytoprocessinformation.

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Keyactors• Strategicbudgeting(formulation),preparation,approval

– Centralfiscalinstitutions(CFAs)– Planningministriesandagencies– Centralbanks/independentagencies– Ministryoffinance/treasury– Spendingministries/units(SUs)– Parliament/congress

• Resourcemgt.(execution),internalcontrol,andreporting– Ministryoffinance/treasury– Cash/debtmanagementagencies/units– Spendingministries– CFAs/SUs(internalcontrol/audit)– Accountingoffices/unitswithinCFAs(accountingandreporting)

• Externalauditandaccountability– SupremeAuditInstitutions(external/independentaudit)– Parliament/Congress/Publicatlarge

Multiple,complex,conflictingobjectives• ThinkofMusgrave’straditionalfiscalpolicyobjectives:

– maintainingasustainablefiscalposition– aneffectiveallocationofresources(redistribution)– efficient(valueformoney)deliveryofgoodsandservices

• Butthesearecomplex,maybeconflicting,objectives• Butthereareotherdimensions:

– reliabilityofresourcesallocatedtogivenobjectives– accountabilityforuseofpublicmoneys– transparencyontruefinancialpositionvis-à-visthepublic

• Anddifferentactorsemphasizedifferentobjectives• Thusaddingtothecomplexity

Morecomplexthanitseems

• Thinkofhowmanymovingparts:– Anumberofphases,oneleadingintotheotherandeachwithitsownoutputs/deadlines/routines

– Asetofactors,agencies,institutions– Anumberprocessesandprocedures

• Andthecomplexinfluenceofpoliticalsystems,history,culture,traditionssothat…– Canhardlyfindtwobudgetsystemsthatlookalike– Eachcountrymustdeviseasystemthatworksforit

AnIntegratedPublicFinancialManagementAct

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a. Fiscalprinciples/rulesb. Contentandpresentationoffiscalstrategyc. Medium-termbudgetframeworkd. Fiscalriskmanagement

a. Budgetdocumentationb. Proceduresforbudgetpreparation&approvalc. Unitofappropriation,reallocation,&carryoverrulesd. Inyearreporting,contingencyreserve,supplementary&excessvote

a. Banking&cashmanagementarrangementsb. Collection,deposit,&retentionofrevenuesc. Authoritytocommit&spendpublicfundsd. Issuanceofloans,guarantees&saleofassets

a. Coverage&standardsforaccountingb. Timetableforpreparationandsubmissionofaccountsc. Externalaudit,internalaudit&follow-upd. Sanctions

MainSections KeyProvisions

a. MinisterofFinance,LineMinistersb. TreasurySecretary,AccountantGeneral&AccountingOfficersc. Parliament,Committees,andFiscalCouncilsd. AuditorGeneral

II.Macro-FiscalPolicy

III.Budgeting

IV.TreasuryManagement

V.Accounting&Audit

I.Roles&Responsibilities

VI.Oversighta. Localgovernmentsb. State-ownedenterprisesc. Extra-budgetaryfundsd. Otherbodies

Functionality

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Budgetsystemscomesinvariousshapesandforms

Whatdofunctionalsystemsdo?• Commonyardstick?

– PFMsystemprovidespredictabilityandcapabilitytodeliveronagreedplans,toachievestatedobjectives

• Focusonfunctionality,butimperfectview– prudentfiscaldecisions– crediblebudgets– reliableandefficientresourceflows– institutionalizedaccountability

• Butexpectdifferencesinfocus,reflecting– politicalregime,governmentstructure,administrationtype,economic

context,etc.

• Andconsiderhowharditistoassessthesethings– Commonassessmentframeworksfocusmoreonprocess

Butafocusonformoverfunctioncanbemisleading

KeyCharacteristicsofamodernPFMsystem

• Goodqualityinformation.Publicavailabilityofclear,reliable,frequent,timely,andrelevantinformationonpast,current,andfuturefiscaldevelopmentsisacondicio sinequanon toassessgovernments’capacitytomeettheirstatedobjectivesandgoalsinanefficientandeffectivemanner.

• Understandthetrueunderlyingfiscalposition.withoutgoodinformationthecapacitytoanalyzethetrueunderlyingfiscalpolicyanditsdynamicsbecomesachallenge.Informationisthusessentialtoanalyzethestatusquo.

• A top-downperspective.Onlythiscanensurethatthemacroeconomicconstraintsaredulyrespectedsothatstabilizationandlong-termsustainabilityarere-establishedwhereneededandmaintained.

• Mediumtolong-termview.Capacitytoassesstheimpactonthemedium-tolongtermoftoday’spolicydecisionsonthepopulationsatlarge,includingtheirdistributionalandenvironmentalaspects.

• Financialcomplianceremainsthecoreofanygoodbudgetingsystemsothatpoliciescanbeexecutedasplanned.

• Accountabilitymustbeexercisedatalllevelsviatheconstitutionallyprotectedindependenceofauditandstatisticalinstitutions,avibrantdialoguewithinthesociety,andpublicparticipationinthebudgetprocess.

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Government,publicinterest,governance,accountability

• Togettheconversationgoing,whatisagovernment?– Isitallinprovidingpublicgoods?Butwhatarethese?Isitallrelative?

• Howdowedefinepublicinterest?– Acontextualtermthatrequiresmorespecificdefinitionthattheonestypicallyfoundin

nationalconstitutionalmandatesorreligiousprescriptions.– Inotherwords,thequestforanobjectivedefinitionofpublicinteresthasprovensomewhat

illusory,asitrequires,forinstance,anexplicitvaluejudgmentonincomeredistributionwithinagivensocietyaswellasontherole,function,andsizeofgovernment.

• Whatisgovernance?– Normativevs.positiveapproach– Thearrangementswherebyintendedoutcomesforstakeholdersaredefinedandachieved.– Government’sabilitytomakeandenforcerules,andtodeliverservices(Fukuyama(2013).

• Howcangovernmentsbeaccountable?– Information– Independentevaluation– Increasingpublicparticipation 39

OnComparingInstitutions

40

• Lack workable definition(s) of governance/publicmanagement; existing ones are loaded with normative judgments that define what governments should do rather than how they should perform.

• Normative definitions tend to dominate so-called best practices, thus generating perverse effects in designing reforms, including isomorphic mimicry, prevalence of de jure over de factoreforms leading to implementation gaps.

• Hence, rating and ranking remain highly judgmental exercises, very clear among most of those who rate and rank, but typically overlooked by users and the media.

Preliminaryconclusions

• PFMsystemshavemanyprocessareas,actors,interactinginconstantways

• Thisleadstocomplexity– Movingparts– Manyembeddedinfluences(history,etc.)– Multiple(potentiallyconflicting)objectives

• Butwehaveanagendathat:– emphasizescompliancewithformoverfunctionality– andsetsmanyreformsupforfailure

Selectedreferences

Andrewes,Matt,etal.,2014,“ThisisPFM”,availableathttp://www.hks.harvard.edu/centers/cid/publications/faculty-working-papers/this-is-pfm

Introductorychapterfrom PublicFinancialManagementanditsEmergingArchitecture,”editedbyCangiano,Marco,TeresaCurristine,andMichelLazare,IMF,2013(Washington:InternationalMonetaryFund).

Schick,Allen,2013,“ReflectionsonTwoDecadesofPublicFinancialManagementReforms,Chapter1inPublicFinancialManagementanditsEmergingArchitecture,editedbyCangiano,Marco,TeresaCurristine,andMichelLazare,IMF,2013(Washington:InternationalMonetaryFund).

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