Enhancing the Capabilities of Central Finance Agencies: From Diagnosis to Action

Dr. Björn Dressel, Centre for Governance and Public Policy

CABRI 7th Annual Seminar Kigali, August 17- 18th, 2011

Outline

• Background – Picking Up from CABRI 2010 & Moving Forward

• Governance and Political Economy Analysis & PFM Sector Reform

• Application: The CFA Project – Part A: Conceptual Framework

– Part B: Methodology

– Part C: Findings

• Conclusion & Discussion – Lessons & Looking Ahead

– Questions for Debate

I. Background

Introduction GPE Analysis & PFM

• Background

– Picking up from CABRI 2010

• “Hippos vs. Camels” (Andrews)

• Context, Functionality, Change

• Problem Driven Governance and Political Economy Analysis (PDGPE) – Evolution &Terminology – Layers & Levels – ‘Scoping’ vs. ‘Drilling’

• Goals & Outcomes – “Good Enough Governance” / “Feasible

Reforms”

• The Challenge – PE-Analysis & PFM

II. Application: The CFA Project

CFA Project Background

• WB Study ‘Enhancing the Capabilities of Central Finance Agencies (CFAs)’ is launched with financial support from the Bank Netherlands Partnership Program (BNPP) in 2008

• The task team comprised a group of World Bank staff and consultants, led by Jim Brumby and Richard Allen

• Outputs to date comprise: – a Framework Paper (2009) and Synthesis Report (2011); – a set of ten case studies in LICs (six in AFR) and related “political

economy” notes, and – a dataset describing the organization and structure of CFAs in 55

countries.

• Looking Ahead – Further operationalization & database extension; book project

CFAs: Definition & Functions

Definition

“CFAs are a group of ministries and agencies with collective responsibility for the design and implementation of a country's financial policies and operations”

CFA Core Functions

The Puzzle

CFA’s are critical to state and development processes, yet sharp differences remain in terms of:

– Degree of centralization/fragmentation of CFA core functions;

– Staffing numbers (i.e. the French Finance ministry employed 120,000 staff in 2007; in U.K. the figure is 1,400; in Slovenia, 120)

– Lead Role in the PFM reform

This raises a number of important questions:

– What accounts for these differences? (i.e. Is the productivity of a finance officer 1,000 times greater in Slovenia than in France, and 85 times greater in Britain?)

– More specifically, how do we explain variation in CFA performance?

– Finally, how can CFA transformation be facilitated?

Enhancing the Capabilities of CFA’s Conceptual Approach

• Background – A new Paradigm: from Capacity to

Capability

– The Analytical Lens: Institutions, Incentives, Individuals, Interests

• The Macro View – Critical Institutional Routes

• Internal CFA Arrangements (Route 1)

• CFA and Political Institutions (Route 2)

• CFA and Line Ministries (Route 3)

• CFA and External Actors (Route 4)

• CFA and Civil Society (Route 5)

– The Structural Context

• The Micro View – PE Analysis & PFM Problems

The Political Economy Environment of CFAs

Source: Adapted from Dressel (2008)

Methodology (Overview)

• CFA study combined qualitative and quantitative research techniques, including:

– Case Studies: in depth analysis of 10 CFAs in LICs (6 in AFR; 2 in EAP; 2 in LAC), using (where possible) the original Dressel-Brumby Framework

– Data Collection & Analysis: Creation of database (currently 55 countries) based on questionnaire covering organizational structures, staffing, ICT etc.

• Two-fold Aim – to explore the extent to which political economy analysis – as applied

in public finance field - is operationally useful and practical;

– break new ground in establishing the first data base on CFA’s

Methodology (Database)

• Data Collection: Questionnaire (3 Parts)

1. Distribution of 16 core CFA functions,

subdivided into 24 activities, across ministries and

agencies within a country

2. Collection of human resource information for

CFAs – including staff size, staff composition,

gender balance, and turnover ratios

3. Collection of usage of information and

communications technology (ICT)

• Data Analysis: Fragmentation Index

– Scoring Methodology (see appendix)

– Policy & Operational Activities (see appendix)

– Definition of Fragmentation

• Narrow: number of finance ministry functions

carried out uniquely by the MoF

• Broad: number of functions carried out

primarily by a subordinate agency of the MoF,

with or without the contribution of the MoF

Database Composition

Database Findings (I): Regional Fragmentation

The Middle East & North Africa, and Europe & Central Asia

show the highest levels of fragmentation – South Asian countries the lowest…..

Database Findings (II): Income Levels

In aggregate, advanced countries and lower-income

countries have higher fragmentation than middle income

countries (U-Curve pattern)….

Database Findings (III): Regional Fragmentation–Policy/Operations

In all regions but the Middle East & North Africa operational

functions are more highly fragmented than policy functions

Database Findings (IV): Policy/Operational Fragmentation: Income

This is also reflected across income groups….

Database Findings (V): Regional Focus: SSA

Fragmentation varies widely across the SSA

sample…

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

Fra

gm

en

tati

on

In

de

x

Fragmentation index - narrow Fragmentation index - broad

Database Findings (VI): Regional Focus: SSA

More so, while operational functions are expected to be

more fragmented, several countries exhibit greater

fragmentation on the policy side….

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

Fragmentation Policy activities (MOF)

Fragmentation Operational activities (MOF)

Database Findings (VII): Fragmentation Summary: SSA

Low End High End

Overall

Fragmentation

Policy

Fragmentation

Operational

Fragmentation

1. Gabon

2. (Rwanda)

3. Swaziland

4. Chad

1. Chad

2. Ghana

3. (Rwanda)

4. Swaziland

1. Gabon

2. Sudan

3. (Rwanda)

4. Mauritania

1. Mauritius

2. Sao Tome

3. Niger

4. South Africa

1. South Africa

2. Cape Verde

3. Sao Tome

4. Niger

1. Mauritius

2. Sao Tome

3. Togo

4. Niger

‘Snapshot’ Fragmentation Bias

Operational Policy

-60.0 -40.0 -20.0 0.0 20.0 40.0 60.0

Chad

Ghana

Cameroon

Togo

Benin

Rwanda

Swaziland

Mauritius

Tanzania

Malawi

Sierra Leone

Mauritania

Niger

São Tomé and Principe

Gabon

Cape Verde

Mozambique

Gambia, The

South Africa

Sudan

Database Findings (VIII): Some Final Data Points

• Staff Size – There is a huge variation in CFA staff numbers which range from 81 employees

(Swaziland) to more than 110,000 employees (India). – When adjusted for manpower-intensive occupations, the average size of the central MoF

is around 1,100 staff.

• Gender – Female employee numbers differ considerably by region (i.e. in MENA female employees

were a minority whereas in ECA they represent a much larger portion), with most employed in accounting functions and other routine finance operations

– Female managers represented less than 4 percent of total staff at that level.

• Usage of ICT – Substantial variation across CFA institutions, as well as countries and regions – 30 countries (86 percent) stated that they actively use official email accounts (yet often

contradicted in practice with staff using personal email accounts) – 20 countries (67 percent) have some form of intranet or knowledge exchange – Specialized agencies – such as tax, customs and procurement authorities, are more likely

to have and use email, and have intranet

‘Drilling Down’: Exploring Patterns through Cases

• Political Economy aspects (rather than technical view) proved critical to understanding of CFA functioning, including:

– Country Context

• Income Level/Historical Legacies/Elite Settlement

• Resource-rich countries are more prone to fragmentation as other actors (i.e. energy ministry and/or the national petroleum company) become powerful sources of financial influence and political patronage

• Fragile states are often less fragmented as it provides unique opportunity to consolidate fiscal functions due to emergency status of public finances, the fragility of political groups, and donor pressure

– Political Economy Issues – highlighted in the case studies were:

• The Use (and Misuse of) Executive Power

• Fragmentation of CFAs for Political Gain

• Internal Constraints within CFAs

• Donor Pressure/Coordination (or lack thereof)

• Further illustrations from the case studies

So What? (Tentative) Implications

• Is there a ‘best practice’ model? – CFA study raises important issues for critical reflection

• The level of CFA fragmentation & underlying drivers

• The link between CFA leadership in PFM & areas of fragmentation

• Policy Implications

– yet ultimately urges thinking in terms of contextual ‘best fit’ rather than institutional ‘best practice’

• Putting political economy analysis centre stage for design and implementation of new initiatives to strengthen CFA’s, including – Understanding existing vulnerabilities and bottlenecks in CFA operations; – Prioritization & Sequencing of CFA and PFM reform; – Strengthening CFA within given ‘ChangeSpace’ (i.e. raising camels, not

hippos)

III. Conclusion

Summary of CFA Study

• Most CFA activities are directly carried out by the central finance ministry itself (but considerable variations in practice from country to country)

• Most policy functions remain within the MOF, while operational functions (i.e. revenue collection, PIM, procurement etc.) may be devolved to subordinate agencies and/or line ministries

• Fragmentation seems to follow a “U-curve pattern” (i.e. decreases and then increases again with income level as automation of routine operations, and capabilities of line ministries grow)

• Finance functions in fragile states tend to be more concentrated, whereas they are more fragmented in resource rich countries

• There is substantial variation in the finance ministries’ staff size; gender bias is evident (yet tentative due to small sample size)

• The use of ICT varies across countries and specialized agencies are more likely to adopt them in respect to finance ministries

• Case studies show usefulness of the Political Economy Analysis to capture existing dynamics and designing ‘best fit’ interventions

Lessons (CFA Staff)

• Take Stock of your Organization/Organizational Environment – Where are we? Where do we want to go? What is the organizational self-understanding?

• Using political economy analysis to better understand the drivers and dynamics of the CFA/PFM reform process – more specifically:

– Where there is a dynamic reform environment, focus on what can actually be done within the limits of the PE constraints (rather than attempting reforms to please the donor community)

– Where there is a stagnant reform environment, try and build partnerships with groups that can exert effective pressure on governments to reform – whether civil society, reform oriented political actors, or external oversight agencies, such as supreme audit institutions

• Focus on the mobilization of internal ‘capabilities’ before seeking donor support in capacity building – more specifically:

– Optimize internal workflow and resource use; strengthen accountability and transparency mechanism; emphasize leadership from within; clarify and consolidate engagement with donors

• Be realistic in expectations – more specifically: – CFA transformation requires time; it is incremental – much will ultimately depend on the ability to

combine technical excellence with the ability to build and sustain reform coalitions

Looking Ahead:

Operationalizing the Framework

• Objective: strengthen Finance Ministries as ‘centers of excellence’ for fiscal policy – analogous to central banks in field of monetary/exchange rate policy

• Strengthen linkages to World Bank Policy for Results (P4R) lending instrument

• Develop analytical framework that combines technical and political economy analysis: – Focus on MOF, and not full range of CFAs – Internal and external interfaces – Establish a baseline of capabilities for future comparison

• How you can help !

Thank-you !

Comments

Q&A

Discussion

Appendix (I)

Questions for Debate

1. What is your reaction to the data? Is there a best

practice model hidden? What do you read from it?

What is missing?

2. What factors do you see as critical to enhancing CFA

capabilities? What are key impediments? How can they

be addressed?

3. How do you see applying Governance and Political

Economy Analysis to your work? How do you see it

lead to different types of interventions?

Appendix (II): Scoring Methodology

Appendix (III): Fragmentation Index

• Two definitions of fragmentation

– Narrow: the number of finance ministry functions rated 0 (carried out

uniquely by the MOF) over the total number of activities reduced by the number of scored 5 and 6 (functions that do not exist, are not systematically applied or for which there is no clarity about responsibility)

– Broad: computed in the same way, but now includes functions that have been scored 0 and 1 (carried out primarily by a subordinate agency of the MOF with or without the contribution of the MoF

where is A an activity, N is the total number of activities, P is the number of activities rated 5 or 6 and i is the subscript indentifying the index definition – Similar indices have been computed separately for policy and

operational functions

Appendix (IV): Example Analytical PE-Framework

Capabilities Description Establishing baseline of

capabilities

Availability of technical

solution (examples)

Political economy

challenges (examples)

Anticipated Outcomes

and Results

1. Internal Interfaces

Allocation of functions 16 CFA functions / 24

activities.

Map of functional

responsibilities

Extent of overlap with

responsibilities of other

CFAs.

Functional and

organizational review of

the MoF, and its

subordinate agencies.

Overlap of

responsibilities with

presidency / ministry of

planning

Dual budget.

Revised map of

functional

responsibilities

Revisions to public

finance law.

Top management

structure

Ministers, deputy

ministers, director-

generals.

Core competencies

Formal duties and

responsibilities

Reporting arrangements

Appointment/removal

Review of top

management structures

included in the functional

review.

Resistance of finance

minister to changes that

dilute his detailed day-to-

day control.

Revised organizational

chart of the MoF, and

revised job descriptions.

2. External Interfaces

Line ministries Clarity of roles and

responsibilities of MoF

and line ministries in

relation to budget

preparation and

execution.

Existing distribution of

formal responsibilities

between MoF and line

ministries.

Indicators of efficiency of

delivery of key public

services.

Recommendations for

clarifying roles and

responsibilities.

Powerful line ministers

who secure large budget

allocations through

informal mechanisms,

e.g., patronage of the

President.

Clarification of roles and

responsibilities as defined

in budget law, but this

may not change the

informal rules and

patronage arrangements.