the world bank sanjay pradhan prem public sector governance page 1 the centrality of public finance...
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The World BankSanjay Pradhan
PREM Public Sector GovernancePage 1
The Centrality of Public The Centrality of Public Finance Policy & Finance Policy & Management in Management in DevelopmentDevelopment
Presented to:Presented to:
Public Finance Analysis & Management CoursePublic Finance Analysis & Management CourseMay 1, 2006May 1, 2006Washington, DCWashington, DC
Presented by:Presented by:
Sanjay PradhanSanjay PradhanDirector Director Public Sector Public Sector Governance BoardGovernance Board
The World Bank
The World BankSanjay Pradhan
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Governance and Development: Lessons of Global Experience
• An effective state is crucial for growth and poverty reduction:
– Building a sound investment climate for growth (macroeconomic stability, rule of law, regulatory system, physical & financial infrastructure)
– Empowering people to make growth inclusive through effective delivery of basic services (education, health, social protection)
• State effectiveness requires a two-pronged strategy:
• Match role of the state to its institutional and fiscal capability – including level and composition of public finances
• Strengthen state capability – both capacity and accountability in state functions, including public finance management
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The Centrality of Public Finance System for Good Governance and Development
A well functioning PF system is crucial for:
Enabling the state to finance & deliver key public services and infrastructure to achieve MDGs
Achieving three levels of fiscal outcomes:
aggregate fiscal discipline
allocation of resources according to strategic priorities
efficient and effective use of public resources
Ensuring transparency and accountability of a government to its citizens
Providing assurance to donors that their funds are being used for the purposes intended
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The new international aid
architecture emphasizes the
principle of mutual accountability
Scaling up of donor assistance requires sound PF systems
and reduced corruption in partner
countries
Recent global developments have put PF systems in the spotlight
Increasing recognition that
"ringfencing" projects will not work
Important benefits from using country's own
systems -- but need to strengthen capacity and
accountability of PF
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Two Aspects of Public Finance Systems
Focus on Public Finance System includes:
Efficiency, equity & sustainability of public expenditures and how they are financed (“numbers”)
Efficiency & effectiveness in how public finances are raised, allocated and utilized (“institutions”)
Two Aspects of PF Systems:
Public Finance Policy: Aggregate fiscal stance, level and composition of public expenditures & revenues
Public Finance Management: Institutional mechanisms that ensure fiscal discipline, allocative and operational efficiency
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Key Issues in Public Expenditure Analysis
Public Expenditure Analysis:
Rationale for Government Intervention: Market Failure, Redistribution
Mechanisms for Intervention: Regulation, Subsidy, Public Provision
Cost-benefit & Cost-effectiveness of Expenditure Allocations
Some Issues:
Data & Methodological Limitations of cost-benefit analysis: Analyzing broad allocations of spending
Benefit valuation & Intersectoral Allocations
Growth impact of expenditure programs
Generating Fiscal Space for infrastructure & social programs
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Public Finance Analysis, ‘Fiscal Space’ & Governance: Diamond
• Fiscal policy – level & composition of public finance – is important not only for stability but also crucially for growth
• Governments have 4 basic alternatives for additional fiscal space – revenue, grant aid, borrowing & efficiency savings – as shown in the fiscal diamond
• Improved governance is crucial for all dimensions
“Fiscal Space”
Increase of Grant Aid in
% GDP
New Borrowing in
% GDP
Improved Revenue Effort in % GDP
Improved Expenditure
Efficiencyin % GDP
0
1
2
3
4
5
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Challenges in Public Finance Management
PFM systems in many countries are still very weak
Governance and corruption indicators reveal major challenges
Fragmentation of donor approaches and overlapping diagnostics
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Fiduciary RiskFiduciary Risk
Sound PF systems can ensure that donor resources are used for the purposes intended
Reputational RiskReputational Risk
Sound PF systems can ensure that large amounts of aid in
countries do not tarnish donors’ reputation
Development Effectiveness Risk
Development Effectiveness Risk
Sound PF System can ensure that budget systems,
including donor supported projects, achieve
development goals
Robust PF System can mitigate key risks from corruption
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Majority of PEM Systems Still Require Majority of PEM Systems Still Require Substantial UpgradingSubstantial Upgrading
Source: Fund-Bank AAP database
02
9
5
15
19
Little Upgrading Required Some Upgrading Required Substantial Upgrading
Required
Relative Need for Upgrading HIPC PEM Systems
(Number in Paranthesis indicate total of benchmarks met)
2001 2004
TZA (11)MLI (12)
BEN (8)RWA (8)UGA (8)BFA (9)GUY (10)
GNB (0)GMB (3)ZMB (3)COD (3)BOL (4)MDG (4)MOZ (4)STP (4)GIN (5)MWI (5)NER (5)NIC (6)CMR (7)ETH (7)GHA (7)HND (7)SEN (7)SLE (7)TCD (7)
BEN (8)BFA (8)GUY (8)HND (8)MLI (8)RWA (8)TZA (8)TCD (8)UGA (8)
BOL (5)CMR (4)ETH (6)GMB (5)GHA (1)GIN (5)MDG (7) MWI (7)MRT (7)MOZ (5)NIC (5)NER (3)STP (4)SEN (4)ZMB (3)
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Main elements of a ‘strengthened approach’ to PFM
PFM Strengthened Approach:
A country-led agenda – including a PFM reform strategy and action plan
A donor coordinated program of support – coordinated, coherent, multi-year program of PFM work that supports and is aligned with the government’s PFM strategy
A results focus with objective performance measurement
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A standard set of high level indicators
• Widely accepted but limited in number
• Broad measures of performance relative to key PFM system characteristics
• Enabling credible monitoring of performance and progress over time
PFM Performance Report
• Integrative, narrative report based on indicators using observable, empirical evidence.
• Updated periodically, depending on country circumstances and operational needs
• Contributes to coordinated donor assessment
• Feeds into government-donor policy dialogue
The Performance Measurement Framework
Credible results measurement framework with standardized reporting should help shift focus
to capacity building
Performance Measurement FrameworkPerformance Measurement Framework
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Trends in PFM can be monitoredNet Change in HIPC Tracking Indicators, 2001-2004
2
6
1
6
7
0
1
2
3
4
5
6
7
8
Decline in 3categories
Decline in 1-2categories
No change Improvementin 1-2
categories
Improvementin 3 or morecategories
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All projects
CPIA (Q16)
< 3.0
CPIA (Q16) from 3.0 to
3.5
CPIA (Q16)
Greater or equal to 3.5
No. of project
s
Projects with
Satisfactory or
better (%)
No. of projec
ts
Projects with
Satisfactory or
better (%)
No. of projec
ts
Projects with
Satisfactory or
better (%)
No. of project
s
Projects with
Satisfactory or
better (%)
PFMPFM 39 85% 15 87% 18 83% 6 83%
ACSACSRR
24 58% 11 36% 9 78% 3 100%
PFM operations perform satisfactorily regardless of governance starting point, but ACSR operations are successful in stronger settings
OED Evaluated PSGB-mapped projects with PFM (without ACSR) and ACSR (without PFM) primary themes, FY00-FY05
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Improving PFM – A Platform Approach
Platform 1A credible budget delivering a reliable and predictable resource to budget managers
Platform 2Improved internal control and public access to key fiscal information to hold managers accountable
Platform 3Improved linkage of priorities and service targets to budget planning and implementation
Platform 4Integration of accountability
and review processes for
both finance and
performance management
• Integration of budget (recurrent & capital budgets)
Strengthen macro and revenue
Forecasting
Streamline spending processes
Broad Activities Re-design
Budgeting
Classification system
Initial design of FMIS for core business processes
Strengthen external audit and define internal audit function
Re-design budget cycle (e.g. MTEF)
Pilot program based budgeting & budget analysis
Further fiscal
Decentralization
Full design of FMIS
Develop IT
Management
Strategy
Initial design of asset register
Enables a basis for accountability
Enables focus on what is done with
money
Enables more accountability for
performance management
Cambodia – Sequence of Platforms
Broad Activities
Broad Activities
Broad Activities
Source: See “Study of measures used to address weaknesses in Public Financial Management systems in the context of policy-based support,” by Peter Brooke, at www.pefa.org
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Citizens/Firms
Reforming PFM Systems:Strengthen Links with Broader Accountability Systems
Citizen
s/Firm
s
Cit
izen
s/F
irm
s
Citizens/Firms
Political Institutions• Political Parties & Leadership• Social & Econ Interest Groups
Executive-Central Govt
PFM Systems
Service Delivery & Regulatory Agencies
Subnational Govt & Communities
Check & Balance
Institutions• Parliament• Judiciary• Oversight institutions
Oversight Groups in
Society• Civil Society
Watchdogs•Media
•Business Associations
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Strengthening Demand for Public Financial Accountability
Participatory Budgeting,
Puerto Alegra(Brazil)
Civil Society Oversight; transparent, competitive
procurement(Slovakia)
Strengthening Supreme Audit Institutions
(Hungary)
Public Expenditure Tracking & Information Campaigns (Ghana, Madagascar, Mozambique, Peru, Senegal, Tanzania, Zambia)
Procurement oversight by
CSOs (Philippines)
Strengthening Public Accounts Committees of
Parliament(India)
Transparent, competitive e-procurement
(LAC) Strengthening Public Accounts Committees
of Parliament (Kenya, Ghana, Zambia --
AFR)
Accountability, Transparency & Integrity
Project(Tanzania)
Key Issue: Instrument to Support Demand-side Interventions
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Philippines: Procurement ReformMobilizing Support & Oversight by Civil Society
Transparency and Transparency and Accountability Network (20+ Accountability Network (20+ member groups)member groups)
Walang Ku-Corrupt Walang Ku-Corrupt Movement Movement (Youth)(Youth)
PAGBA PAGBA &&AGAPAGAP(w/in (w/in Gov’t)Gov’t)
CBCP(Church)
Philippine Contractors Association(private sector – main stakeholder)
Local chambers of Commerce (Private sector)
Drew other civil society groups Drew other civil society groups into the advocacy efforts and into the advocacy efforts and
coordinated the activitiescoordinated the activities
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Reaching OutReaching Out Radio: The swath Radio: The swath
& the dagger& the dagger
The Media Campaign:The Communications Strategy
Print Media: Print Media: Amplifying the Amplifying the
problemproblem
TV: Raising the TV: Raising the anteante
Advertising: Creating a Advertising: Creating a ‘brand name’‘brand name’
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“BIR Officials Amass Unexplained Wealth” By Tess Bacalla, Philippine Center for Investigative
Journalism
CAR MODEL
BENEFICIAL OWNER
REGISTERED OWNER
Nissan Patrol Edwin Abella BIR Reg'l Director, Quezon City
Sulpicio S. Bulanon Jr. 1817 Jordan Plains Subd., Quezon City (listed address of Abella in his SALs)
Suzuki Grand Vitara
Ditto
Merrick Abella (son of Abella)
24 Xavierville, Loyola Heights, Q uezon City
Nissan Cefiro Ditto Elizabeth S. Buendia 152 Road 8,-asa, Quezon City
BMW Lucien E. Sayuno BIR Reg'l Director, Makati City
Limtra Dev. Corp. Zone 4, Dasmariñas, Cavite
BMW Ditto Marie Rachel D. Mene c/o Metrocor and Holdings, G&F, Makati City
Honda Accord Danilo A. Duncano BIR Reg'l Director, Quezon City
Daniel Anthony P. Duncano 2618 JP Rizal, New Capital Estate, Quezon City
Mitsubishi L200 Corazon P. Pangcog Asst. Reg'l Director,
Alberto P. Pangcog (husband) B2 L23 Lagro Subd., Quezon City
Owner: Regional Director in the Bureau of Internal Revenue; forced to resign; currently facing corruption charges; other officials suspended, also facing charges
Media,Transparency, and Combating Media,Transparency, and Combating CorruptionCorruption
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From fragmented, overlapping PFM
diagnostics …
From fragmented, overlapping PFM
diagnostics …
… to integrated, harmonized, PFM
assessments
… to integrated, harmonized, PFM
assessments
Strategic directions for PF work for future
From ad hoc PE analysis …From ad hoc PE analysis … … to more systematic PF policy analysis
… to more systematic PF policy analysis
From diagnosis & producing reports…
From diagnosis & producing reports…
… to capacity building & improving PF
performance
… to capacity building & improving PF
performance
From technocratic, supply-side interventions
From technocratic, supply-side interventions
… to strengthening demand-side pressures
& accountability systems
… to strengthening demand-side pressures
& accountability systems
From silos of separate EP, FM, Procurement, PSG
teams
From silos of separate EP, FM, Procurement, PSG
teams
… to integrated country PF teams
… to integrated country PF teams
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Broadening of the PF Agenda
From PREM preoccupation in early years of PERs to broad cross-network interest
PFAM course is offered in collaboration with HD, INF and AGR networks, as well as participation of IMF
PEFA Indicators developed in partnership between FM, Procurement and PREM within Bank, and with PEFA donor partners
Integrated Public Finance Thematic Group
Finally: Thanks to Course Organizers:
Anand Rajaram, Bill Dorotinsky, Tuan Minh Le as thematic leaders
Excellent supporting work by Juliet Teodosio, Zhicheng Li Swift, Nataliya Biletska
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Primary focus of WB Primary focus of WB operations in governanceoperations in governance
Local Participation & Community Empowerment
• Decentralization with accountability• Community Driven Development (CDD)• Oversight by parent-teacher associations & user
groups• Beneficiary participation in projects
Local Participation & Community Empowerment
• Decentralization with accountability• Community Driven Development (CDD)• Oversight by parent-teacher associations & user
groups• Beneficiary participation in projects
Political Accountability
• Political competition, broad-based political parties
• Transparency & regulation of party financing
• Disclosure of parliamentary votes
Political Accountability
• Political competition, broad-based political parties
• Transparency & regulation of party financing
• Disclosure of parliamentary votes
Institutional Checks & Balances
• Independent, effective judiciary
• Legislative oversight (PACs, PECs)
• Independent oversight institutions (SAI)
• Global initiatives: UN, OECD Convention, anti-money laundering
Institutional Checks & Balances
• Independent, effective judiciary
• Legislative oversight (PACs, PECs)
• Independent oversight institutions (SAI)
• Global initiatives: UN, OECD Convention, anti-money laundering
Civil Society & Media• Freedom of press• Freedom of information• Civil society watchdogs• Public hearings of draft laws• Report cards, client surveys• Participatory country
diagnostic surveys
Civil Society & Media• Freedom of press• Freedom of information• Civil society watchdogs• Public hearings of draft laws• Report cards, client surveys• Participatory country
diagnostic surveys
Private Sector Interface
• Effective, streamlined regulation
• Transparent public-private dialogue
• Break-up of monopolies • Transparency in
Extractive Industries• Corporate governance• Collective business
associations
Private Sector Interface
• Effective, streamlined regulation
• Transparent public-private dialogue
• Break-up of monopolies • Transparency in
Extractive Industries• Corporate governance• Collective business
associations
Anticorruption has many dimensions Anticorruption has many dimensions Bank operations focus only on someBank operations focus only on some
Effective Public Sector Management
• Ethical leadership: asset declaration, conflict of interest rules
• Meritocratic civil service with adequate pay• Transparency & accountability in budget
mgnt • Transparent, competitive procurement• Anticorruption in sectors
Effective Public Sector Management
• Ethical leadership: asset declaration, conflict of interest rules
• Meritocratic civil service with adequate pay• Transparency & accountability in budget
mgnt • Transparent, competitive procurement• Anticorruption in sectors
GOODGOODGOVERNANCEGOVERNANCE
GOODGOODGOVERNANCEGOVERNANCE
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Purchasing of public positions
Source: Kaufmann, Pradhan, Ryterman (1998)
Percent of public officials
believed to have purchased their
positions
Cutting-edge diagnostics help ‘unbundle’ Cutting-edge diagnostics help ‘unbundle’ corruption & identify entry pointscorruption & identify entry points
Public expenditure tracking (Uganda)
Source: Reinikka and Svensson (2004)
Public info campaign (1999)
Control of corruption, 2004: World map
Colors are from Dark Red - the worst bottom 10th percentile rank to Dark Green - the best above 90th percentile. Source: Governance Matters IV: Governance Indicators for 1996–2004, D. Kaufmann A. Kraay, and M. Mastruzzi (2005)
5
10
15
20
25
30
Proportion of firms affected by capture of …
HungaryHungary EstoniaEstonia RussiaRussia UkraineUkraine
Parliamentary VotesParliamentary VotesPresidential Admin. DecreesPresidential Admin. Decrees
Civil Court DecreesCivil Court Decrees
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Fiduciary RiskFiduciary Risk
That donor resources will not be used for
the purposes intended
Reputational RiskReputational Risk
That large amounts of aid in countries with high
corruption & weak PFM systems will tarnish donors’ reputation
Development Effectiveness Risk
Development Effectiveness Risk
That corruption in weak PFM systems will undermine the
achievement of development goals in general and in donor
supported projects
Robust PFM can mitigate key risks from corruption
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Improvements in Satisfaction: public Services in Bangalore
Source: Public Affairs Committee, India
5 6 49
25
1
14
4147
42
67
34 34
16
32 32
73
94
73
92
7378
8596
77
n/a n/a0
10
20
30
40
50
60
70
80
90
100
City c
ouncil
Elect
ricity
Wat
er s
upply
Telep
hones
Public h
ospita
ls
Police
Land a
uthorit
y
Public b
uses
Transp
ort au
thorit
y
Agencies
% s
atis
fied
1994 1999 2003
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Corruption is not just a developing country problem
Source: “Are Foreign Investors and Multinationals Engaging in Corrupt Practices in Transition Economies?” by Kaufmann, Hellman, Jones, in Transition, May-June 2000. Note: Survey Question was “How often nowadays do firms like yours need to make extra, unofficial payments to public officials to gain government contracts?” Firms responding “sometimes” or “more frequently” were classified as paying kickbacks. These figures are subject to significant margins of error and thus should be regarded as approximate.
Percentage of firms that pay public procurement kickbacks by country of origin of foreign direct investment
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Transparency in Extractive Industries
Publish What You Pay (PWYP) – (focus on home governments)
Initiation: The PWYP campaign was founded by Global Witness, CAFOD, Oxfam, Save the Children UK, Transparency International UK and the Open Society Institute.
Participants: There are now several Publish What You Pay national NGO coalitions around the world, including in Azerbaijan, Chad, Congo Brazzaville, Democratic Republic of Congo, France, Kazakhstan, The Netherlands, Nigeria, the United States and the United Kingdom.
Extractive Industries Transparency Initiative (EITI) (focus on host governments)
Initiation: The UK Prime Minister, Tony Blair announced the EITI initiative at the World Summit on Sustainable Development in Johannesburg, September 2002. In January 2005, the International EITI Secretariat in the UK Department for International Development (DFID) produced the first version of the EITI Source book.
Participants: Governments, donors, companies, industry associations, international organizations, NGOs and investors
Countries: Azerbaijan, Congo, Republic of, Ghana, Kyrgyz Republic, Nigeria, Sao Tome and Principe, Timor Leste, Trinidad & Tobago
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Ethics Infrastructure
Political Political LeadershipLeadership
Codes of Codes of ConductConduct
GuidanceGuidanceProfessional Professional SocializationSocialization
Legislative Legislative FrameworkFramework
ControlControlAccountability & Accountability &
ControlControl
Coordinating Coordinating BodyBody
ManagementManagementPublic Service Public Service
ConditionsConditions
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0
10
20
30
40
50
60
70
80
90
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
% of countries meeting benchmark in 2001 % of countries meeting benchmark in 2004
Formulation Execution Reporting Procurement
Progress in Meeting HIPC Progress in Meeting HIPC BenchmarksBenchmarks
(Percentage of benchmarks met by indicator)
Source: Fund-Bank AAP database 2005
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Comprehensive Fiscal oversight:
Are the aggregate fiscal position and risks are
monitored and managed?
Comprehensive Fiscal oversight:
Are the aggregate fiscal position and risks are
monitored and managed?
Information:Is adequate fiscal, revenue and expenditure
information produced and disseminated to meet decision-making and management purposes?
Information:Is adequate fiscal, revenue and expenditure
information produced and disseminated to meet decision-making and management purposes?
Comprehensive, Policy-based, budget:
Does the budget capture all relevant
fiscal transactions, and is the process, giving regard to government
policy?
Comprehensive, Policy-based, budget:
Does the budget capture all relevant
fiscal transactions, and is the process, giving regard to government
policy?
Budget Realism:Is the budget realistic, and
implemented as intended in a
predictable manner?
Budget Realism:Is the budget realistic, and
implemented as intended in a
predictable manner?
Control :Is effective control and stewardship exercised
in the use of public funds?
Control :Is effective control and stewardship exercised
in the use of public funds?
The PFM performance areas monitored in the framework
Accountability and Transparency :
Are effective external financial accountability
and transparency arrangements in place?
Accountability and Transparency :
Are effective external financial accountability
and transparency arrangements in place?
Performance Measurement FrameworkPerformance Measurement Framework
Six PFM System Aspects
All represent different aspects of risk to client and Bank funds, projects and objectives