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Napodano

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PEFA & POLICY MANAGEMENT: a collaborative experience
« on: November 10, 2012, 07:45:47 GMT »
We start this new board with something special: a collaborative experience by three PFM Board members, which request the sharing of experience by other members.

Gord Evans, John Short and Martin Johnson are ready to share their experiences to explore the complex relationship between financial and policy planning and to suggest how to better address this relationship within the PEFA methodology

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Problem Statement (full paper attached below- you need to register in order to download it)
PEFA has developed a robust set of comparable country assessments for public financial management and accountability.  One of its core measures, policy-based budgeting, is determined by Performance Indicators (PIs) 11 and 12, focusing respectively on the annual budget process and multi-year fiscal planning.
Although these PIs provide important information concerning policy-based budgeting, the exclusion from the assessment of the government’s related policy management systems and institutions may, in some cases, produce an incomplete or even inaccurate assessment.  It is our belief that sufficient experience with integrated policy and financial planning exists to address this gap within the PEFA methodology.
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All PFM Board members are called to share their field experience on the matter by making a post to this topic (including attachments if they feel like it). The deadline is 31 December 2012. Gord Evans, John Short and Martin Johnson will keep the discussion alive and at the end will consolidate all the contributions into a single document which potentially can become the PFM Board Compendium 01, a new product of our community. All the contributors will be acknowledged in the Compendium, which will be sent to the PEFA Secretariat for consideration.

The time for sharing is now.

[Admin note: the Compendium is downloadable in the last post of this topic - scroll down to get it]
« Last Edit: February 27, 2013, 08:48:34 GMT by Napodano »

John Short

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Re: PEFA & POLICY MANAGEMENT: a collaborative experience
« Reply #1 on: November 11, 2012, 09:22:02 GMT »
^

petagny

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Re: PEFA & POLICY MANAGEMENT: a collaborative experience
« Reply #2 on: November 12, 2012, 09:31:01 GMT »
A very useful initiative! I'll definitely be giving some thought to it.

In the meantime, the attached paper by Matthew Andrews could be a good stimulus to discussion (also see his archived 'fireside' discussion).


Napodano

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Re: PEFA & POLICY MANAGEMENT: a collaborative experience
« Reply #3 on: November 14, 2012, 15:04:28 GMT »
I received from Tony Bennett , some comments which he made directly on the Problem Statement paper (attached).

Thank you Tony.

The time to share is now.

« Last Edit: November 14, 2012, 15:07:32 GMT by Napodano »

harnett

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Re: PEFA & POLICY MANAGEMENT: a collaborative experience
« Reply #4 on: November 28, 2012, 13:01:07 GMT »
I've had a few initial thoughts:

Do you agree with this assessment?


This is a very good analysis of the situation.  I couldn’t agree more regarding the importance of the link between PFM and policy – after all what is a budget if not the main expression of a government’s intent to implement its policies?  However, we should be careful with respect to what the role of PEFA is, and what is likely to be feasible during an assessment.
In many areas of PFM assessed by PEFA, it is acknowledged that it is a broad-brush snapshot of the current PFM system.  Areas requiring further analysis should be subject to a “drill-down” assessment e.g. procurement.  Looking at policy based budgeting in more detail strikes me more as a “drill-up” and concerns me in that we are now potentially assessing government policy (in as much as it exists) – a much more sensitive topic than PFM architecture.
Of course, I would not deny that it is often a good idea to assess how government policy is transformed into a credible budget.  It has been the point of PFM reform in many countries!  However, we are opening a real can of worms if we are to question the linkage between the government’s policy management systems and the budget.
Why?  Well I would posit that much PFM reform has not been endogenous (to use Matt Andrew’s phrase).  In the words of Sybi Hyda, commenting on his time as a Budget Officer in Albania “many times I have experienced the situation when high officials at the MoF, including Ministers, have used the expression “we are doing it because it is required from our international advisers”.”  Equally, much strategy development has not been endogenous, either at national or sectoral level.  This, of course is not surprising, given the priority of donors to increase levels of spending in the social sectors, with MDG targets to fulfil in much of the world – hence the proliferation of Poverty Reduction Strategies.  It would appear that most National Development Plans have been either donor led or drawn up in a manner to satisfy donor concerns.  Everybody needs donor funds, especially if it is budget support!
Moreover, recent decades have, with few exceptions, appeared to offer little policy choice to governments around the world – the neoliberal paradigm has dominated policy, not only of donors, but also competing political parties in most countries.  The best we have had in terms of policy choices seems to have been whether to prioritise roads or the social sector (such as the debate between the donors and Museveni in Uganda in the 1990s in that wonderful documentary: The Bank, The President and the Pearl of Africa).  Apart from that, how often do we catch a glimpse of whether the government agrees or not with the “official” policy documents?  And if they don’t, what is their policy in that case? 
In many (if not most) countries the objective of governments has been to accumulate wealth amongst the major power brokers (for the re-election campaign as well as personal gain), keep the vote bearing civil servants happy, and hopefully be re-elected and/or avoid overthrow.  It is not necessarily the aim to provide the services expressed in the “policy” documents.
As a result it will often be the case that the link between policy and budget is weak.  There may well be no formal policy management systems to speak of.  If they do exist they may not function well.  This is of little consequence to many governments.  What is of consequence is if the donors expose these truths – hence my concerns about access to assess many of the issues highlighted.
 
What is your experience in such matters?

Largely that policy is irrelevant in most LICs and MDCs.  Governing parties do not distinguish themselves by their policies – hence the willingness to allow donors to ventriloquise their own concerns into strategy documents.
Regarding the PEFA indicators:
PI-11
(i) Existence of and adherence to a fixed budget calendar; This usually scores well, usually reflecting the legal status of the budget code
(ii) Clarity/comprehensiveness of and political involvement in the guidance on the preparation of budget submissions (budget circular or equivalent); This is more erratic in that some countries comply with a donor-suggested timetable, whilst others regard political involvement as superfluous (indeed the budget may well be superfluous!)
(iii) Timely budget approval by the legislature or similarly mandated body (within the last three years); Usually fine, although sometimes disrupted by strife or elections
PI-12
(i) Preparation of multi -year fiscal forecasts and functional allocations; If an MTBP/MTEF has been introduced then this usually scores well
(ii) Scope and frequency of debt sustainability analysis; if the IMF has conducted analyses it scores well.  Also if the IMF has trained the Debt Dept. to carry out such analyses. 
(iii) Existence of sector strategies with multi-year costing of recurrent & investment expenditure; this usually scores badly.  There are often islands of good practice, usually in areas with significant donor funding e.g. education, health, transport.
(iv) Linkages between investment budgets and forward expenditure estimates; invariably poor
My other related experience is that policy can be ignored if political expedience requires.  This can occur with little regard to budgetary implications. 
Maybe the best example we have seen in that sphere was the U-turn regarding the investment budget in Albania seen in 1999(?).
After establishing reasonable processes (including political buy-in) regarding budget preparation, including the troublesome development budget, all was sacrificed when the political interests of both the Albanian government and the US conspired to build a superhighway through the mountains of Albania to link it with newly independent Kosovo (site of the largest US base in Europe without “friendly” access to the sea).  Protestations (by cognoscenti such as consultants) that in design it was over engineered (and therefore needlessly expensive for the Albanian taxpayer) were ignored.  Any political opposition to the road was casually swatted away with cries of “Anti-Albanian”.  What’s more, although the road was not fully ready for the election campaign, the Prime Minister ensured it was ready enough for him to cut the ribbon  and go on to win the election.  Bystanders could only admire his political vision (whilst guardedly moaning about the position of his daughter as legal adviser to the main road contractor!).
Having said all of that, of course it is the prerogative of politicians to adapt to circumstances and rewrite policy “on the hoof”.  What happened in Albania was proved to be right by the election result!  Such policy swings in other countries are often motivated by more naked aggrandisement.

How should this problem be addressed in practice?

I would adopt a gentle approach to assessing the linkage between policy management systems and budget.  If any changes were to be made to the indicators,I would either add a dimension or collapse dimensions (i) and (iii) of PI-11 into one dimension and introduce a new dimension on the efficacy of policy management systems where an A score indicated they existed and passed on all (or most?) the following documents to MoF at appropriate times in the budget cycle:
o   statements of government priorities;
o   medium-term strategic or policy documents;
o   annual legislative programs;
o   ministry/agency strategic plans;
o   existing legislative mandates with expenditure implications;
o   individual policy and regulatory proposals; and
o   monitoring reports for strategic documents/plans.
A D score would indicate no policy management system.
B & C would be points in between.
Such an approach would not, one hopes, require too much interaction with cabinet or similar, but would indicate if there was such a system in place.  I feel also that it has the makings of being objectively measurable.

What type of guidance would be beneficial?

I would leave this section to Mr. Gord Evans.  My only comment is that we would have to define what constituted a policy management system.  Is a Presidential Decree to be included?  A cabinet decision relayed to MoF?  Or does it have to be a formal policy institution within the cabinet office or similar?
« Last Edit: November 29, 2012, 03:20:37 GMT by harnett »

Napodano

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Re: PEFA & POLICY MANAGEMENT: a collaborative experience
« Reply #5 on: November 29, 2012, 10:21:01 GMT »
Interesting considerations, harnett!

I want to make my contribution on the matter as I have often noticed a discrepancy between the analysis on the Policy-Based Budgeting dimension in the PEFA country reports and what I found in these countries when on MTEF TA missions. It should be noted that these discrepancies were consistently one-sided: the scoring and the analysis in the PEFA reports looked to me skewed to the upper-end (the situation as evinced from the PEFA report appeared better than in reality).  I can propose a couple of real cases if the proponents of this initiative would consider it useful for the final document.

I like to start my comment by drawing your attention on the 'size' of the Policy-Based Budgeting dimension compared to the other dimensions of the PEFA methodology. The Policy-Based Budgeting dimension is the only one which has ONLY two indicators. In addition the PI-12 has four i's dimensions, which it shares only with PI-18 and PI-27. For me these  elements are a sign that the dimension is not enough developed to expand the analysis on such a crucial link beteewn policy and budget. And this despite the fact that the international best practice points to a reinforcement of the Policy-Budget link in the overall budget system.

What to propose
1. I would definitively add one or two Performance Indicators to the Policy-Based Budgeting dimension to analyse more in details and in a more measurable way the links between the Government policies priorities and the expenditures forecasts. In defining the new indicator(s) and its i's dimensions I would consider the need to look at both the budget planning and implementation of the policy priorities.
2. I would advocate a dedicated indicator or at least a  i's dimension on Public Investment Management process.
3. I would propose the following quantitative analysis to the (i) dimension of the PI-12 'Multi-year fiscal forecast and functional allocation':
  • the deviation between the MTEF expenditures allocations and the annual budget allocations at both aggregate and sector level (see the attached table and chart as example - you need to be registered member of the Board to see them).
 
I stand ready to expand my inputs if the proponents see them useful.
« Last Edit: November 29, 2012, 17:39:05 GMT by Napodano »

harnett

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Re: PEFA & POLICY MANAGEMENT: a collaborative experience
« Reply #6 on: November 29, 2012, 12:29:47 GMT »
You would add 1 or 2 performance indicators on the link between policy and budget!  You make me look conservative - which is rare!!!  The issue is what can be objectively measured in a PEFA.  The comparison between costed national and sectoral strategies and the priorities (implicitly) expressed in the budget is a major piece of work.  A PEFA could not undertake this and as far as I know it is rare for such analysis to exist for PEFA to pick up on.  A PEFA requires objectively identifiable evidence - hence my gravitation towards whether a policy management system exists and score on its sophistication.

Yes - I would also consider an indicator on PIM, but that is a bit outside the scope of the discussion methinks!

The idea of the deviation between MTEF (or similar) and Budget allocations I think is already captured in whether the multi-year forecasting is operational.  If there is a discrepency, then the 1st dimension scores badly.  Essentially you want to know if the 1st year of the MTEF is the budget.  If it is then much follows (maybe!) - if it isn't then we don't have an operational MTEF.




John Short

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Re: PEFA & POLICY MANAGEMENT: a collaborative experience
« Reply #7 on: November 29, 2012, 22:53:23 GMT »

Harnett has raised some very points re policy coherence in the context of budgets and PFM.  He cites two countries as examples of donor/government interface (and endogenous/exogenous policy generated formulation, which I would like to explore further.  It is interesting that Uganda in the 1990s has been given as an example quoting the Documentary “The Bank, The President and the Pearl of Africa” relating to the policy debate.  Yet very little about the debate was related to PFM.  It was the time of Balance of Payment support where there was really no discussion of the use of Ugandan Shilling counterpart funds generated and used in the budget.  The policy debate was about import and export licensing, import tariffs, foreign exchange liberalisation, private sector development, deregulation and export and investment promotion.  If this is neoliberal policy, it looks like sound policy to me!    I have not seen the documentary but was in many meetings where the camera was rolling.  Public expenditure issues centred on the fact that the implicit subsidy (from losses being funded from the budget) to a textile factory employing hundreds being the same as the allocation to health!  And it was not an issue of roads versus social sector.  It was an issue of stimulating markets for agriculture by building roads (all roads at the time could be considered rural). To paraphrase the ST/PS Planning at the time (now Governor of the Bank of Uganda) agriculture and industry and associated policy are too important to be left to the respective ministries!  There was policy coherence with the ST/PS in the vanguard and often one step ahead of the donors.  Only once the economy was developing as a result, the attention turned to PFM issues as a policy with the PEAP and poverty reduction policies.

Turning to Albania, surely the example of the road shows that the Government was actually following its own policy convictions – perhaps not fully planned (later than 1999 more like 2007) and contradicts the observations of donor compliance.  What policy?  Foreign policy for sure, but also regional policy opening up Kukes and its surrounds to the rest of Albania, and also perhaps economic development policy realising the benefits from easy access to the sea for Kosovars.    This is of course with the benefit of hindsight as all appear to be realised.  Now with the R7 road completed (or almost completed) from the border to Pristina, Pristina to the coast can be travelled safely in well below 3 hours.  I make the point of safety as an important one in terms of the over engineering and “high” cost for the Albanian taxpayers.  I have travelled that road many times in all seasons including a snowy winter.  I have also travelled on the alternative route through Macedonia and into Albania around Lake Ohrid in the snow.  One thing that has always struck me is that the dual carriage road through and around the mountains is on very difficult terrain (spanning valleys etc) may have cost a lot, but it had to cost a lot to achieve what it has achieved.  Has it been over engineered – would a single lane road have done the same job?  I can only point to the difference in leaving the tax payers part of the road and joining the World Bank financed single lane continuation.  Safety alone suggests that it was a correct decision.  Can the road be justified in terms of its benefits, ex post I would thinks so, whether it was ex ante........?
http://en.wikipedia.org/wiki/Albania-Kosovo_Highway
In terms of trying to assess the linkage between policy and budgets I think that these two examples that Harnett has raised justifies a closer look within PEFA if only to accentuate its importance to which the authors are drawing attention.  If governments are accountable, why should the link between policy and budgets not be a factor in assessing PFM? Whether PEFA is the tool for a full examination of this, is one question that is being asked, but improving the treatment beyond the present coverage is another one.  So the answer to Napodano is yes, please expand on your contribution!

harnett

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Re: PEFA & POLICY MANAGEMENT: a collaborative experience
« Reply #8 on: November 30, 2012, 08:20:50 GMT »
Ah - I thought my cynicism regarding policy might elicit some response!  Sure the Uganda example was not a PFM issue - just a rare example of a genuine policy debate  - the documentary is well worth watching - this should get it - http://www.youtube.com/watch?v=cRNn-DbS6gk  The debate if I recall correctly was more along the lines of donors wanting to support the social sector and Museveni wanting roads - which he indicated was for economic reasons but the donors were concerned that the roads were also for military reasons given the war he was fighting at the time.  But if you were there at the time it would be interesting to hear your views on the documentary.  I used to use it in my lectures in Liverpool!

As for Albania, yes the government followed its own (and that of the US?) policy convictions - just interesting how it panned out in the PFM sphere.  Here's a quote from the Wikipedia entry as in Short's message: "The highway project is the biggest road infrastructure project ever done in Albania. Its initial cost was estimated at €600m but during the course of construction this has more than doubled. The project is being financed by the government of Albania and some foreign lending institutions. The total cost of the highway is estimated to be over €1bn ($1.4bn).[citation needed] amid allegations of corruption and a growing public debt."

And as for the link between policy and budgets - I think the choice is between altering PEFA to accommodate this or establishing a new measure as intimated in Matt Andrew's look at "What a perfect PFM system should look like" - which can be downloaded on Petagny's comment below.  I'm really not sure which is the way to go, but given the history of PEFA, I can't see any radical alteration - just a tweak here and there.



« Last Edit: November 30, 2012, 08:24:58 GMT by harnett »

Napodano

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Re: PEFA & POLICY MANAGEMENT: a collaborative experience
« Reply #9 on: November 30, 2012, 08:24:15 GMT »
In terms of trying to assess the linkage between policy and budgets I think that these two examples that Harnett has raised justifies a closer look within PEFA if only to accentuate its importance to which the authors are drawing attention.  If governments are accountable, why should the link between policy and budgets not be a factor in assessing PFM? Whether PEFA is the tool for a full examination of this, is one question that is being asked, but improving the treatment beyond the present coverage is another one.  So the answer to Napodano is yes, please expand on your contribution!

As we are talking about major infrastructure I 'd like to have my second input on Public Investment Managment.

The Albanian road is a good example. In my opinion the problem there was not 'Road yes or no'. A policy choice was made by the Government: debatabale but legitimate . The MANAGEMENT of the project was the real problem as it had significant (doubling?), unplanned cost increases. Leaving outside corruption charges (behind the scope of this debate), this is a well know phenomenon in PIM, known as 'Optimism bias'. This should be gauged in the PEFA country reports in my opinion for major infrastructural sectors. Below attached is a table I used for an assessment of PIM in Brazil together with Professor Scandizzo.

I call on Professor Scandizzo and petagny to expand more on the PIM.

« Last Edit: February 22, 2013, 08:40:22 GMT by Napodano »

Napodano

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Re: PEFA & POLICY MANAGEMENT: a collaborative experience
« Reply #10 on: November 30, 2012, 08:37:02 GMT »
And as for the link between policy and budgets - I think the choice is between altering PEFA to accommodate this or establishing a new measure as intimated in Matt Andrew's look at "What a perfect PFM system should look like" - which can be downloaded on Petagny's comment below.  I'm really not sure which is the way to go, but given the history of PEFA, I can't see any radical alteration - just a tweak here and there.

harnett,

I am aware that the PEFA Secretariat is wary of too drastic changes of the PEFA structure. This is legitimate.

What could be proposed is to have 'add-on expansions' on specific dimensions: one definitively on policy-based budget; another for example could be on taxation (which was considered in the past but then abandoned by the PEFA Secretariat - attached - see page 24).  These 'add-on expansions' could be considered to be added before launching the PEFA exercise in a country on the basis of its perceived PFM shortcomings and need for analysis.

« Last Edit: November 30, 2012, 08:48:30 GMT by Napodano »

Napodano

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Re: PEFA & POLICY MANAGEMENT: a collaborative experience
« Reply #11 on: December 11, 2012, 10:57:58 GMT »
Two more considerations:

1. a (i) dimension within a PI could compare the composition of Government's budget submissions and the final budget appropriations as approved by Parliament. In some countries in which I worked (e.g. Mongolia and Kyrgyzstan) Parliamentarians have the right to introduce significant, last-minute changes to the Government policy priorities and the related expenditures, thus invalidating any policy management effort pre-budget. This create a disincentive to build up a systematic process for policy management and MTEF. 

2. PI-24 addresses the quality and timeliness of in-year budget report and this is fine. What I would add in a PEFA policy-based budget dimension is a review of actual spending on a monthly basis by Central Government as whole and key sector ministries. Often there is a spike in spending at the end of the year (see attached chart from WB Albania PEM - You need to register in order to see it). The reasons for this spike are multiple and interesting to analyze as all are related to policy implementation.
« Last Edit: December 11, 2012, 11:06:25 GMT by Napodano »

Napodano

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Re: PEFA & POLICY MANAGEMENT: a collaborative experience
« Reply #12 on: December 29, 2012, 19:23:48 GMT »
Chandra Bhandari <bhandarick@gmail.com> provided the following input via email:

QUOTE

Dear Gord Evans, John Short and Martin Johnson,

Please find my views attached here on the topic of Policy Based Budget of PEFA ,PMF.

Thanking you.

With Best Regards,
Chandra Kanta Bhandari,FCA

UNQUOTE
« Last Edit: December 29, 2012, 19:38:49 GMT by Napodano »

Napodano

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Re: PEFA & POLICY MANAGEMENT: a collaborative experience
« Reply #13 on: February 27, 2013, 07:31:42 GMT »
Herewith is the final product of this collaborative experience.

PFM Board Compendium vol.01: PEFA and Policy Management
From November to December, 2012, the PFM Board posted a discussion paper written by Gordon Evans, John Short and Martin Johnson entitled 'PEFA and Policy Management', with a view to developing a position on this topic. With this position paper, the PFM Board hopes to suggest a way forward that would be welcomed by the PEFA Secretariat and, after due consideration and study, incorporated within the next update of the methodology.

The PFM Board Compendium is an innovative, collaborative experience, whereby individual members of the Board initiate a debate online, based on a position paper. Other members make their own contributions, posting online their views and recommendations. In the end the position paper becomes the compendium which is circulated within the community and beyond.
« Last Edit: February 27, 2013, 07:37:50 GMT by Napodano »

 

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