Legal framework best practice

[Napodano]

One key element for a credible budget is a new legal framework capable to clearly define and regulate the budgte process, including the definition of program structure and performance.

Attached is a techncial note prepared by the IMF on what to consider when drafting an Organic Budget Law (OBL).
This note addresses the following main issues:
• Why adopt a new law relating to the budget system?
• What is the relationship between the OBL, the constitution and the wider legal framework?
• How should an OBL be adapted to conform to a country’s political arrangements?
• How should the respective roles of the executive and legislative be reflected in the OBL?
• What should be included in an OBL, and what should be excluded?

Also attached as reference the Albania and Croatia OBL's.

On the Albanian OBL, our member STONE could tell us interesting inside stories, as he was the mastermind of the law during his time in Tirana.
Are you there, STONE?

[STONE]

Yes, I'm here. 

Thanks to Napodano for raising this issue. 

The note by Leinert and Fainboum is a good one, and worth a read for anyone thinking of venturing into the process of assisting a Government in revising or drafting a new Budget System Law (BSL).  BSL is a better term than OBL (organic budget law) which is specific to only some country contexts.

As for mastermind behind the Albanian Law on the Budgetary System... well I don't think 'mastermind' is the role I played - I think the mastermind behind the law was the General Secretary of the Ministry of Finance who was in office from 2002 to 2006.  I was just an adviser and not alone in that.  I think some of my Albanian colleagues might have another term  for me in my role as 'adviser' on this process.  The lead role was taken up by two other senior MoF staff after the GS left his office.

I have used the term process twice now.  That is the most important thing about it - the law is just a result of a process of preparation of rules that describe and determine  how public financial/expenditure management processes should be.  Leinert and Fainboum do not directly deal with process in their note - although there are some process bits to it.

If I have any inside stories to relate I should like to concentrate on the process and not the content (although) some of the content is interesting.  The key thing to note is that we started advising on the new BSL in 2002 and it passed into law in 2008.  It took six years.  This is not because I am a slow writer (which I am) or because I am endowed with endless patience (far from it), it is because I believe (perhaps quaintly) in the importance of such laws and processes being developed by the people whose responsibility it is to manage them and implement the ensuing law.  It's too easy to take a note like Leinert and Fainboum's and look at a couple of other laws here and there and write something that'll pass muster (including with IMF FAD and the World Bank).  It is much harder to say "no we won't write it for you - we'll help you write it"  and then try and resist all pressure to deviate from that line.

I could relate some stories from my memory or I could add process comments to the advice that Leinert and Fainboum offer.  Please let me know.  Here's taster on how ....

It all started ... with a Terms of Reference that included "assist the Government in amending the Organic Budget Law".  That made our approach easier - we were funded by a donor who understood and believed in process and less in ticking the deliverables boxes.   Helpfully the General Secretary had a draft of the amendments he thought should be made.  They went straight to the heart of the most challenging stuff in PFM - responsibility and accountability.  These were the bits that remained challenging right up to the last moment.  He had some other ideas and asked us to draft something.  So we did. It wasn't a law it was a note of our advice on how to manage the process of amending the BSL.  The first thing to do was set up a "Task Force" of key stakeholders within and outwith the MoF and draw up a plan.  In order to help the process we set out a legislative review as a background piece for the Task Force.  We presented the review to the GS and some of his MoF staff in the General Directorate of Budget and asked the GS when we could present it to the Task Force.  The answer was there wasn't a task force - could we carry on and draft a law?  No was our answer.  Fortunately we were doing short term inputs so we could leave having got the assurance that a Task Force would be in place when we returned, and we could stick to the process plan that the GS agreed was exactly the right way of doing it.  On our return the GS asked with a smile if we had drafted the law. No.  We asked with a smile if the Task Force had been set up.  No.  The reasons were the public administration culture did not like 'committees' and anyway no-one would read a draft law unless it was written by a foreigner.  So began 6 years of process that ended the right way - there was eventually a task force and even if we did draft bits from time to time to help things along, they were drafted with lots of square brackets and alternative wordings to try and ensure that it was not going to be a case of 'that's what the adviser said'.

That is a flavour - if you want more I'll be happy to recount some anecdotes...


 

[Napodano]

Simon,

Thank you for such interesting and entertaining post.

One comment on my side on the six-year period to approve the law, which may seem a very long period. In reality this time was used to extensively test the new budget system, both process and performance structure, through successive budget cycles. I believe that only when they felt confortable with it, the Albanian officials were ready to finalise a draft law.

This time also allowed to consolidate practices and strenghten institutions in a way that could be sustainable for the Albanian public administration, which were then formalised in the ensuing by-laws and administrative regulations. I am thinking specifically of the GSBI (Group for Stratgey Budget and Intergation), the key group within line ministries responsible to regularly review, plan and budget program policies.

I am sure I am corrrectly reading the PFMBoarders' minds in asking for more from you, Simon. Down with the anecdotes, which make the salt of our profession.

[petagny]

I'm attaching quite a handy presentation by one of the author's of the IMF guidance to which Napodano has drawn our attention.

It shows differences in the legal framework between groups of OECD countries.

[Albani]

I would like to thank you for this interesting topic.  Related to this topic I'm attaching Kosovo OBL, which is known as Law on Public Finance Management and Accountability (LPFMA), and amendments, as well as the Law on Local Government Finance (LLGF). 

LPFMA was initially drafted in 2002, but due to Kosovo circumstances, the same Law was passed in 2003, then it was amended in 2008 to reflect new reality. Furthermore it was amended in 2010 as part of package of fiscal laws.  I'm not a legal expert but i've read many reports where this law was considered as a good law however, in my opinion, still not fully implemented, especially with regards to budget planing because proper capacities are needed for proper implementation of a good law. However, in my opinion, it lacks focus in medium term planning aspects.

PS. Sorry i needed to modify my post due to problems with my internet explorer software.

[Martin Johnson]

Perhaps one of the most interesting aspects of the drafting of the new legislation in Albania is touched upon by both Stone and Napodano. When our team was asked in 2002 to “assist the Government in amending the Organic Budget Law”, this was in the context of a wider assignment in which the team was asked to assist the government in preparing detailed regulations and procedure for the Albania (medium term and annual) budget process. This was within an environment where an enabling Organic Budget Law had been established in 1998 which had little to say about the budget process beyond a deadline for issuing a budget preparation instruction (July 10th) and a date for submitting the draft budget to the legislature (within the month of October).

When our team arrived in Albania in 2002, important aspects of budget reform were underway (including the creation of infrastructure for programme-based and medium term budgeting). At the same time, there was a general absence of standing regulations and procedure. The interesting situation that I refer to above, therefore, was one whereby our team was effectively commissioned to prepare secondary legislation (regulations and procedure), in effect, for a reform for which the endpoint had yet to be clearly articulated whilst at the same time providing advice on the nature of the changes to the legislation that would be required to deliver, safeguard and support this new system. Not so much a case of what comes first, chicken or egg, than working out first which one is the chicken and which the egg.

So, whilst Napodano is correct in part in pointing out that the Government needed the comfort of seeing the system in operation before passing the legislation to support it, the delays in passing the legislation were rooted in even more fundamental factors than this – in particular, the fact that the vision for the new system had not been articulated in anywhere near the requisite detail by 2002 to make a revision of the existing legislation or drafting of new legislation relevant and appropriate at that point. It is no coincidence then that our initial piece of advice was for the government to prepare a policy paper that would articulate what a new piece of public finance legislation would seek to achieve. (By way of a digression, we preceded that advice by engaging the then General Secretary and Budget Director in a discussion over whether it would be more appropriate to revise the existing legislation or whether there should be an entirely new piece of legislation. They were clearly of the opinion that a new piece of legislation should be prepared. Throughout the next six years, therefore, the work in progress became commonly referred to as the ‘New Organic Budget Law’. Ultimately, the Law on the Management of the Budgetary System that this became in 2008 did not – and does not – have the status of an organic law. Because of the nature and length of its provenance, however, many people even now continue to refer to it as the New Organic Budget Law.)

As Stone can illustrate through anecdotal reference, however, this advice was never really taken up, which contributed ultimately to the lengthy process and which caused eminently avoidable problems at the later drafting stages. To regard the six year period, therefore, as one during which all parties (external and internal) were waiting for the government to get its act together to pass a piece of legislation that was already more or less articulated in principle at least does not really capture the essence of the situation. Six years passed in the way they did for a variety of reasons. The absence of a government policy review for the new legislation was one of them. Pure process was another - from our experience, the words of the General Secretary were correct – the Government of Albania does not work through committees well, the Task Force for the new law was long in being established and met infrequently during the early years (and not that frequently in later years). Meanwhile, the Ministry of Finance simply got on building and testing the heart of the new programme and performance based budget procedure.

In 2005, the Department for Strategy and Donor Coordination under the Office of the Prime Minister played a crucial enabling rule through its support and leadership for the establishment of an Integrated Planning System. Among other things this confirmed the Government’s determination to modernise, improve and strengthen its policy, planning and budgeting process and provided the strongest signal to all parties that the new budget regulations and procedure (as a central part of the Integrated Planning System) had to be fully implemented and followed. This provided the leadership that had been missing through the absence of a legislative policy review. It also, in effect, confirmed the new regulations and procedure that had been developed by the Ministry of Finance and its centre of government partners through the IPS as the vision that would form the basis of what would ultimately become the Law on the Management of the Budgetary System. What this meant in practice was that by 2006, the Government was, at last, in a position whereby a Task Force for preparation of the new legislation could become effective.

The process over the previous four years had, in many respects, been about creating an environment within which a relevant piece of legislation could be properly prepared by the Government (this is not to say that a framework had not already been prepared – as Stone in particular among others can testify, one had). It was from this point onwards, however, that the drafting proper and the associated negotiation and finessing over detail could begin in earnest. Whilst this was strongly supported by our team (principally Stone), it is important to stress that the Government led from the front at this point, particularly through the Deputy Minister of Finance and the then Budget Director. Mr Stone can provide the anecdotes to flesh out the story properly, but I hope the above provides some insight into how and why these things take time and, in particular, how and why the Government of Albania produced a piece of legislation developed by its own staff (albeit with support) according to their own perception of Albania’s requirements.

[John Short]

The above contributions on Albania have indicated the process that was undertaken in getting to the Law on the Management of the Budgetary System.  Albani has drawn attention to the Law on Public Financial Management and Accountability in Kosovo and it is interesting to compare the genesis of both laws.  In the former, the process can be described as organic (even though the law is not) while the latter the law was prescriptive – what the powers to be considered should be desirable in the law irrespective of the capabilities to implement.  The Kosovo Law reflects the genesis of Kosovo itself.

As the 2009 PEFA states:

“When UNMIK began to work with Kosovar authorities to establish the institutions of government (regardless of the eventual resolution of Kosovo’s status), there has always been the understanding that the responsibility for PFM was an important issue and that it had to have a designated place in the executive branch of government.  Initially, the Central Fiscal Authority (CFA) was formed by UNMIK (but administered under Kosovar control) to fulfil this function, and the CFA evolved into the Ministry of Finance and Economy in 2002.  Although Kosovo was still under UNMIK jurisdiction until 2008, the MFE conducted the full range of national-level finance ministry functions, as laid out in the Constitutional Framework and the LPFMA. 
Currently, the overall legal framework is the Constitution of Kosovo.  This was adopted on the 9th April 2008 and it came into force on 15th June 2008 with the handover of all responsibilities to the Government from the UN.  The responsibility for public financial management, which had been shared between the PISG and UNMIK prior to Independence, is now in the hands of the Government, although a legacy of UNMIK policies and procedures is still found in many institutions and the Government’s systems as a whole (e.g., the civil service pay and grading system. 
”PISG Budget Organizations” were managed by the Government of Kosovo and included: the Assembly, the Offices of the Prime Minister and of the President; and the Ministries of: Finance & Economy, Public Services, Agriculture, Trade & Industry, Transport & Communication, Health, Culture, Education, Labor & Social Welfare, Environment & Spatial Planning, Communities & Returns, Local Government, Energy & Mining, Internal Affairs, Justice, and some small organizations such as the Independent Procurement Commission and the Public Procurement Agency. 
“Reserved Power Organizations” were managed by UNMIK and included: Customs, the Auditor General, the Kosovo Protection Corps, Police Services, the Courts system, the Kosovo Trust Agency (including POEs and SOEs), the Ombudsperson, and a variety of smaller organizations.  These two classifications ceased to be used once Kosovo declared its Independence, when most central organizations came under the single Government of Kosovo.
The framework for public financial management is legislated through Law No. 2003/2, the Law on Public Financial Management and Accountability and its 2008 successor (Law no 03L-048 with the same name) as well as the Law no 03/L-049 on Local Government Finance.  While the LPFMA provides the overall frame for public financial management there are other laws and regulations, which deal with specific activities, as well as the annual budget laws.”

However, the Law includes that the Minister shall prepare and deliver to the Government the following information inter alia:
1. a mission statement and performance plan setting forth:
- a definition of each budget organization’s mission;
- a list of the measurable goals that are to be used to evaluate the success of a budget organization in achieving its mission;
2. a capital program setting forth a multi-year capital investment plan that identifies and includes the highest priority needs and proposed capital projects for the upcoming fiscal year and estimates of the financial impact on future years of such projects;
3. details of the estimated amount of all contingent liabilities of budget organizations, with a specific identification of those that have a significant potential to give rise to actual liabilities during the upcoming fiscal year.

As Albani points out these are conspicuous by their absence – desirable features but not scoring high on PI-11 and 12 in the PEFA.  While there has not been a recent PEFA in Albania, my gut feeling is that scores for these two indicators would be at the higher end of the scoring range.

One feature of both laws is that they were not rushed.  This contrasts with the time assigned to producing a new budget law in a country where I reviewed the TA programme on PFM reform project.  An outline of a draft Law on Public Finance and Accountability had been produced within the first six days of the Inception Mission due to the “need to pass a new organic budget law before the adoption of the (next) budget”.  My advice to the Minister was that a little bit more time and discussion would be more appropriate and perhaps a visit to Albania may prove productive.  Three years later there does not appear to be a new budget law.

[Albani]

It's good that John mentioned the Kosovo government structure during UN Administration, because such structure had huge impact in the drafting of Kosovo Law on Public Finance Management and Accountability.
   
The drafting of the Law started in 2001 by Central Fiscal Authority which was co-headed by an international and local person (the local then became Minister of MEF),  and its purpose was to establish fiscal policies, budget preparation and execution, and thereby to establish the grounds for any future government considering that CFA operated under a mandate of Interim UN Administration, as described in my Kosovo PFM post.  In line with these, the draft law was prepared, and was finalized in 2002 after the establishment of Local Institutions called Provisional Institutions.  However, the Constitutional Framework (provisional) set out some reserved powers that were retained by UNMIK, which were a reason for UNMIK to seek changes in the draft law. Namely they insisted to have MEF that would be responsible for the PISG powers and CFA responsible for fiscal policies and for UNMIK reserved powers.

Being aware that two institutions in the same sector would be detrimental for the PFM in Kosovo, the locals insisted to have all the competencies within the MEF. As a result, a decision was made to close CFA, and "good bye CFA" party was held in February 2002 to mark a huge step toward consolidating the MEF.  However,  in turn, UNMIK sought measures to ensure that its reserved powers receive proper attention, therefore a new institution "Economic and Fiscal Council" was added to the process, headed by UNMIK person and with internationals having a majority of votes.  Following the agreement on this issue, the LPFMA was passed by the Kosovo Assembly on 2003.

This was a brief history, but very important for the following part of my post.

The arrangement provided for parallel budget planning regardless of the formal process in place which was engrained in the Law.  In reality, there was MEF who developed macroeconomic indicators, set the medium term ceilings, annual budget ceilings for the General Government, prepared the budget for PISG powers and UNMIK powers based on such indicators and forecasts, but all the planning became useless when the draft budget was submitted to Economic and Fiscal Council.  Usually, this council made interventions to the draft budget in favour of UNMIK Reserved Powers.  This had a very de-motivating effect to PISG institutions for budget planning.  In such situation, ad hoc decisions became a routine process.  This became a PFM and budget planning culture which unfortunately persists still today!.

I’ve mentioned in my previous posts elsewhere in before that since that Treasury function remained within MEF and was perfectly regulated by Law, and the KFMIS captured  budget appropriations approved by the Economic and Fiscal Council, Assembly and UNMIK Administrator (Supreme Authority), the attention of the people involved in drafting the law were more focused in the execution part, because that was the only part that remained subject of discussions between local and international administrations.  Therefore, the majority of LPFMA deals with execution part.  This is not something that I consider bad, but still it lacks some previsions similar to the Brasil Budget Law containing some constraints in budget planning for certain circumstances, and Albania budget law that would set a high level planning process under a culture where approach “if it is in the law, it should be adhered to, and it is not illegal if it is not specified by law" prevails.

Therefore, under such circumstances, the planning process should either be included as amendment to LPFMA or it should be specified by another Law that would be related to any strategic planning process. Personally I do not like everything to be specified by regulations, but yet if drafting of the law went through such process, obstacles and disagreements, I think that something should be undertaken in this regard.

As mentioned, the ad hoc decisions had a de-motivating effect in the MEF staff, because no matter how good the budget was prepared, it was changed by the Economic and Fiscal Council and send back to them for inclusion of such changes.  More concretely, the MEF staff did not develop a belief in the value of budget planning which unfortunately still exists.