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What Is PFM?

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This post was written by Paolo de Renzio, Senior Research Fellow for the Open Budget Initiative at the International Budget Partnership

Public Financial Management (PFM) is a term often thrown about when talking budgets and budgeting. Just as often its definition remains somewhat mysterious. A heterogeneous group of experts from academia, multilateral institutions, and think tanks—including yours truly from IBP, representing civil society views on the matter—collaborated on a recently published paper that tries to “demystify the concept.” It aims to present a simple yet innovative way to think about what PFM is, what it does, and question some common assumptions about budget reforms around the world.

We start by describing a typical PFM system, dividing it into the typical four main stages of the budget cycle: formulation, approval, execution, evaluation. We show that some stages can in turn be further subdivided into more specific constituent parts. For example, the budget formulation stage usually contains a more strategic component that is linked to broader policy directives, as part of the more mechanic budget preparation process. Similarly, budget execution comprises processes for managing resources, ensuring compliance with established rules and procedures, and keeping records and producing reports. Despite these similarities, PFM systems in different countries will exhibit differences and particularities, with a varying constellation of actors involved at different stages, and agendas and interests that are often conflicting.

These more procedural aspects of PFM systems are often given a lot of attention . We argue, however, that there is a need to move away from a focus on process (or form) and think more directly about the goals (or functions) that PFM systems aim to achieve. Four main categories of goals are proposed:

      1. prudent fiscal decisions;
      2. credible budgets;
      3. reliable and efficient resource flows and transactions; and
      4. institutionalized accountability.

To monitor the extent to which PFM systems are able to promote and achieve these goals, rather than their conformity to widely accepted “good practice” forms, there is a need to review existing assessment frameworks (such as the PEFA framework and its related assessments). In other words, it shouldn’t matter what a PFM system looks like as long as it delivers on its key goals. And, in order to deliver, it may in fact have to look different from country to country, based on local history, institutions, norms, and practices.

A similar argument can be applied to the type of PFM reforms that several international agencies have promoted over the years throughout the developing world. Many are based on the assumption that specific PFM tools and processes—such as medium-term frameworks, performance budgeting, and IT-based financial management packages—can and should be replicated across countries to bring about better PFM system “functionality,” without paying attention to the local context. It’s no surprise that many end up failing. We argue that the purpose of reforms should instead be “to help fit a ‘good practice’ to a local context, so that PFM institutions may more directly respond to locally defined issues and problems, and match local capacity and political realities.”

Some of the arguments in the paper are not new. But, we have tried to distill and summarize them in a short and easy-to-read document that, we hope, will spur further discussion and bring new voices and actors into the debate. Most important, this includes the voices of domestic actors and civil society groups in developing countries, where donor agencies often wield too much influence and end up shaping (what should be) local reform agendas.

Budgeting for Human Rights: Using the Maximum of Available Resources

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This post was written by Helena HofbauerDirector of Partnership Development and Innovation at the International Budget Partnership.

The last few decades have seen two mutually reinforcing trends with regard to government budgets. First, though fiscal policy has long been seen as a key tool for governments to support stable economies and provide public services, the instrumental role of budgets in promoting development, redistributing wealth, and reducing poverty has been increasingly recognized. Second, this growing recognition of the importance of budgeting in addressing some of the world’s most persistent challenges has been a major factor in transparency and accountability becoming fashionable.

While budgets today have a global profile like never before, the lingo connecting public budgets to people’s lives has a clear precedent in the International Covenant on Economic, Social and Cultural Rights (ICESCR), adopted by the UN General Assembly in 1966 and ratified by more than 160 countries. Article 2 of the ICESCR states “each State Party to the present Covenant undertakes to take steps…especially economic and technical, to the maximum of its available resources [emphasis added], with a view to achieving progressively the full realization of the rights recognized in the present Covenant …”

The wording of this principle — the maximum of available resources — inevitably lends itself to analysis of government budgets when assessing whether governments are meeting their commitments. But, despite the clear connection between the covenant and public revenues and spending, its implications for fiscal policy and budgeting have so far remained under explored.

The Use of Maximum Available Resources

To close this gap, the International Budget Partnership and a handful of groups that use budgets to push for the realization of rights have published a new handbook on using budget analysis to hold governments to account for their ICESCR commitments. So, what does using “the maximum of its available resources” mean for how governments should manage public resources?

  1. Governments must mobilize as many resources as possible to realize people’s rights. All revenues and taxes must be levied and collected in a way that maximizes the resources available to spend on rights and recognizes the differences in people’s ability to pay. For example, tax reforms that reduce how much revenue is mobilized to spend on services that contribute to the realization of rights may contravene this provision, unless there is credible evidence that all the rights articulated in the covenant have been fulfilled.
  1. Governments must give “due priority” to the realization of rights. Signatory governments must prioritize allocations and expenditures toward rights-related areas. For example, if a government is failing to use available resources to provide basic education to children, it may be failing to comply with the provision.
  1. Governments should not divert resources that are essential to the realization of rights to other areas. For example, taking money away from social programs to finance infrastructure to host international sporting events violates this obligation.
  1. Expenditures must be efficient. Governments should not pay more than necessary for goods and services. Buying medicines at retail prices due to lack of adequate planning and consolidated purchases, for example, may contravene this. Governments should also not spend on unnecessary items (like workshops in fancy hotels, with five course dinners). Furthermore, finance ministries should transfer funds to implementing agencies in a well-planned way throughout the fiscal year. Impeding the steady provision of essential services by “dumping” of funds near the end of the fiscal year, a recurrent practice in many countries, may violate this obligation.
  1. Expenditures must be effective in the realization of rights. A government must purchase those goods and services that make a real contribution to the right at stake. For example, they should provide services, say heating that materially improve the living conditions in public housing, not simply those that may improve the appearance of that housing.
  1. Funds allocated to rights must be fully spent. This means making an effort to overcome the institutional barriers or bottlenecks that impede the adequate functioning and spending of certain programs. It also means addressing lack of institutional capacity where required.

The connection between international human rights law and budget analysis has the potential to be a powerful tool for holding governments to account for their obligations. The handbook has begun to illustrate this connection. In doing so, it underscores the need for new, innovative approaches for evaluating governments’ compliance with human rights.

But many more cases and campaigns are needed to reach a deeper understanding of the public finance implications of the covenant. We invite you all to produce evidence and share analysis and stories that can help maximize the impact of government budgets on the realization of the rights of the people they should be serving.

Links Roundup: Research, Publications, and Country Budget Developments

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Ahead of the 4 July holiday in the States, we’ve compiled a list of publications, articles, and other interesting links to keep you up-to-date on recent happenings related to budget work, participatory budgeting initiatives, budget websites, and much more. Enjoy!

Research and publications

ODDC Dissemination of the Uganda/Kenya Case Study: Highlights (Development Initiatives)

  • This post reviews the findings of a study “How open data could contribute to poverty eradication in Kenya and Uganda through its impacts on resource allocation.”

Book Review: Public Financial Management and Its Emerging Architecture (IMF PFM Blog)

  • A fresh look at the book PFM and Its Emerging Architecture which was published last year and edited by Marco Cangiano.

A Needless Journey (The Politics of Poverty, Oxfam America)

  • In this video interview, Semkae Kilonzo of Policy Forum Tanzania talks about the importance of budget transparency and civil participation as a tool for breaking through barriers and bottlenecks in government.

Tech Projects for Transparency – A New Guide to the “Fundamentals” That Deliver Impact and Save Money (Transparency & Accountability Initiative)

  • TAI has released a new guide called “Fundamentals for Using Technology in Transparency and Accountability Organisations” which deals with everything from defining a strategy to monitoring outcomes of technology projects.
  • The guide is available to view on TAI’s website or to download as a PDF.

Country news

 China’s Audit Office Plays Powerful but Silent Role in Anticorruption Crackdown

  • China’s National Audit Office (NAO) is contributing to the country’s battle against corruption. Last year, audit offices across the country scrutinized more than 150,000 companies and government departments. The NAO’s efficiency is partially due to the fact that it keeps its inner workings confidential.

 What Happens When Silicon Valley Experiments With Direct Democracy

  • This post talks about adding new digital technologies to participatory budgeting in the San Francisco area.

 New Budgetary Website Makes Dutch Aid More Transparent (Development Initiatives)

  • The Dutch Minister for international trade and development cooperation has launched a budgetary website which provides full access to the ministry’s overall budget, with estimated and actual expenditures which are cross-referenced with their individual activities, driven from live IATI data.

Mozambique: Budget Support in Decline (All Africa)

  • Donors have sharply cut the support they give to the Mozambican state budget.

World Bank Endorses New Country Partnership Strategy for Philippines (Manilla Bulletin)

  • The World Bank’s new country partnership strategy (CPS) will support the Philippines’ goal of promoting growth that reduces poverty and creates more and better jobs. The CPS will guide the World Bank’s engagement in the Philippines from 2015 until 2018.

 Budget Transparency in Uganda to be Achieved through ICT? (New Vision, Uganda)

  • Uganda’s Minister of Finance mentioned a number of new systems — including an SMS system, hotline, and website for the public to participate in budget decisions and monitoring — to enhance budget transparency and accountability.

The Hidden Corners of Public Finance: Where Can CSOs Look, and for What?

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This post was written by Paolo de Renzio, Senior Research Fellow for the Open Budget Initiative

Budget transparency, the mantra goes, is key for citizens to hold governments accountable for how they spend public money. But what if public spending does not happen through the budget, or if a good share of public resources are not captured in budget documents? Time and time again, the Open Budget Survey has shown that many governments keep certain corners of public finance hidden from public view. Questions in the Open Budget Survey that are linked, for example, to extra-budgetary funds, state-owned enterprises, and other similar activities consistently score very low, highlighting a problem that an increasing number of civil society groups are becoming aware of.

In Angola, for example, vast sums of money have been spent outside of the official budget process through Sonangol, a state-owned oil company. Sonangol engages in a number of so-called “quasi-fiscal activities” on the government’s behalf, including providing fuel subsidies and contributing to the servicing of the national debt. In many countries, tax incentives and concessions are used by governments to stimulate activity in certain sectors of the economy. The tax revenue that is forgone from such arrangements often amounts to more than 10 percent of total revenue. Yet little or no information is publically available on why they were originally granted, how long they are supposed to last, and how much they cost the public purse.

To cast some light on what we have called the “hidden corners” of public finances (see figure below), the IBP has embarked on a project to look at how some governments  chosen among those that perform better on the Open Budget Index  have set up reporting requirements and transparency practices on extra-budgetary funds, tax expenditures, state-owned enterprises, and quasi-fiscal activities. Eight country case studies were commissioned to gain a better understanding existing practices in these four areas, and help to define the basic pieces of information that governments should make publicly available to allow for independent monitoring and enhance accountability.

Figure: The public sector, its components, and the “hidden corners”

Hidden Corners of Public Finance

The case studies reveal a wide variety of country circumstances and approaches. In a number of cases it is possible, by looking beyond the key budget documents that the Open Budget Survey focuses on, to gather extensive amounts of information on these areas of public finance. Many of the governments of the countries we studied approve laws and publish reports that allow for a reasonably detailed picture of government-funded activities and operations beyond the core budget to emerge. These take the form of annual reports published by state-owned enterprises, special appropriation laws for extra-budgetary funds, and tax expenditure reports, among others. Some areas, such as quasi-fiscal activities, remain more difficult to detect and monitor, and some extra-budgetary institutions are still not reported on in any detail.

Civil society groups and other actors interested in monitoring government activities and operations in these areas can use the report and the case studies as a resource to gain a better understanding of some of the issues involved, some of the innovative practices that exist around the world, and some of the key topics to look into if they decide to investigate these areas in their own countries. The Annex of the report presents a more detailed checklist of the types of information that governments should make publicly available, which could serve as a basis for advocacy campaigns asking for more transparency around the hidden corners of public finances.

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