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Public Finance Management in a Post-2015 World: Time to Care About Service Delivery?

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This post was written by Sierd Hadley, Research Officer for the Centre for Aid and Public Expenditure, at the Overseas Development Institute

As we motor on towards a Post-2015 development agenda it may also be time to build a new era for public finance management (PFM) – one which considers service delivery far more closely.

Few would disagree that a better understanding of PFM and public sector management is central to reducing poverty. Fiscal stability is needed to promote economic growth and create jobs; while the distribution of public resources (including many forms of external aid) is the basis for providing public services that are critical to improving living standards. Yet PFM looks increasingly unbalanced in many developing countries: while macro-fiscal outcomes seem to be doing well, if not spectacularly so, public service provision is not.

Is it that the global PFM community just doesn’t care about service delivery?

PFM has emerged as one of the most successful governance themes in international development. Over the past two decades, the profession has built up an armoury of standards, tools and norms to guide interventions. Today, those standards are fervently infiltrating public sector reforms around the world. It could even be argued that these have contributed to the remarkable stability shown by developing countries following the 2008 global economic and financial crisis. Yet, despite this progress, the PFM discipline has much less to say about how it can go further to improve service delivery.

Surely, none at the Governance Partnership Facility (GPF) Conference  in September would believe that public services are not important. Organised by the Overseas Development Institute and the World Bank, the conference explored lessons from engaging on governance and anti-corruption projects and deliberated on future priorities for the World Bank. Despite plenty of good will, the dedicated session on “new directions in PFM” revealed just how wide the professional gap between PFM and service delivery really is. Three points stood out from the discussion.

Tools and Measures

Firstly, the standard tools and measures of PFM are inadequate to address concerns about service delivery. Consider the provision of infrastructure: Over the past half-century, “the solution” has progressed from national development planning, to standardised project cycles, and now lies in medium-term expenditure frameworks. But few countries have managed to fully reconcile the need to balance fiscal stability with the construction of good infrastructure projects.

PFM measures such as the Public Expenditure and Financial Accountability (PEFA) assessment are largely blind to the issues facing people and units on the front line. Though some indicators do exist, information that would be considered basic in a private company is often missing from the diagnosis of a PFM system: How many contracts have been signed and paid on time? What proportion of capital projects were budgeted for but never completed? That allows things to go wrong without anyone knowing, or being able to find out, why.

A Lack of Understanding on Why the Gap Exists

Secondly, it is not clear why the gap between PFM and service delivery exists (though there was much speculation at the conference). Perhaps it is because services are highly complex and not easily supported by standardised PFM tools? Others asked if the reasons are more political. Do economists and finance ministries have an overarching say in shaping PFM systems? How well do donors talk and bridge disciplines within their organisations? Or does the gap exist because PFM solutions cannot address the incentives that surround service delivery in developing countries? (After all, PFM almost always involves money, and incentives that involve money can be unpredictable.)

A Lack of Consensus on How to Fill the Gap

Thirdly, there is no consensus on how PFM could be made more service-oriented. Given that we don’t know why the gap between PFM and service delivery exists, it is perhaps unsurprising that there is no consensus on how to fix it. Most likely, different sectors will have different needs. In two separate break-out discussions on health and infrastructure development, both raised the need to address incentives, but differed otherwise. Health units need flexibility to respond to changes in health needs during the year. It may also be possible to get better health outcomes by getting basic PFM systems right (particularly systems for managing the payroll and cash management) or by learning from the experiences of using payment-for-results (PforR). Infrastructure projects face their own distinct challenges, such as managing donors and public-private partnerships. Corruption and poor prioritisation and sequencing are widespread concerns.

A New Era for Public Finance Management?

It is a poor reflection of the politics of PFM that service delivery has been largely side lined by the quest for greater aggregate fiscal discipline (and control). Surely these objectives are not as incompatible as they currently look. As the global economy recovers, and as the international community turns its attention to the post-2015 development agenda, it seems only appropriate for the PFM community to follow in step.

The newly created World Bank Community of Practice – which bring together sector and finance specialists – is a great starting point.  ODI will also be stepping up its research work in this area and no doubt others will too. There is a long way to go, but the timing seems right to show that PFM as a discipline really does care about service delivery.

Budgeting for Human Rights: Progressive Realization

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This post was written by Helena Hofbauer, Director of Partnership Development and Innovation at the International Budget Partnership

My last blog post on budgeting for human rights explored the obligation for governments to use the maximum of available resources to realize rights enshrined under the International Covenant on Economic, Social and Cultural Rights (ICESCR). Here we will examine what the obligation of progressive realization means for government budgets.

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,with a view to achieving progressively [emphasis added] the full realization of the rights recognized in the present Covenant …”

Progressive realization

The obligation of progressive realization has long been central to understanding how economic, social, and cultural (ESC) rights should be achieved. At the time the ICESCR was adopted, it was considered appropriate to underscore that the right to health, education, and social security, among other rights, could not be fully and immediately realized everywhere in the world. Progressive realization recognizes that achieving ESC rights requires governments to spend, and that not all governments are able to mobilize the requisite resources to immediately comply. But it requires governments to demonstrate they are taking steps to do so.

Let’s see what this means for the way in which governments make budgetary decisions.

  1. Progressive realization is realistic but also demanding.
    It takes time to fully realize ESC rights and a government’s ability to do so depends on the resources that it has at its disposal. But the obligation of progressive realization is tied to the obligation of using the maximum of available resources: If a government is not advancing towards a fuller enjoyment of rights, it should demonstrate that – despite its failure – it is actually using all resources that are available to do so. For instance, a government working with a tight budget( or “with limited resources”) may need to choose between committing an equal amount of resources to realizing each right or prioritizing, say, housing over education. Input from civil society and the public is critical for ensuring that these decisions reflect public priorities and peoples’ greatest needs.For example, in the early 2000s the South African government claimed not to have enough resources to fund the prevention of mother to child transmission of HIV. The South African civil society group, Treatment Action Campaign (TAC), pointed out that the government was systematically underspending an important portion of its health budget. South African’s High Court concurred, ruling that resources were evidently available and had to be used to safeguard the right to life and the right to health of children to be born to HIV positive mothers.
  1. Governments are obliged to continuously improve conditions that are fundamental to the realization of ESC rights.
    Basic first steps to realize ESC rights must be taken as soon as possible. This includes developing plans, processes and policies to ensure ESC rights are addressed. These first steps must be followed by other more concrete measures. This includes ensuring that the resources allocated to the realization of ESC rights must increase proportionally to the overall budget. If the government increases its budgetary envelope, by bringing in additional resources through new taxes or loans from multilateral institutions, it must increase the budget of ESC rights related programs accordingly.But just because more resources are allocated to a specific issue, doesn’t mean we can automatically assume that rights are being realized progressively. The mere allocation and expenditure of resources is only an indirect indicator – the realization of rights has to be demonstrated, ultimately, by the positive shift in other, more substantive and direct indicators.For example, a government might spend increasing amounts of resources on food programs, without achieving a reduction in the indicators related to malnutrition. This could be because the money is spent in an inefficient way, the program is not reaching those in most need, or the food is of inadequate nutritional value. Thus, although more money is being spent, the right itself is not realized progressively.
  1. Avoid retrogression.
    Government reforms that deliberately diminish people’s enjoyment of their rights contravene the obligation of progressive realization. This does not mean that a government can never cut budgets related to ESC rights. However, it should demonstrate that it is using resources more efficiently or compensatory measures are being introduced to offset the negative impact of reforms. Resources might also be cut once a program is no longer needed, because previous gaps have been addressed and solved. Nevertheless, any substantive cut in budgets associated to the realization of rights should be carefully examined, explained and probed, in order to ensure that it is not undermining the enjoyment of rights that have previously been achieved.For example, when the Brazilian government tabled a fiscal reform that would have affected the resources available for health services, it was denounced as unconstitutional. Under the ICESCR the reforms would have been retrogressive.
  1. Protective measures during times of crises. In times of crises plans can become undone and budgets are often cut to address the immediate problem. Progressive realization limits what a government can do under such circumstances. First and foremost, governments must carefully evaluate all their options and then ensure that the maximum available resources under the circumstances are used to protect vulnerable members of society and maintain certain minimum standards. There are some circumstances in which a government must make immediate budget cuts in order to avoid long-term repercussions. The burden of proof that ICESCR puts on governments to show that cuts that may diminish the enjoyment of rights are absolutely necessary provide significant protection to those most at risk.

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. It can help establish standards and criteria for making hard choices when resources are scarce, and equally hard choices when they are plentiful. It tells us, above all, that when it comes to public resources, the priorities should not be to steadily advance towards the fullest realization of the rights of the people the government seeks to serve.

Sign-up to join our online webinar on 26 September 2014 to discuss “progressive realization.” And tweet your questions and comments to  #Article2.

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.

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The Open Budgets Blog features news, analysis, and opinions related to transparency, participation, and accountability in government budgeting, civil society budget analysis and advocacy, and public finance management.

Each post is the responsibility of the individual author alone, and does not necessarily represent the views of the International Budget Partnership, our donors, or partners.

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