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CReCER’09LATIN AMERICA AND THE CARIBBEAN

Restoring Confidence in the Wake of the Financial CrisisSeptember 23-25, 2009

Presented by Jim BrumbySeptember 25, 2009

Closer to the People: PFM Innovations for Sub-national

Governments

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Outline of the Presentation

• Consequences of the Global Financial Crisis

• How will the Financial Crisis Affect Sub-National Governments

• What can SNGs do? Coping strategies

• PFM innovations: Challenges and Lessons from International Experience

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Global Financial Crisis and Poverty

• By end-2010, 89 million more people are expected to be living in extreme poverty

• Shortfalls to cover at-risk core spending (health, education, safety nets, and infrastructure) amount to about $11.6 billion for the poorest countries

• Despite sharp declines in commodity prices • Food prices in August 2009 are about 57.6 percent higher than in 2005• Energy prices are about 27.5 percent above their average in 2005

• Some specifics impacts:• The current downturn could result in 30 to 50 thousand additional infant

deaths in Sub-Saharan Africa in 2009.

• Some 48 garment factories have closed in Cambodia between September 2008 and May 2009, leaving 62,000 unemployed. • Women make up nearly 90 percent of garment industry workers.

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• Projected increases in overall fiscal deficits in smaller advanced countries of 7.8 percentage points of GDP in 2009 and 8.8 percentage points in 2010 are larger than in the advanced G-20.• Much of the increase in fiscal deficits in emerging market and developing

countries reflects a sharp decline in revenues, not fully matched by lower spending.

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The Financial Crisis and Sub-National Governments

Contagion Mechanism – Fiscal stress at National Level might be transferred to SNG

• National authorities might be tempted to transfer part of the adjustment to SNGs, for example, by cutting or delaying transfers.

• Even in countries were transfers are automatically allocated and/or mandated by the Constitution (i.e. Philippines), the decrease in government revenue will reduce the amount of these transfers.

Difficulties in mobilizing Own Source Revenue

• In most SNGs, the main source of OSR are: (i) Business Tax, and; (ii) Real Property Tax (RPT). Revenues from both sources will likely experience a significant decrease as a consequence of the economic downturn.

Reduced Fiscal Space in SNGs• Depending on expenditure assignments, SNGs will likely experience even tighter

fiscal space, and temptations will be to cut capital outlays to absorb the lion’s share of the adjustment cost.

• Balance sheet adjustment likely to be large

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What can SNGs do? Coping strategies

• Productive Efficiency: “Do the same with less" or improve the value for money of existing public expenditures;

• Allocative Efficiency: Cut poor quality or low-performing programs;

• New public asset management policies: Adjustment in SNG’s balance sheet in response to reduced fiscal space, and where possible, stimulate demand.

• Performance information/monitoring systems; • Performance budgeting or result-

oriented budgeting; • Fundamental reviews & strategic

planning (preference changes)

• Public investment management performance strategies.

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PFM Innovations Lessons from International Experience

Lessons in implementing performance-oriented reforms•When reforms involve different tiers of government…

Strong partnership between central and sub-national levels of governmentActive consultation increases chance of adoption and implementation of reforms

•Well designed reformsPerformance oriented reforms require creation of adequate information systems

Performance indicators need coupled with performance ObjectivesTargets should be set at realistic levels Beware perverse incentivesUsage is a major measure of success – focusing on using information for decision

making

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PFM innovations Lessons from international experience (2)

Lessons in implementing performance-oriented reforms•Think Big, Start Small

Make a virtue of simplicity. Avoid over engineered reforms Initial diagnostic should reduce concerns about duplication or overlapping effortsCosts need to be managedFlexibility. Performance oriented reforms need permanent , progressive and incremental improvements

•JURISDICTIONAL OWNERSHIP!!Donor driven efforts usually not sustainableStrong champion is usually essential to success

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Conclusion• GFC is significant toll on the balance sheet of all levels of Government

• SNGs are likely to bare a very significant share of adjustment costs

• Improvements in productive and allocative efficiency can help: • "Doing the same with less" or improving value for money; • Cutting poor quality , or low-performing, or out of favor programs; and• Resorting to new public asset management policies.

• Some promising PFM innovations focus on performance include:• Performance budgeting or result-oriented budgeting; • Performance monitoring systems; • Strategic planning, informed by fundamental reviews; and• Reinvigorated public investment management processes, including

innovative infrastructure financing vehicles, particularly in the context of large size cities and states.