the world bank sanjay pradhan prem public sector governance page 1 the centrality of public finance...

The World BankSanjay Pradhan

PREM Public Sector Governance

The Centrality of Public The Centrality of Public Finance Policy & Finance Policy & Management in Management in DevelopmentDevelopment

Presented to:Presented to:

Public Finance Analysis & Management CoursePublic Finance Analysis & Management CourseMay 1, 2006May 1, 2006Washington, DCWashington, DC

Presented by:Presented by:

Sanjay PradhanSanjay PradhanDirector Director Public Sector Public Sector Governance BoardGovernance Board

The World Bank



Governance and Development: Lessons of Global Experience

• An effective state is crucial for growth and poverty reduction:

– Building a sound investment climate for growth (macroeconomic stability, rule of law, regulatory system, physical & financial infrastructure)

– Empowering people to make growth inclusive through effective delivery of basic services (education, health, social protection)

• State effectiveness requires a two-pronged strategy:

• Match role of the state to its institutional and fiscal capability – including level and composition of public finances

• Strengthen state capability – both capacity and accountability in state functions, including public finance management



The Centrality of Public Finance System for Good Governance and Development

A well functioning PF system is crucial for:

Enabling the state to finance & deliver key public services and infrastructure to achieve MDGs

Achieving three levels of fiscal outcomes:

aggregate fiscal discipline

allocation of resources according to strategic priorities

efficient and effective use of public resources

Ensuring transparency and accountability of a government to its citizens

Providing assurance to donors that their funds are being used for the purposes intended



The new international aid

architecture emphasizes the

principle of mutual accountability

Scaling up of donor assistance requires sound PF systems

and reduced corruption in partner

countries

Recent global developments have put PF systems in the spotlight

Increasing recognition that

"ringfencing" projects will not work

Important benefits from using country's own

systems -- but need to strengthen capacity and

accountability of PF



Two Aspects of Public Finance Systems

Focus on Public Finance System includes:

Efficiency, equity & sustainability of public expenditures and how they are financed (“numbers”)

Efficiency & effectiveness in how public finances are raised, allocated and utilized (“institutions”)

Two Aspects of PF Systems:

Public Finance Policy: Aggregate fiscal stance, level and composition of public expenditures & revenues

Public Finance Management: Institutional mechanisms that ensure fiscal discipline, allocative and operational efficiency



Key Issues in Public Expenditure Analysis

Public Expenditure Analysis:

Rationale for Government Intervention: Market Failure, Redistribution

Mechanisms for Intervention: Regulation, Subsidy, Public Provision

Cost-benefit & Cost-effectiveness of Expenditure Allocations

Some Issues:

Data & Methodological Limitations of cost-benefit analysis: Analyzing broad allocations of spending

Benefit valuation & Intersectoral Allocations

Growth impact of expenditure programs

Generating Fiscal Space for infrastructure & social programs



Public Finance Analysis, ‘Fiscal Space’ & Governance: Diamond

• Fiscal policy – level & composition of public finance – is important not only for stability but also crucially for growth

• Governments have 4 basic alternatives for additional fiscal space – revenue, grant aid, borrowing & efficiency savings – as shown in the fiscal diamond

• Improved governance is crucial for all dimensions

“Fiscal Space”

Increase of Grant Aid in

% GDP

New Borrowing in

% GDP

Improved Revenue Effort in % GDP

Improved Expenditure

Efficiencyin % GDP

0

1

2

3

4

5



Challenges in Public Finance Management

PFM systems in many countries are still very weak

Governance and corruption indicators reveal major challenges

Fragmentation of donor approaches and overlapping diagnostics



Fiduciary RiskFiduciary Risk

Sound PF systems can ensure that donor resources are used for the purposes intended

Reputational RiskReputational Risk

Sound PF systems can ensure that large amounts of aid in

countries do not tarnish donors’ reputation

Development Effectiveness Risk


Sound PF System can ensure that budget systems,

including donor supported projects, achieve

development goals

Robust PF System can mitigate key risks from corruption



Majority of PEM Systems Still Require Majority of PEM Systems Still Require Substantial UpgradingSubstantial Upgrading

Source: Fund-Bank AAP database

02

9

5

15

19

Little Upgrading Required Some Upgrading Required Substantial Upgrading

Required

Relative Need for Upgrading HIPC PEM Systems

(Number in Paranthesis indicate total of benchmarks met)

2001 2004

TZA (11)MLI (12)

BEN (8)RWA (8)UGA (8)BFA (9)GUY (10)

GNB (0)GMB (3)ZMB (3)COD (3)BOL (4)MDG (4)MOZ (4)STP (4)GIN (5)MWI (5)NER (5)NIC (6)CMR (7)ETH (7)GHA (7)HND (7)SEN (7)SLE (7)TCD (7)

BEN (8)BFA (8)GUY (8)HND (8)MLI (8)RWA (8)TZA (8)TCD (8)UGA (8)

BOL (5)CMR (4)ETH (6)GMB (5)GHA (1)GIN (5)MDG (7) MWI (7)MRT (7)MOZ (5)NIC (5)NER (3)STP (4)SEN (4)ZMB (3)



Main elements of a ‘strengthened approach’ to PFM

PFM Strengthened Approach:

A country-led agenda – including a PFM reform strategy and action plan

A donor coordinated program of support – coordinated, coherent, multi-year program of PFM work that supports and is aligned with the government’s PFM strategy

A results focus with objective performance measurement



A standard set of high level indicators

• Widely accepted but limited in number

• Broad measures of performance relative to key PFM system characteristics

• Enabling credible monitoring of performance and progress over time

PFM Performance Report

• Integrative, narrative report based on indicators using observable, empirical evidence.

• Updated periodically, depending on country circumstances and operational needs

• Contributes to coordinated donor assessment

• Feeds into government-donor policy dialogue

The Performance Measurement Framework

Credible results measurement framework with standardized reporting should help shift focus

to capacity building

Performance Measurement FrameworkPerformance Measurement Framework



Trends in PFM can be monitoredNet Change in HIPC Tracking Indicators, 2001-2004

2

6

1

6

7

0

1

2

3

4

5

6

7

8

Decline in 3categories

Decline in 1-2categories

No change Improvementin 1-2

categories

Improvementin 3 or morecategories



All projects

CPIA (Q16)

< 3.0

CPIA (Q16) from 3.0 to

3.5

CPIA (Q16)

Greater or equal to 3.5

No. of project

s

Projects with

Satisfactory or

better (%)

No. of projec

ts

Projects with

Satisfactory or

better (%)

No. of projec

ts

Projects with

Satisfactory or

better (%)

No. of project

s

Projects with

Satisfactory or

better (%)

PFMPFM 39 85% 15 87% 18 83% 6 83%

ACSACSRR

24 58% 11 36% 9 78% 3 100%

PFM operations perform satisfactorily regardless of governance starting point, but ACSR operations are successful in stronger settings

OED Evaluated PSGB-mapped projects with PFM (without ACSR) and ACSR (without PFM) primary themes, FY00-FY05



Improving PFM – A Platform Approach

Platform 1A credible budget delivering a reliable and predictable resource to budget managers

Platform 2Improved internal control and public access to key fiscal information to hold managers accountable

Platform 3Improved linkage of priorities and service targets to budget planning and implementation

Platform 4Integration of accountability

and review processes for

both finance and

performance management

• Integration of budget (recurrent & capital budgets)

Strengthen macro and revenue

Forecasting

Streamline spending processes

Broad Activities Re-design

Budgeting

Classification system

Initial design of FMIS for core business processes

Strengthen external audit and define internal audit function

Re-design budget cycle (e.g. MTEF)

Pilot program based budgeting & budget analysis

Further fiscal

Decentralization

Full design of FMIS

Develop IT

Management

Strategy

Initial design of asset register

Enables a basis for accountability

Enables focus on what is done with

money

Enables more accountability for

performance management

Cambodia – Sequence of Platforms

Broad Activities

Broad Activities

Broad Activities

Source: See “Study of measures used to address weaknesses in Public Financial Management systems in the context of policy-based support,” by Peter Brooke, at www.pefa.org



Citizens/Firms

Reforming PFM Systems:Strengthen Links with Broader Accountability Systems

Citizen

s/Firm

s

Cit

izen

s/F

irm

s

Citizens/Firms

Political Institutions• Political Parties & Leadership• Social & Econ Interest Groups

Executive-Central Govt

PFM Systems

Service Delivery & Regulatory Agencies

Subnational Govt & Communities

Check & Balance

Institutions• Parliament• Judiciary• Oversight institutions

Oversight Groups in

Society• Civil Society

Watchdogs•Media

•Business Associations



Strengthening Demand for Public Financial Accountability

Participatory Budgeting,

Puerto Alegra(Brazil)

Civil Society Oversight; transparent, competitive

procurement(Slovakia)

Strengthening Supreme Audit Institutions

(Hungary)

Public Expenditure Tracking & Information Campaigns (Ghana, Madagascar, Mozambique, Peru, Senegal, Tanzania, Zambia)

Procurement oversight by

CSOs (Philippines)

Strengthening Public Accounts Committees of

Parliament(India)

Transparent, competitive e-procurement

(LAC) Strengthening Public Accounts Committees

of Parliament (Kenya, Ghana, Zambia --

AFR)

Accountability, Transparency & Integrity

Project(Tanzania)

Key Issue: Instrument to Support Demand-side Interventions



Philippines: Procurement ReformMobilizing Support & Oversight by Civil Society

Transparency and Transparency and Accountability Network (20+ Accountability Network (20+ member groups)member groups)

Walang Ku-Corrupt Walang Ku-Corrupt Movement Movement (Youth)(Youth)

PAGBA PAGBA &&AGAPAGAP(w/in (w/in Gov’t)Gov’t)

CBCP(Church)

Philippine Contractors Association(private sector – main stakeholder)

Local chambers of Commerce (Private sector)

Drew other civil society groups Drew other civil society groups into the advocacy efforts and into the advocacy efforts and

coordinated the activitiescoordinated the activities



Reaching OutReaching Out Radio: The swath Radio: The swath

& the dagger& the dagger

The Media Campaign:The Communications Strategy

Print Media: Print Media: Amplifying the Amplifying the

problemproblem

TV: Raising the TV: Raising the anteante

Advertising: Creating a Advertising: Creating a ‘brand name’‘brand name’



“BIR Officials Amass Unexplained Wealth” By Tess Bacalla, Philippine Center for Investigative

Journalism

CAR MODEL

BENEFICIAL OWNER

REGISTERED OWNER

Nissan Patrol Edwin Abella BIR Reg'l Director, Quezon City

Sulpicio S. Bulanon Jr. 1817 Jordan Plains Subd., Quezon City (listed address of Abella in his SALs)

Suzuki Grand Vitara

Ditto

Merrick Abella (son of Abella)

24 Xavierville, Loyola Heights, Q uezon City

Nissan Cefiro Ditto Elizabeth S. Buendia 152 Road 8,-asa, Quezon City

BMW Lucien E. Sayuno BIR Reg'l Director, Makati City

Limtra Dev. Corp. Zone 4, Dasmariñas, Cavite

BMW Ditto Marie Rachel D. Mene c/o Metrocor and Holdings, G&F, Makati City

Honda Accord Danilo A. Duncano BIR Reg'l Director, Quezon City

Daniel Anthony P. Duncano 2618 JP Rizal, New Capital Estate, Quezon City

Mitsubishi L200 Corazon P. Pangcog Asst. Reg'l Director,

Alberto P. Pangcog (husband) B2 L23 Lagro Subd., Quezon City

Owner: Regional Director in the Bureau of Internal Revenue; forced to resign; currently facing corruption charges; other officials suspended, also facing charges

Media,Transparency, and Combating Media,Transparency, and Combating CorruptionCorruption



From fragmented, overlapping PFM

diagnostics …

From fragmented, overlapping PFM

diagnostics …

… to integrated, harmonized, PFM

assessments

… to integrated, harmonized, PFM

assessments

Strategic directions for PF work for future

From ad hoc PE analysis …From ad hoc PE analysis … … to more systematic PF policy analysis

… to more systematic PF policy analysis

From diagnosis & producing reports…

From diagnosis & producing reports…

… to capacity building & improving PF

performance

… to capacity building & improving PF

performance

From technocratic, supply-side interventions

From technocratic, supply-side interventions

… to strengthening demand-side pressures

& accountability systems

… to strengthening demand-side pressures

& accountability systems

From silos of separate EP, FM, Procurement, PSG

teams

From silos of separate EP, FM, Procurement, PSG

teams

… to integrated country PF teams

… to integrated country PF teams



Broadening of the PF Agenda

From PREM preoccupation in early years of PERs to broad cross-network interest

PFAM course is offered in collaboration with HD, INF and AGR networks, as well as participation of IMF

PEFA Indicators developed in partnership between FM, Procurement and PREM within Bank, and with PEFA donor partners

Integrated Public Finance Thematic Group

Finally: Thanks to Course Organizers:

Anand Rajaram, Bill Dorotinsky, Tuan Minh Le as thematic leaders

Excellent supporting work by Juliet Teodosio, Zhicheng Li Swift, Nataliya Biletska



DiscussionDiscussion



EXTRA SLIDES



Primary focus of WB Primary focus of WB operations in governanceoperations in governance

Local Participation & Community Empowerment

• Decentralization with accountability• Community Driven Development (CDD)• Oversight by parent-teacher associations & user

groups• Beneficiary participation in projects

Local Participation & Community Empowerment

• Decentralization with accountability• Community Driven Development (CDD)• Oversight by parent-teacher associations & user

groups• Beneficiary participation in projects

Political Accountability

• Political competition, broad-based political parties

• Transparency & regulation of party financing

• Disclosure of parliamentary votes

Political Accountability

• Political competition, broad-based political parties

• Transparency & regulation of party financing

• Disclosure of parliamentary votes

Institutional Checks & Balances

• Independent, effective judiciary

• Legislative oversight (PACs, PECs)

• Independent oversight institutions (SAI)

• Global initiatives: UN, OECD Convention, anti-money laundering

Institutional Checks & Balances

• Independent, effective judiciary

• Legislative oversight (PACs, PECs)

• Independent oversight institutions (SAI)

• Global initiatives: UN, OECD Convention, anti-money laundering

Civil Society & Media• Freedom of press• Freedom of information• Civil society watchdogs• Public hearings of draft laws• Report cards, client surveys• Participatory country

diagnostic surveys

Civil Society & Media• Freedom of press• Freedom of information• Civil society watchdogs• Public hearings of draft laws• Report cards, client surveys• Participatory country

diagnostic surveys

Private Sector Interface

• Effective, streamlined regulation

• Transparent public-private dialogue

• Break-up of monopolies • Transparency in

Extractive Industries• Corporate governance• Collective business

associations

Private Sector Interface

• Effective, streamlined regulation

• Transparent public-private dialogue

• Break-up of monopolies • Transparency in

Extractive Industries• Corporate governance• Collective business

associations

Anticorruption has many dimensions Anticorruption has many dimensions Bank operations focus only on someBank operations focus only on some

Effective Public Sector Management

• Ethical leadership: asset declaration, conflict of interest rules

• Meritocratic civil service with adequate pay• Transparency & accountability in budget

mgnt • Transparent, competitive procurement• Anticorruption in sectors

Effective Public Sector Management

• Ethical leadership: asset declaration, conflict of interest rules

• Meritocratic civil service with adequate pay• Transparency & accountability in budget

mgnt • Transparent, competitive procurement• Anticorruption in sectors

GOODGOODGOVERNANCEGOVERNANCE

GOODGOODGOVERNANCEGOVERNANCE



Purchasing of public positions

Source: Kaufmann, Pradhan, Ryterman (1998)

Percent of public officials

believed to have purchased their

positions

Cutting-edge diagnostics help ‘unbundle’ Cutting-edge diagnostics help ‘unbundle’ corruption & identify entry pointscorruption & identify entry points

Public expenditure tracking (Uganda)

Source: Reinikka and Svensson (2004)

Public info campaign (1999)

Control of corruption, 2004: World map

Colors are from Dark Red - the worst bottom 10th percentile rank to Dark Green - the best above 90th percentile. Source: Governance Matters IV: Governance Indicators for 1996–2004, D. Kaufmann A. Kraay, and M. Mastruzzi (2005)

5

10

15

20

25

30

Proportion of firms affected by capture of …

HungaryHungary EstoniaEstonia RussiaRussia UkraineUkraine

Parliamentary VotesParliamentary VotesPresidential Admin. DecreesPresidential Admin. Decrees

Civil Court DecreesCivil Court Decrees



Fiduciary RiskFiduciary Risk

That donor resources will not be used for

the purposes intended

Reputational RiskReputational Risk

That large amounts of aid in countries with high

corruption & weak PFM systems will tarnish donors’ reputation



That corruption in weak PFM systems will undermine the

achievement of development goals in general and in donor

supported projects

Robust PFM can mitigate key risks from corruption



Improvements in Satisfaction: public Services in Bangalore

Source: Public Affairs Committee, India

5 6 49

25

1

14

4147

42

67

34 34

16

32 32

73

94

73

92

7378

8596

77

n/a n/a0

10

20

30

40

50

60

70

80

90

100

City c

ouncil

Elect

ricity

Wat

er s

upply

Telep

hones

Public h

ospita

ls

Police

Land a

uthorit

y

Public b

uses

Transp

ort au

thorit

y

Agencies

% s

atis

fied

1994 1999 2003



Corruption is not just a developing country problem

Source: “Are Foreign Investors and Multinationals Engaging in Corrupt Practices in Transition Economies?” by Kaufmann, Hellman, Jones, in Transition, May-June 2000. Note: Survey Question was “How often nowadays do firms like yours need to make extra, unofficial payments to public officials to gain government contracts?” Firms responding “sometimes” or “more frequently” were classified as paying kickbacks. These figures are subject to significant margins of error and thus should be regarded as approximate.

Percentage of firms that pay public procurement kickbacks by country of origin of foreign direct investment



Transparency in Extractive Industries

Publish What You Pay (PWYP) – (focus on home governments)

Initiation: The PWYP campaign was founded by Global Witness, CAFOD, Oxfam, Save the Children UK, Transparency International UK and the Open Society Institute.

Participants: There are now several Publish What You Pay national NGO coalitions around the world, including in Azerbaijan, Chad, Congo Brazzaville, Democratic Republic of Congo, France, Kazakhstan, The Netherlands, Nigeria, the United States and the United Kingdom.

Extractive Industries Transparency Initiative (EITI) (focus on host governments)

Initiation: The UK Prime Minister, Tony Blair announced the EITI initiative at the World Summit on Sustainable Development in Johannesburg, September 2002. In January 2005, the International EITI Secretariat in the UK Department for International Development (DFID) produced the first version of the EITI Source book.

Participants: Governments, donors, companies, industry associations, international organizations, NGOs and investors

Countries: Azerbaijan, Congo, Republic of, Ghana, Kyrgyz Republic, Nigeria, Sao Tome and Principe, Timor Leste, Trinidad & Tobago



Ethics Infrastructure

Political Political LeadershipLeadership

Codes of Codes of ConductConduct

GuidanceGuidanceProfessional Professional SocializationSocialization

Legislative Legislative FrameworkFramework

ControlControlAccountability & Accountability &

ControlControl

Coordinating Coordinating BodyBody

ManagementManagementPublic Service Public Service

ConditionsConditions



0

10

20

30

40

50

60

70

80

90

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

% of countries meeting benchmark in 2001 % of countries meeting benchmark in 2004

Formulation Execution Reporting Procurement

Progress in Meeting HIPC Progress in Meeting HIPC BenchmarksBenchmarks

(Percentage of benchmarks met by indicator)

Source: Fund-Bank AAP database 2005



Comprehensive Fiscal oversight:

Are the aggregate fiscal position and risks are

monitored and managed?

Comprehensive Fiscal oversight:

Are the aggregate fiscal position and risks are

monitored and managed?

Information:Is adequate fiscal, revenue and expenditure

information produced and disseminated to meet decision-making and management purposes?

Information:Is adequate fiscal, revenue and expenditure

information produced and disseminated to meet decision-making and management purposes?

Comprehensive, Policy-based, budget:

Does the budget capture all relevant

fiscal transactions, and is the process, giving regard to government

policy?

Comprehensive, Policy-based, budget:

Does the budget capture all relevant

fiscal transactions, and is the process, giving regard to government

policy?

Budget Realism:Is the budget realistic, and

implemented as intended in a

predictable manner?

Budget Realism:Is the budget realistic, and

implemented as intended in a

predictable manner?

Control :Is effective control and stewardship exercised

in the use of public funds?

Control :Is effective control and stewardship exercised

in the use of public funds?

The PFM performance areas monitored in the framework

Accountability and Transparency :

Are effective external financial accountability

and transparency arrangements in place?

Accountability and Transparency :

Are effective external financial accountability

and transparency arrangements in place?

Performance Measurement FrameworkPerformance Measurement Framework

Six PFM System Aspects

All represent different aspects of risk to client and Bank funds, projects and objectives

the world bank sanjay pradhan prem public sector governance page 1 the centrality of public finance...

Documents

key public services

composition of public

world bank slide

good governance

accountability of pf

effective state

sound pf systems

aspects of pf systems