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Since the mid 1990s, there has been a surge in donor interest in the way public sector budgets are set, managed, delivered and reported on. OECD DAC figures suggest that investment in activities related to strengthening public financial management has risen form $85m in 1995 to almost $1,000m by 2007. This reflects not only an increased demand for transparency in the way aid is used, but also a recognition that effective financial management is pivotal to an effective administration.
One of the key lessons learned over this period of investment is that simply applying the theories and practices of developed country administrations in a developing country context is not effective. Instead, the process of reforming public financial management often requires an approach rooted in organisational development and capacity building, and a commitment to understanding the political economy of the administration seeking to change. OPM's blend of relevant skills and experience places us at the forefront of this field.
For more on our effective public financial management, see our brochure below.
Public expenditure reviews (PERs) help answer the most fundamental questions around public finance: did the money go where it was meant to go? Was expenditure consistent with policy priorities, and what did it achieve? Expenditure reviews of different types aim to improve expenditure allocation and management decisions made during budget formulation, and strengthen the composition and management of the budget to deliver policy priorities.
Whether across the whole of government or focused on a single sector, by examining how public expenditure was allocated and managed, governments and donors are better able to assess not only the impact of their investment, but also the effectiveness of budget planning and execution. PERs are designed to give exactly such insights, examining what previous expenditure has delivered and - increasingly - providing a comprehensive and independent analysis of the systems and frameworks that determine how public money is managed, from the way the budget is set to the way disbursements are made on the ground.
The goal of this process is not simply to add to the library of evaluation reports, but to provide the basis for future improvements in strategic planning, budget preparation and fiscal management. Our PER teams typically include experts in both public finance management and the policy sectors under review. This combination of different disciplines enables us to not only confirm whether public money has been managed transparently and with good governance, but also to help assess whether the policy options taken delivered value for money - or whether other routes could have achieved more with less.
A PER should examine the full scope of public expenditure over a multi-year period, identifying not only whether the money was allocated correctly each year but also whether longer-term commitments were adhered to. These were the underlying objectives of our work in locations such as Rwanda, Turkey and Sierra Leone.
However, the thinking behind a PER - assessing whether sector expenditures are consistent with sector priorities, and what results were achieved - should also form part of a government’s annual budget planning cycle. Alongside the process of independent assessment, therefore, OPM seeks to use PERs as an opportunity to build the capacity of governments themselves to conduct such analyses on a regular basis.
The increased emphasis placed on budget reform within development policy reflects the importance of effective financial management to a growing economy. But without understanding the political economy of the partner country, efforts to introduce budgetary reforms can flounder. In our experience, reform programmes need to focus as much on institutional analysis and change management disciplines as on financial management theory.
A national budget is (or should be) the mechanism by which policy is delivered. That is precisely why there is such a desire amongst governments and development partners to move away from input-based budget approaches towards a stronger performance orientation and a focus on outcomes.
To achieve that focus, however, there first needs to be a clear articulation of policy goals and priorities, across the whole of the government. There needs to be an accurate understanding of the available resource envelope. And there needs to be, above all, an open dialogue between senior ministers and officials about how those resources can best be allocated towards the agreed policy goals.
In many countries, such an approach not only represents a significant shift in the way the budget is prepared, but a substantial change in the way the administration operates. Vested interests will be challenged; established processes and protocols threatened. Hence our work to support and enable budget reform places a premium on understanding the administrative history of a country, its current governance structures and the way in which decisions are made in practice. Without this understanding and the commitment of senior officials within the government budgetary reforms – by their nature a complex, long-term process – will not succeed.
Our experience in helping develop medium-term budget frameworks in countries such as Pakistan, Georgia, Palestine and Rwanda has repeatedly shown that the real challenges are not technical, but in understanding and influencing the political economy framework within which budgets are negotiated and agreed. By securing and maintaining political support for budget reform, and embedding this commitment through a process of administrative change our economists, public finance and sector policy specialists can work closely with partner governments to help devise approaches that will make performance-orientated budgeting a reality.
Recent studies show tangible improvements in budget preparation processes in many developing countries. However, budget execution remains a significant challenge. Once the budget has been approved, it must then be executed as planned with appropriate management control and accountability systems in place. This involves the development of incentive structures and sanctions, and systems of rules to control spending that ensures the efficient and effective use of funds. So where should donors, and committed partner governments, refocus their attention? Is the problem one of processes and systems, or skills and capacity?
Budget execution is the point at which responsibility moves away from the centre to a diverse network of agencies and departments. While building the capacity of the staff that work in these agencies will typically be an important step, there is also a need to ensure that staff understand their responsibilities and how they support the wider goal. For example, if government officials are required to collect data to enable financial reporting, they should understand how that data will be used, and why it matters. If they are expected to follow specific disbursement cycles – to ensure, for instance, that farmers receive subsidies or loans at important times of year – they need to be aware of why these cycles have been set.
Importantly, these ‘people’ aspects must be backed by process changes, such as the introduction of transparent audit systems and monitoring frameworks. As a starting point, some governments – and some donors – may wish to commission public expenditure tracking studies and fiduciary risk analyses. Such activities, which OPM is experienced in conducting, can help to identify and address weaknesses in budget execution, such as ineffective authority relationships and poorly defined institutional roles and responsibilities that undermine control and accountability systems. Equally importantly, they can indicate where a current policy is not effective, and feed into discussions of how to improve value for money.
We understand that control systems have important consequences for how managers behave. In budget execution, rules are required to control what money can be spent on before it is actually spent (ex-ante controls), and also to measure, reward, and sanction the results of managerial action after spending has occurred (ex-post controls). Correctly designed control systems help to ensure effective and efficient use of resources, while also stimulating the use of appropriate reporting systems.
From reviews conducted under the Public Expenditure and Financial Accountability (PEFA) framework to more in-depth fiduciary risk analyses, OPM is equipped to provide open and constructive assessments of the effectiveness of public finance management in different locations. Our comprehensive experience working in developing countries gives us additional insights into the challenges that may be encountered.
The introduction of international standards for public finance, such as PEFA, have transformed the dialogue around financial management. Instead of focusing solely on budget preparation, an increased emphasis is now placed on governance issues, such as internal control (through audit committees, etc), the availability of reliable and timely public accounts, the availability of performance reports, and the conduct of professional external audit. OPM’s trained experts have carried out PEFA assessments in a number of locations.
However, it is important to remember that the core purpose of such frameworks is to benchmark PFM performance against a series of internationally accepted indicators and standards of performance, as a precursor to and incentive for further improvements. They do not provide the kind of in-depth fiduciary risk analysis that donors, and some partner governments, increasingly require before entering into certain aid or development agreements.
Fiduciary risk analysis is particularly important in budget support approaches, where it helps assess the likelihood of donor funds not being properly accounted for, or not being used for their intended purposes. In some cases, such an analysis will affect whether or not the aid is granted; in others, it can lead to additional stipulations in the aid agreement to help mitigate the risks identified. Unlike collaborative PEFA assessments, fiduciary risk analysis is carried out independently and often put out to peer review. As well as conducting fiduciary risk analysis in countries including Sierra Leone and Malawi, OPM currently provides peer review of all DFID’s major fiduciary risk analyses.