Public Financial Management
International trends
Priorities in Armenia
Jens Kromann Kristensen
Senior Public Sector Specialist
The World Bank
Agenda
1. Perspectives on public financial management
2. International trends and lessons
– Reform trends
– Lessons
– Impact of the financial crisis
3. Public Financial Management in Armenia
– Status
– Challenges
4. Vision: The Armenian Governments Public Financial
Management Strategy
5. Q/A - discussion
Perspectives…
PFM is power, policy and politics
• Budgeting is power, policy and politics – the
authoritative allocation of resources in a society –
who gets what, how, why and when
• The study of the budget should be a center piece
of political science
• Surprisingly, budgeting not very well researched
academically. Most recent analyses are
operational/practical/applied research
• Reform of budget systems is the structuring of
politics and power….
• …but obviously only part of the story…
Perspectives…
PFM and good governance
Transparency
Accountability
Effectiveness
Efficiency
Forward vision
The budget and the public financial management
provides a good entry point for enhancing these
principles in a polity.
Perspectives…
PFM and Development
Perspectives…
Objectives
Managing Public Expenditure, introduction, Allen & Tomasi, OECD 2001
Perspectives…
The public financial management cycle
Planning
systems
Project
appraisal
Medium term
plans
Resource
allocation
Expenditure
review
Liquidity
management
Expenditure
review
Funds release
Accountability
Expenditure
control
Post event
review
Audit system
Annual Budgets
Monitoring
& controlling
Reporting
Accounting
Source: Adapted from Integrated Financial Management. Michael Parry, International Management Consultants Limited. Training Workshop on Government
Budgeting in Developing Countries. THE UNITED NATIONS. December 1997.
International…
Trends
• Changing global context: emerging pressures on the State
– Growing global competition – demands for macro stability & competitive investment
climate
– Growing citizen demands for effective service delivery, transparency, & accountability
– Growing fiscal demands for efficiency & effectiveness
• Vision– A more capable, responsive & high-performing State that:
–
–
–
–
Provides stability & credible investment climate for growth
Delivers public services to make growth inclusive & equitable
Ensures value-for-money of public spending
Demonstrates transparency, accountability & good governance
• Demands on public sector: much more performance focus
A public sector that
– serves the public and delivers on promises
– is less inward-looking and rule-bound, and more performance-focused
– dynamically achieves key objectives and outcomes
Sources: Presentation by Guenter Heidenhof, Sector Manager, Public Sector & Governance November 2010, The World Bank 8
and Manning and Shepherd, Public Management Reform: should Latin America learn from the OECD?
International…
Trends
1990s – Performance
 Concern to make promises and deliver on them
 Measurement of results and the use of
measurements for planning or accountability purposes
1970s - Responsiveness to elected officials and
political priorities
 Frustration with political neutrality
 Concern that the public service is an obstacle to political objectives
1950s - Equal access and equal treatment
 Impartiality
 Concern that employment in the public sector should be representative of society
19th century - Due process and institutional continuity
 Patronage & purchase of public positions
 Northcote-Trevelyan Reforms of 1854 in UK
 Driven by the law
Source: Manning and Shepherd, Public Management Reform: should Latin America learn from the OECD?
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International…
Trends
IN HIGH INCOME OECD COUNTRIES
• Increasing emphasis on allocative and
operational efficiency
– Introduction or strengthening of many
fiscal rules since 1990s for aggregate
discipline
– Responsiveness & performance
increasingly targeted allocative &
operational efficiency
IN OTHER COUNTRIES
•
Strengthening of Budget Rules to foster aggregate Fiscal
Discipline
– Numerical restrictions, “Fiscal Responsibility” laws
– Procedural rules – Centralizing authoriy, limiting
particularistic interests of ministers and legislators
•
Reforms to improve performance
– Many countries tried to introduce performance
elements in their budgeting framework, but only few
countries have mastered sophisticated approaches
such as results-based budgeting (e.g. Chile)
– Some progress in linking development plans to the
annual budget (a substantial number of countries
around the world)
– But still a lot of countries with limited linkages
between development strategy and budget (e.g.
Bolivia, Peru, countries in Africa)
•
Strong focus on Integrated Financial Management
Systems (IFMSs)
– Many successful reforms efforts around the world in
1990s
– But many systems did not go the “extra mile” to
strengthen public procurement or institutions of
accountability (e.g. Supreme Audit Institutions)
• Performance-based budgeting: recent trends
– Shifting focus from input control to
accountability for results
• Example: UK Public Service
Agreements (PSAs) with the
Treasury: three-year agreements
with objectives & targets, published
& monitored by Treasury
• Accounting & auditing reforms
– Strengthening accounting practice (e.g.
move to accrual accounting) and
performance & value-for-money audits
Source: Presentation by Guenter Heidenhof, Sector Manager, Public Sector & Governance The World Bank
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International…
Trends
Macrofiscal
Discipline
Medium-Term Expenditure Frameworks

Performance, Program budgeting
Strategic
Allocation
Operational
Efficiency




IFMIS, automation


Fiscal Responsibility Laws

Treasury Single Account

Budget classification, chart of account



Reporting/ Transparency




Procurement

Internal control/audit

External audit

Accrual Accounting
?

?
Source: Presentation by Dorotinsky, Sector Manager, ECA PREM, Practice Co-Leader, PSP GET,July 2010
?
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International…
Trends
•
•
•
•
Anti-corruption - anti-corruption commissions
Decentralization to lower levels of government
Deconcentration – to ministries and creation of agencies
Demand-side
– Legislative oversight, involvement
– Civil society oversight, participation
•
•
•
•
•
•
Sovereign wealth funds
Public-Private Partnerships
Monitoring and Evaluation
Sectoral measures (e.g. road funds)
Long-term planning
Debt sustainability analysis
Source: Presentation by Dorotinsky, Sector Manager, ECA PREM, Practice Co-Leader, PSP GET,July 2010
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International…
Lessons
• Government-led reform strategy - ideally,
government approved
• Balanced development of components
• Overly advanced components regress
• Less advanced hinder progress
• System components need to work together
• Focusing on weakest link, foundation
elements, good starting point problem-driven
reforms provides the soundest foundation
Source: Presentation by Dorotinsky, Sector Manager, ECA PREM, Practice Co-Leader, PSP GET,July 2010
International…
Lessons
• Reform should also address current needs of or
gaps felt by decision-makers and managers
–
–
–
–
Government (PM or President + Cabinet)
Minister of Finance
Ministry of Finance
Spending ministries
• Management
• Budget managers
• Street level
– Parliament
– Civil society
Source: Presentation by Dorotinsky, Sector Manager, ECA PREM, Practice Co-Leader, PSP GET,July 2010
International…
Lessons
• Pragmatic, practical reform measures
• Specific, monitorable measures
• Benchmarking to assess success
• Measure current performance as baseline
• PEFA as broad measure of system performance
• Improvements should get the right information to
the right people at the right time
• not only data, but information and analysis
• generally, improved transparency
Source: Presentation by Dorotinsky, Sector Manager, ECA PREM, Practice Co-Leader, PSP GET,July 2010
International…
Impact of the Crisis
The global financial crisis has not changed
priorities but highlighted even more
– Expenditure efficiency
– Performance information for prioritization
– Wage bill management
– Better revenue collection
– Medium-term budgeting and fiscal space
– Capital investment efficiency
Source: Presentation by Dorotinsky, Sector Manager, ECA PREM, Practice Co-Leader, PSP GET,July 2010
PFM in Armenia
General overview
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•
•
•
•
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PFM in Armenia is well analyzed and documented across the cycle.
Strengths and weaknesses are well understood.
Major achievements have been made (Planning processes, MTEF
and macro management, TSA, cash planning and management,
payment processing etc.)
Substantial activities have been undertaken in preparation of the
next phase of reform including in the areas of i) Program based
budgeting, ii) GFMIS, iii) debt management, iv) Internal control, v)
Accounting, vi) procurement, Etc.
In addition efforts have been initiated to bring the parts together in
a comprehensive PFM reform Strategy.
Work has gone into formulating a long term PIFC strategy
Challenges remain...
PFM in Armenia
2008 PEFA Self Assessment
PFM in Armenia
2010 OECD- EC PIFC Gap Analysis
• Overall Management Structure:
– Centralization of responsibility – limited delegation
– Focus on compliance and cash management not efficiency and
effectiveness
• Information systems:
– GFS 2001 provides a solid basis for budgeting
– The classification does not deliver on the needs of budget managers
• Links to objectives:
– Limited link between resources and objectives at all levels
PFM in Armenia
2010 OECD- EC PIFC Gap Analysis
• Internal structures for governance and control
– No finance director position
– No risk management
– Inappropriate supervision of NCOs and public companies
• Internal assurance measures:
– Internal audit it weak in regard to independence, regulatory
framework and quality
• Central Harmonization Unit:
– Just established
• Internal and external reporting:
– Line managers are given limited information about budgets and their
use
– External reporting includes only financial information
PFM in Armenia
Government Reform Vision
2010-2020
“The purpose of the reforms is to increase the efficiency of public
expenditure management thereby ensuring improved quality of policies and
delivered services, specifically
• ensuring fiscal discipline which will contribute to macroeconomic stability
and predictability of budget system;
• guaranteeing the linkage of funds with main policies and priorities through
following up on strategic approaches;
• ensuring value for money and guaranteeing efficient, effective and
economic use of funds;
• ensuring accountability in public spending.
Source: Government Decree on Approving the Strategy for Reforming the PFM System
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PFM in Armenia
Government Reform Visions
2010-2020
“The core vision of the reforms is: “Centralized regulation - decentralized management”.
To accomplish this, public finance management system reforms should facilitate the
establishment of a management culture which,
• on the one hand ensures centralized (harmonized) regulation of PFM-related
procedures and on the other hand;
• grants powers to managers at all levels (decentralization), and they have obligation and
accountability for optimal use of resources (managerial accountability and
responsibility).
The aim of PFM reforms shall be ensuring a PFM system acting in accordance with the
following principles in all levels of governance:
• managerial accountability and responsibility;
• availability of control;
• ongoing improvement of services delivered. “
Source: Government Decree on Approving the Strategy for Reforming the PFM System
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PFM in Armenia
Stages towards the vision
Stage 1
• Complete the work on introduction of the basic systems and
controls while gradually transitioning from centralized
administration to decentralized management and result-based
program management
• Increase managerial accountability
Stage 2
• Increase emphasis on efficiency and effective use of resources
Stage 3
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PFM in Armenia
Challenges to achieving the vision
– Potential for stronger integration of functional
processes
– Integration and enhanced capability of ICT systems
– Building Capacity, Professionalization and Motivation
of FM staff across the cycle and across Government
institutions
– Reform management, prioritizing, phasing integration and coordination of reforms at all levels of
the reform process (design, implementation,
management)
PFM in Armenia
Priority stage 1 reform activities
Suggested activities in order of priority:
1. Integration of information and business processes
across the budget cycle
2. Strengthening internal control and accounting
3. Gradually advance Program Based Budgeting
4. Build ICT management capacity incl. ICT strategy
These actions would be pursued in coordination to
achieve stage 1 and would be internally sequenced in a
work plan.
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PFM in Armenia
Priority reform activities (1/4)
1. Integration of information and business processes
across the budget cycle
• Why: To enable planned reforms of functional processes
(PBB, IPSAS, PIFC), reduce transaction costs, enhance
data quality and increase accuracy - i.e to use one
capture of data for many purposes.
• How: Through implementation of ICT enabled business
process reengineering ( i) BPR, ii) GFMIS)
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PFM in Armenia
Priority reform activities (2/4)
2. Strengthening internal control and accounting
• Why: Mitigate fiduciary risks (incl. SNCOs). Enhance transparency
and accountability. Enable decentralization without loss of control.
• How 1: Establish managerial accountability and clarify overall
management structure in line with PIFC. Build internal audit
capacity. Develop standards, including public and corporate
accounting standards to provide assurance to stakeholders.
Adequate information systems including automation of the internal
audit function. Establish strong CHU covering both financial
management and control and internal audit. Strengthen internal
and external reporting. Enhance controls over SNCOs.
• How 2: Reorganize spending units through delegation and
accountability
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PFM in Armenia
Priority reform activities (3/4)
3. Gradually advance Program Based Budgeting and further
strengthen budget preparation processes and capacity
• Why: To further deepen policy orientation of the budget
process and to prepare for results based budgeting
implementation and management
• How: Build on existing process and address downstream
implications of Program Based Budgeting (Adjustment of the
Chart of Accounts, reporting, treasury operations). Consider a
consultation with current and potential PBB users and
checklist assessment of template before appropriating against
the PBB. Build capacity for investment appraisal. Strengthen
risk and sustainability analysis.
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PFM in Armenia
Priority reform activities (4/4)
4. Build ICT management capacity incl. ICT strategy
• Why: To enable for GFMIS. To improve management of existing
systems. To establish data security.
• How: Improve IT management capacity (technology architecture,
policy framework, human resource management). Reconsider
infrastructure aspects of GFMIS strategy (wide-area network, data
center) in light of e-Government plans of GoA. Identify essential
data input and reporting requirements of PFM reform program and
develop interim IT solutions for them based on current or new
software, according to cost and technology factors. Design and
engineer interim IT solutions for possible expansion and industrial
strengthening. Execute training plan for internal IT staff (SOA,
project management, IT procurement)
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Assessment and key messages
• Further integration of business processes are necessary to achieve a next
level of PFM.
• Status quo on ICT is not an option if ongoing reforms are implemented.
• Work on PPB with a view to strengthening policy orientation of the budget
should continue while maintaining the existing execution controls.
• ICT management capacity should be improved in any reform scenario.
• Capacity development and change management should take center stage
in any reform scenario.
• Current plans for reforms implies a rather large investment. Further
preparatory activities should be informed by priorities and funding
availability.
• PIFC is an important but complicated and long term process. Focus on
delegation and organization is hugely important for the efforts to go
beyond increased compliance control.
• PIFC and reforms to “up-stream” reforms should go hand in hand
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