92439 September 2014 – Number 132 X1` 18 Key Principles of PFM Reform in MENA Hisham Ahmed Waly1 Introduction: While circumstances vary by country, there are some generic principles for PFM reform. For this Quick Note these principles were drawn from the personal experience (within and outside the World Bank) of the author as well as selected readings presented at the end of the note. 1- First, Define the Problem. The starting point for reform is asking what the problem is. Officials embrace change more readily when faced with specific problems that they must address. If the problems are not internally recognized, reform attempts, even if externally financed and supported is more likely to fail. 4- “Basics First”—But Agree on What Constitutes “Basics” Countries with low capacity should focus 2- Develop a PFM Strategy, but Remain Flexible. first on the basics (the foundation) on which the PFM reforms benefit from being implemented as reforms are to be built. The “basics” could include part of a home-grown, country-led comprehensive for example: PFM strategy. PFM reform strategies that assume that a developing country’s budgetary systems can • a well-functioning budgeting input that be up-graded to OECD standards within the typical generates a comprehensive and credible annual multi-year span of a donor funded project —and budget; without an appropriate enabling institutional environment—are unrealistic. • budget execution controls and spending ceilings that are consistent with the country’s fiscal 3- In Most Cases, Say No to the “Big Bang” It is policy and targets; important to take a holistic approach to reform—but this does not mean launching simultaneous multiple • reliable accounting system that meet the large-scale projects. Such a “big bang” approach IPSAS - cash reporting standards for central requires conditions rare in most developing government operations; countries: political opportunities, government stability, skills, information, and organization. It • efficient cash management, including a entails intensive coordination with multiple single treasury account and sound internal controls stakeholders, and does not allow for absorptive that avoid arrears; capacity to grow as the reform initiative expands. • complete, timely, regular, and transparent financial reporting; and 1 Governance Practice Manager, Governance Global Practice (GGODR), the World Bank. • an independent and robust external auditor. and responsibilities among these players varies substantially from country to country (e.g., 5- Beyond the Basics: Approach with Care! The centralized versus decentralized structures). The decision to move beyond the basics to more wider political economy context is critically advanced functions should be determined by important, and is shaped by several institutional country and reform circumstances. This transition interfaces—formal political institutions, must be adequately sequenced as when administrative institutions, civil society, and governments tried to “leap-frog” to more external actors—as well as by such structural sophisticated reforms—such as performance constraints as the degree of ethnic fragmentation. budgets, and accrual accounts—most failed because of premature implementation and limited 11- Ensure That Accountants and Economists Work ownership. Well Together. PFM experts may compete over the leadership of a PFM reform process. Accountants 6- Beware of the Allure of “Best Practices” tend to focus on improved controls, accounting, Benchmarking a country’s status to peer comparator reporting, and internal and external auditing countries with relatively similar contexts, and systems, whereas economists concentrate on identifying the “good practices” that can be adapted budgeting, fiscal discipline, and macroeconomic to the local context, is a better approach. issues. Both sets of skills are vital for the success of PFM reforms. 7- Deal with Ongoing PFM Reforms: It’s Complicated! Successful ongoing reforms could be 12- Develop Feedback Loops. Having accurate, incorporated in the new reform. Nonetheless, in timely, and meaningful feed-back loops, from both some cases, tough choices will need to be made to state and non-state actors, is crucial to making PFM terminate, delay, or modify ongoing reform reforms more effective. Such feedback loops lead to elements if their costs outweigh their benefits. smarter project design that reflects lessons of the past, midcourse corrections, and improvements, 8- Nontechnical Factors: Ignore Them and They instead of relying on late evaluations. They also May Sink Your Reform. Success of reforms inform subsequent decision-making—for example, depends to a large extent on the nontechnical when considering whether to move beyond the context—that is, political, economic, institutional, basics to more advanced reforms. and organizational factors. It is essential to analyze these factors and adjust the reform to mitigate risks. 13- Manage the Risk of Failure. In a note on In some circumstances, an analysis of the “Sequencing PFM Reforms,” Jack Diamond nontechnical factors will lead to a conclusion that summarizes the five correlated dimensions launching reform is not possible at a given time, or influencing the overall risk of failure in PFM that certain implementation actions need to be reforms: “the scope, the degree of behavior change delayed. involved, the number of institutions covered, the time required for completion, and the reform 9- Recognize the Strengths and Limitations of the action’s ‘visibility.’” He also proposes three guiding Ministry of Finance. Having a wide array of principles for sequencing: “First, whenever possible champions both inside and outside of the Ministry minimize reform risks while maximizing reform of Finance will help move PFM reform forward, impact. Second, match the risk profile of reform especially in countries where ministers are replaced actions to the risk environment. Third, allow frequently. In most cases, however, securing the flexibility in deciding between different sequencing firm support and long-term commitment of the strategies.” Minister of Finance is essential for the PFM reform to succeed. 14- Life Happens. Natural disasters happen, economic shocks occur, revolutions erupt, elections 10- Look Beyond the Ministry of Finance. It is are lost, Ministers of Finance are replaced, crucial to understand and take into account the government priorities change, and donors develop relationships among the different players and new strategies. To respond to these unforeseen stakeholders in PFM reform. The allocation of roles events the PFM reform strategy must be designed August 2014 · Number 132 2 with flexibility and with the understanding that a states are quite diverse and what works in Iraq may well-thought-out change of course during not be appropriate in Yemen. implementation is not a sign of failure, but is the best way forward. Suggested references that inspired some of the ideas in this article: 15- Mind the Gap. Analyzing PEFA scores, Matt Andrews has distinguished between PFM • Allen, R. 2009. The Challenge of Reforming dimensions linked to legislation, processes, and Budgetary Institutions in Developing Countries IMF procedures (that is, de jure reforms) from those Working Paper. FAD linked to implementation (that is, de facto reforms). He finds that average scores for de jure dimensions • Allen, R. 2008. “Reforming Fiscal are consistently higher than those of de facto ones. Institutions: The Elusive Art of the Budget Advisor.” In many cases, instead of focusing on closing the gap OECD Journal of Budgeting. Paris: OECD. between laws and practice and helping countries implement approved budgets (the challenging part • Allen, R., R. Hemming and B. H. Potter, eds. of PFM reform), some PFM practitioners, donors 2013. The International Handbook of Public and countries focus on introducing more laws and Financial Management. London: Palgrave decrees (the easier part of PFM reform). Macmillan. 16- Manage the Donors and their Consultants. All • Andrews, M. 2013. The Limits of donors and PFM experts agree that (i) PFM reforms Institutional Reform in Development: Changing need to be home-grown and country-led, and (ii) Rules for Realistic Solutions. Cambridge University donor coordination is crucial. However, the exact Press. opposite often happens: donors develop the reforms, and international consultants lead their • Andrews, M. 2006. “Beyond ‘Best Prac-tice’ implementation (often on the excuse of weak and ‘Basics First’ in Adopting Performance country capacity). There are excellent examples of Budgeting Reform.” Public Ad-ministration and donor coordination and country leadership that Development 26(2):147 - 161. Wiley InterScience. need to become more frequent. • Bietenhader, D. and Andreas Bergmann, A. 17- Remember: Communication Matters. Strategic 2010. Principles for Sequencing Public Financial use of communication increases the chance of Reforms in Developing Countries. International achieving successful PFM reforms and may help Public Management Review, 11 (1): 52-66. mitigate many of the risks related to their non- technical aspects, such as a lack of political will to • Diamond, Jack. 2013. “Good Practice Note instigate reform. Toward this end, key elements of a on Sequencing PFM Reforms.” PEFA. communications strategy will need to be developed, including: defining communication objectives; • Dressel, Bjoern, Brumby, Jim. 2012. targeting key groups; utilization of media outlets; Enhancing Capabilities of Central Finance Agencies: and delineation of messages. From Diagnosis to Action. Washington, DC: World Bank. 18- Fragile and Conflict-Affected States (FCS): Appreciate the Diversity. Most of the principles • Organization for Economic Co-operation discussed here apply to FCS but their interpretation and Development (OECD). 2010. Progress in Public may be different. For example, in some FCS, Management in the Middle East and North Africa. focusing reform efforts on budgetary execution Case Studies on Policy Reform. could be a priority over budgetary preparation. Also, the number of donors tends to be much higher • Potter, B. and Diamond, J. 1999. Guidelines in FCS, posing a challenge for aid coordination and for Public Expenditure Management. Washington harmonization. It is important to recognize that FCS DC: IMF. August 2014 · Number 132 3 • Schiavo-Campo, S., (2007), “Budgeting in Contact MNA K&L: Postconflict Countries,” in Budgeting and Budgetary Gerard A. Byam, Director, Strategy and Institutions. Ed. A. Shah. Washington, DC: The Operations. MENA Region, The World Bank. World Bank. Preeti Ahuja, Manager, MNADE Regional Quick Notes Team: • Schick, A. 1998. 'Why Most Developing Omer Karasapan, and Mark Volk Countries Should Not Try New Zealand Reforms', Tel #: (202) 473 8177 The World Bank Research Ob-server. 13(1): 123-131. The MNA Quick Notes are intended to summarize lessons learned from MNA and other Bank Knowledge and Learning activities. The Notes do • Wescott, C. 2008. “World Bank Support for not necessarily reflect the views of the World Bank, Public Financial Management: Conceptual Roots its board or its member countries. and Evidence of Impact.” Background Paper. World Bank. • World Bank. 2008. “Public Sector Reform: What Works and Why?” World Bank Independent Evaluation Group. August 2014 · Number 132 4