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PFM Knowledge Sharing, Part 8: Topics in PFM

 

March 19, 2009

This is part 8 of the 9 part series on PFM knowledge sharing.

FreeBalance provides a Commercial Off-the-Shelf (COTS) IFMIS suite that is used in many countries around the world. We hope that the following is sufficiently objective to be of value to you.

Updated: June 2009

Procurement, budget planning, government performance management and public private partnerships (PPP) are four subjects discussed by many Public Financial Management (PFM) practitioners at conferences. All four subjects present an opportunity for improved fiscal management and government results. PPPs have become more visible recently.

There was little guidance from experts on when procurement, budget planning or performance initiatives should be implemented. This depends on the country context. These subjects are somewhat linked. Procurement reform requires performance metrics showing improved spend management. Performance management can be integral to budget planning. PPPs remain controversial.

Procurement

Government procurement can represent a significant portion of the country Gross National Product (GNP). Reducing government costs through more competition and effective management of commitments can have a significant fiscal impact. A country could achieve up to a 4% improvement in GDP through improved procurement processes.

Many countries do not have an effective portfolio of procurement vehicles like leasing, framework contracts, international sourcing or spend management. Local vendors are often unaware of how to leverage these vehicle to provide improved value to governments.

Budget Planning

There appears to be a sequence in budget planning maturity as countries adopt Medium Term Expenditure Frameworks (MTEF). A government budget represents the legal embodiment of government policy.

Many governments begin with line-item budgeting with incremental changes from one year to the next. This does not improve government results. Nor does this approach provide a credible budget because outcomes often take more than one year until fruition.

Multi-year program budgeting is the next step. This enables governments to identify programs and projects across multiple years. Performance management is the next step.

Government Performance Management

Performance management is more difficult in government than the private sector. Companies in the private sector have a “bottom-line” of profit or loss. Performance Management requires planning for objectives during budget planning. The audit function in many governments have transitioned from compliance to regulations to analysis of value for money.

View more presentations from FreeBalance. (tags: budget government)

Public Private Partnerships

Public Private Partnerships enable governments to fund and implement projects using the private sector. The structure of these projects differ. Many experts believe that PPPs represent another way to spend “off budget”. Other experts believe that the private sector can provide improved efficiency and value for money.  A conference poll at the 23rd Annual ICGFM Conference found that “sources of finance” was the msot often used justification for PPPs.

Notes

Procurement

  • In a high risk environment: how to ensure that partners and competitors are ethical? How to change culture of doing business? How to get competitors and stakeholders on board? Strengthen corruption commitments, provide incentives for stakeholders and companies. Collection action can be successful. (Petkovski)
  • Corruption affects delivery of public services (Ayoung)
  • No system is corruption proof (Ayoung)
  • No one thinks of investments in procurement as investments. They look at it in terms of expenses, even though the investment can have good results (Claro 2).
  • Public procurement represents 10% to 15% of GDP in many countries. Procurement can range as high as 70% of government budgets. Governments are trying to invest more in infrastructure and to stretch budgets to do more with the current financial crisis. Making procurement more efficient translates to obtaining more value for money. (Bigart 2)
  • Most public procurement systems focus on rule  compliance. She noted that the purpose of procurement is to achieve a net  service delivery. Procurement officers are often viewed as clerical staff who insist on running to the rules. This can often result in delays to important and critical services. Emergency situations mean that organizations like the World Bank  needs to lend more quickly and be much more flexible in rules in order to achieve service results (Bigart 2).

Lessons learned from public procurement reform include: (Bigart 2)

  • Procurement is linked as part of Public Financial Management reform
  • Procurement reform costs money and takes time
  • Some reforms can deliver results in the short term
  • Reform cannot be effective if isolated from broader public sector management

and financial management reform
Reforms require long term commitment to achieve sustainable results

Trends in Procurement (Claro)

  • Reform of the State is one of the most important components of the International fight against corruption but this has not resulted in the best approach from a technical viewpoint.
  • Procurement needs to be integrated with other Public Financial Management initiatives as part of an overall strategy.
  • International studies indicate Public Sector Procurement accounts for approximately 15% to 20% of GNP in many countries Procurement has traditionally been poorly managed with inefficiencies adding anywhere between 15% to 20% to the cost of the works, goods and services being procured   Corrupt practices add an additional 15% to 20% to the cost of those works, goods or services In other words, inefficiency and corruption combined could account for 2.25% to 4% of GNP in most countries, thus negating growth – yet there seems to be little concern about this loss of GNP in most countries.
  • Most of the data from countries about procurement is inaccurate. This is particularly important because of the rise of different procurement methods. Framework Contracts, Lease Agreements, Reverse Auctions and Public-Private Partnerships are described in the presentation.
  • There has been no profession of “government procurement”. Capacity building for civil servants and vendors is required.
  • Need for: legislative and regulatory framework, institution framework and management capacity, procurement operations and market capacity, integrity and transparency of the system, committed government, donor harmonization
  • Vendors need to be trained as much as the government
  • Reform of the State is one of the most important components of the International fight against corruption but this has not resulted in the best approach from a technical viewpoint.
  • Procurement needs to be integrated with other Public Financial Management initiatives as part of an overall strategy.

Budget Planning

  • There have been some challenges in moving to performance planning because there remains a tendency to favour effectiveness measurements. (Alvarez)
  • Mr. Alvarez emphasized the importance of the multi-year approach to planning and project planning. This reform has been difficult to implement. The Government of Costa Rica develops many multi-year scenarios. (Alvarez)
  • The budget needs to be used as a macro fiscal tool and that fiscal strategy needs to be closely coordinated with monetary policies. She noted that there are trade-offs between fiscal controls and strategic allocation of resources. Tight financial controls are generally needed at the beginning of any reform, but these controls needed to be loosened. This forms part of a gradual approach to achieving all three goals. (Angelovska-Bezoska)
  • Budget reform is also challenging. Budget preparation needs to focus on results (Angelovska-Bezoska)
  • The Government of Macedonia introduced more flexibility than line-item budgeting by introducing aggregate appropriation controls. Line-item budgeting requires too much administration of budget transfers and provides few benefits. (Angelovska-Bezoska)

Performance Management in Government

  • Government performance management requires audit to ensure that the government has achieved the best value for money. There has been a switch from compliance “with every single rule” to performance in South Africa. Corruption can be reduced through information availability, variance analysis, corporate performance culture, limited computer fraud, audits, GAAP disclosure requirements and better means of investigation. This provides a “paper trail” for accountability. Criminal sanctions in South Africa address financial malfeasance. (Woods)
  • The American government experience provides very good insight to any government considering improving outcomes through performance management. The performance review of government projects by the Bush administration has resulted in significant budget changes. Nevertheless, there has been resistance from Congress who are more concerned about outputs than outcomes. Performance management has achieved a high momentum in the US federal government so “performance is here to stay” regardless of who becomes President in 2009 (Joyce)

Linkage of budget and performance. (Joyce)

  • Desired state is “clarity of task and purpose” yet, legislative bodies create ambiguity. Additional problems are created by legislative involvement in budget execution. Results in multiple and conflicting goals for ministries.
  • Often uniformed budget decisions.
  • Legislative oversight tends to be episodic rather than comprehensive. Little attentiveness to performance signals that overall results don’t matter.
  • US Congress appropriations committees have been uninterested in the Program Assessment Rating Tool.
  • Performance information remains little used. It is difficult to change the status quo.
  • Easier to use in production
  • Measuring costs as hard as measuring results
  • Requires leadership and incentives
  • Performance data important to transparency.

40% of respondents to a survey at the Winter ICGFM Conference said that performance reporting is the most needed affect of public financial management transparency. The voting was:

  • Strategic priorities: 17%
  • Budget priorities: 9%
  • Financial reporting: 34%
  • Performance reporting: 40%

Public Private Partnerships

  •  PPPs seem like magic like free money. Yet, companies have made significant profits. The magic is that the debt is hidden where the government has the obligation to repay the debt to the private sector. (Wynne 1)
  • Is PPP a gimmick or a value-for-money proposition? Value-for-money requires real risk transfer from the public sector to the private sector. Without such real risk transfer, then PPPs are simply a mechanism to move projects and related financing off-budget. (Hawkesworth)
  • PPPs appear to reduce the level of borrowing. Andy believes that PPP sounds more cuddly and friendly than privatization (Wynne 2)
  • Establishing effective procedures for the budgetary treatment of PPPs is a work in progress in OECD countries with noted failures in the United Kingdom. (Hawkesworth)
  • In 2002 2002 – 57% of public sector accountants in UK did not think PPPs provided value for money (Wynne 2)
  • PPP economics are only temporarily jeopardized by the financial crises. PPP is not solution in time of financial crises, and should not be leveraged to stimulate the economy (Drapak)
  • PPP risk is never fully transferred to the private sector, and the risk is transfered to the government that assumes the liability. Allowing the private sector to charge for public services as part of PPPs is not sustainable. (Wynne 2)
  • If you wanted to design a system to maximize the opportunity for corruption, you would create something like PPPs,  “You have all the ingredients to maximize corruption.” (Wynne 1)

Lesson Learned

  •  Many countries do not have an appropriate legal structure to handle PPPs. (Bigart 2)
  • PPP economics have changed. In particular,  emerging countries are seeing a lack of funding on both the equity and debt side.  There is a general lack of interest of investors and operators in PPP for infrastructure projects. (Drapak)
  • The UK experience is that IT projects should not be PPP. (Hawkesworth)
  • Public Private Partnerships (PPPs) can enable  building private sector capacity. (Bigart 2)
  • PPPs should not be used for infrastructure projects (Wynne 2)

References

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Doug Hadden

Doug Hadden

Executive Vice President, Innovation at FreeBalance
Doug is responsible for identifying new global markets, new technologies and trends, and new and enhanced internal processes. Doug leads a cross-functional international team that is responsible for developing product prototypes and innovative go-to-market strategies.

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