This was from the IMF PFM Blog in August. http://blog-pfm.imf.org/pfmblog/2014/08/18-key-principles-of-pfm-reform.html
18 Key Principles of PFM Reform
Posted by Hisham Waly
1- First, Define the Problem. The starting point for reform is asking officials what the problem is. Officials embrace change more readily when faced with specific problems that they must address. If the problems are not recognized internally, any attempt at reform, even if externally financed and supported is more likely to fail.
2- Develop a PFM Strategy, but Remain Flexible. PFM reforms benefit from being implemented as part of a home-grown and country-led comprehensive PFM strategy. PFM reform strategies that assume that a developing country’s budgetary systems can be up-graded to the standards of OECD countries within the typical multi-year span of a donor funded project—and without an appropriate enabling institutional environment—are unrealistic.
3- In Most Cases, Say No to the “Big Bang” It is important to take a holistic approach to reform—but this does not mean launching multiple large-scale projects at the same time. Such a “big bang” approach requires conditions that are difficult to find in most developing countries: political opportunities, government stability, human skills capacity, information, and organization. It entails intensive coordination with multiple stakeholders, and does not allow for absorptive capacity to grow as the reform initiative expands.
4- “Basics First”—But Agree on What Constitutes “Basics” Countries with low capacity should focus first on the basics (the foundation) on which the reforms are to be built. The “basics” could include for example:
• a well-functioning budgeting input that generates a comprehensive and credible annual budget;
• budget execution controls and spending ceilings that are consistent with the country’s fiscal policy and targets;
• reliable accounting system that meet the IPSAS - cash reporting standards for central government operations;
• efficient cash management, including a single treasury account and sound internal controls that avoid arrears;
• complete, timely, regular, and transparent financial reporting; and
• an independent and robust external auditor.
5- Beyond the Basics: Approach with Care! The decision to move beyond the basics to more advanced functions should be determined by country and reform circumstances. This transition must be adequately sequenced as when governments tried to “leap-frog” to more sophisticated reforms—such as performance budgets, and accrual accounts—most failed because of premature implementation and limited ownership.
6- Beware of the Allure of “Best Practices” Benchmarking a country’s status to peer comparator countries with relatively similar contexts, and identifying the “good practices” that can be adapted to the local context, is a better approach.
7- Deal with Ongoing PFM Reforms: It’s Complicated! Successful ongoing reforms could be incorporated in the new reform. Nonetheless, in some cases, tough choices will need to be made to terminate, delay, or modify ongoing reform elements if their costs outweigh their benefits.
8- Nontechnical Factors: Ignore Them and They May Sink Your Reform. Success of reforms depends to a large extent on the nontechnical context—that is, political, economic, institutional, and organizational factors. It is essential to analyze these factors and adjust the reform to mitigate risks. In some circumstances, an analysis of the nontechnical factors will lead to a conclusion that launching reform is not possible at a given time, or that certain implementation actions need to be delayed.
9- Recognize the Strengths and Limitations of the Ministry of Finance. Having a wide array of champions both inside and outside of the Ministry of Finance will help move PFM reform forward, especially in countries where ministers are replaced frequently. In most cases, however, securing the firm support and long-term commitment of the Minister of Finance is essential for the PFM reform to succeed.
10- Look Beyond the Ministry of Finance. It is crucial to understand and take into account the relationships among the different players and stakeholders in PFM reform. The allocation of roles and responsibilities among these players varies substantially from country to country (e.g., centralized versus decentralized structures). The wider political economy context is critically important, and is shaped by several institutional interfaces—formal political institutions, administrative institutions, civil society, and external actors—as well as by such structural constraints as the degree of ethnic fragmentation.
11- Ensure That Accountants and Economists Work Well Together. PFM experts may compete over the leadership of a PFM reform process. Accountants tend to focus on improved controls, accounting, reporting, and internal and external auditing systems, whereas economists concentrate on budgeting, fiscal discipline, and macroeconomic issues. Both sets of skills are vital for the success of PFM reforms.
12- Develop Feedback Loops. Having accurate, timely, and meaningful feed-back loops, from both state and non-state actors, is crucial to making PFM reforms more effective. Such feedback loops lead to smarter project design that reflects lessons of the past, midcourse corrections, and improvements, instead of relying on late evaluations. They also inform subsequent decision-making—for example, when considering whether to move beyond the basics to more advanced reforms.
13- Manage the Risk of Failure. In a note on “Sequencing PFM Reforms,” Jack Diamond summarizes the five correlated dimensions influencing the overall risk of failure in PFM reforms: “the scope, the degree of behavior change involved, the number of institutions covered, the time required for completion, and the reform action’s ‘visibility.’” He also proposes three guiding principles for sequencing: “First, whenever possible minimize reform risks while maximizing reform impact. Second, match the risk profile of reform actions to the risk environment. Third, allow flexibility in deciding between different sequencing strategies.”
14- Life Happens. Natural disasters happen, economic shocks occur, revolutions erupt, elections are lost, Ministers of Finance are replaced, government priorities change, and donors develop new strategies. To respond to these unforeseen events the PFM reform strategy must be designed with flexibility and with the understanding that a well-thought-out change of course during implementation is not a sign of failure, but is the best way forward.
15- Mind the Gap. Analyzing PEFA scores, Matt Andrews has distinguished between PFM dimensions linked to legislation, processes, and procedures (that is, de jure reforms) from those linked to implementation (that is, de facto reforms). He finds that average scores for de jure dimensions are consistently higher than those of de facto ones. In many cases, instead of focusing on closing the gap between laws and practice and helping countries implement approved budgets (the challenging part of PFM reform), some PFM practitioners, donors and countries focus on introducing more laws and decrees (the easier part of PFM reform).
16- Manage the Donors and their Consultants. All donors and PFM experts agree that (i) PFM reforms need to be home-grown and country-led, and (ii) donor coordination is crucial. However, the exact opposite often happens: donors develop the reforms, and international consultants lead their implementation (often on the excuse of weak country capacity). There are excellent examples of donor coordination and country leadership that need to become more frequent.
17- Remember: Communication Matters. Strategic use of communication increases the chance of achieving successful PFM reforms and may help mitigate many of the risks related to their non-technical aspects, such as a lack of political will to instigate reform. Toward this end, key elements of a communications strategy will need to be developed, including: defining communication objectives; targeting key groups; utilization of media outlets; and delineation of messages.
18- Fragile and Conflict-Affected States (FCS): Appreciate the Diversity. Most of the principles discussed here apply to FCS but their interpretation may be different. For example, in some FCS, focusing reform efforts on budgetary execution could be a priority over budgetary preparation. Also, the number of donors tends to be much higher in FCS, posing a challenge for aid coordination and harmonization. It is important to recognize that FCS states are quite diverse and what works in Iraq may not be appropriate in Yemen.
Suggested references that inspired some of the ideas in this article:
• Allen, R. 2009. The Challenge of Reforming Budgetary Institutions in Developing Countries IMF Working Paper. FAD
• Allen, R. 2008. “Reforming Fiscal Institutions: The Elusive Art of the Budget Advisor.” OECD Journal of Budgeting. Paris: OECD.
• Allen, R., R. Hemming and B. H. Potter, eds. 2013. The International Handbook of Public Financial Management. London: Palgrave Macmillan.
• Andrews, M. 2013. The Limits of Institutional Reform in Development: Changing Rules for Realistic Solutions. Cambridge University Press.
• Andrews, M. 2006. “Beyond ‘Best Prac-tice’ and ‘Basics First’ in Adopting Performance Budgeting Reform.” Public Ad-ministration and Development 26(2):147 - 161. Wiley InterScience.
• Bietenhader, D. and Andreas Bergmann, A. 2010. Principles for Sequencing Public Financial Reforms in Developing Countries. International Public Management Review, 11 (1): 52-66.
• Diamond, Jack. 2013. “Good Practice Note on Sequencing PFM Reforms.” PEFA.
• Dressel, Bjoern, Brumby, Jim. 2012. Enhancing Capabilities of Central Finance Agencies: From Diagnosis to Action. Washington, DC: World Bank.
• Organization for Economic Co-operation and Development (OECD). 2010. Progress in Public Management in the Middle East and North Africa. Case Studies on Policy Reform.
• Potter, B. and Diamond, J. 1999. Guidelines for Public Expenditure Management. Washington DC: IMF.
• Schiavo-Campo, S., (2007), “Budgeting in Postconflict Countries,” in Budgeting and Budgetary Institutions. Ed. A. Shah. Washington, DC: The World Bank.
• Schick, A. 1998. 'Why Most Developing Countries Should Not Try New Zealand Reforms', The World Bank Research Ob-server. 13(1): 123-131.
• Wescott, C. 2008. “World Bank Support for Public Financial Management: Conceptual Roots and Evidence of Impact.” Background Paper. World Bank.
• World Bank. 2008. “Public Sector Reform: What Works and Why?” World Bank Independent Evaluation Group
 Governance Practice Manager, Governance Global Practice, Middle East and North Africa Region, World Bank. The views expressed in this article are the author’s and do not necessarily represent those of the World Bank.
Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.
I'm always looking for material that simplifies complex systems and stories, especially in areas I care about--like public budgeting and financial management (PBFM). Here is a summary of some key issues in the PBFM system in the USA, from http://www2.fiu.edu/~ganapati/3003/budget.html
Public Budgeting and Financial Management
What is a budget?
According to the Office of Management and Budget:
Why is a Budget required?
What are the major components of a Public Budget?
What are the revenue sources for a government?
The revenue sources differ depending on the level of government (i.e. federal, state, and local). Although the federal government collects most amount of tax, states and local governments have a wider menu of choices with respect to taxing:
What are the major classes of public expenditure?
What are the major differences between the Federal government and other governments (i.e. state and local) in terms of budgeting?
What are the different approaches to preparing a budget? [The time periods shown in parentheses are when the Federal government broadly subscribed to such policies]
Most of the above budget approaches are managerial in their nature, in the sense that there is a rational decision making process involved. Yet, budgets also have a political angle, where the decisions are ratified based on political power play and narrow interests of one's constituency. For example, "pork barrel" projects tend to be based on one's political ability to get such projects to his or her constituency.
We are working with the Prime Minister and his team, and my class was lucky enough to have him for a half hour the morning earlier. An interesting man and inspiring initiative in Albania that we are lucky to be engaged in.
Class 8 of my course was an exam class. In Class 9 I had Lant Pritchett in class teaching about capability traps and the reasons why countries get stuck en route to building state capacity to get things done.
Lant discussed the way in which international agendas have inspired a focus on form over function in state reforms.
This bias has been especially influential in poorer countries that are dependent on donors who set the agendas for reform and who assess compliance with reforms. Countries are rewarded if they comply well, as any good isomorphic mimic does. If countries try to break with the agenda they risk trying something new and 'failing' in the short run (meaning, the short run performance looks less than appealing). These countries often become effervescent bubbles.... they sparkle for a short period and then pop.
The capability trap thus sees countries either as isomorphic mimics or effervescent bubbles. The question is: How do you get out of this trap?
Here are the materials for the class and a couple of useful videos:
Why things don’t ‘get done’ despite past management ‘solutions’
Class objectives and reading advice:
This class will focus on the idea of capability traps in development. In this situation isomorphic pressures cause organizations to adopt a variety of policy and organizational reforms that improve the way they look but not how they actually function. In preparing for the class, focus on the Pritchett et al. reading and think about the ‘perfect storm’ one finds when (i) rigid agendas dominate the environment (ecosystem) in which organizations find themselves (ii) organizations are evaluated according to their compliance with this agenda, and (iii) agents have personal interests that foster a compliance outlook. This leads to the isomorphism trap we saw in Zombetta. While reading the article, think about the conditions that foster ‘effervescent bubbles’ like we saw in Nomburo.
Pritchett, L., M. Woolcock and M.Andrews. 2012. Looking Like a State: Techniques of Persistent Failure in State Capability for Implementation. CID Working Paper No. 240, June 2012. http://www.hks.harvard.edu/var/ezp_site/storage/fckeditor/file/pdfs/centers-programs/centers/cid/publications/faculty/wp/240.pdf
Pritchett and Woolcock. 2002. Solutions when the solution is the problem. http://www.cgdev.org/sites/default/files/2780_file_cgd_wp010.pdf
Up to class 7 of my course we have focused on some different ideas proposed to help get things done in development. The ideas from classical management theory and New Public Management combine into a formidable toolbox of managerial solutions to the problems of implementation!
But what tool do we choose for what setting?
This is where the course intends to pivot in future classes.
Before getting there, however, we have to ask what it means to 'get things done' in development. Sounds like a silly question? Well, organizational theory tells us that organizations have many focal points and they are not always complimentary. In my class I discussed the fact that organizations may focus on goals (what they are doing), or on process (how they do it), or on ensuring they have the right people and their people are happy (they internal 'who'), or ensuring external constituencies are happy and support them (the external 'who').
I argue that many organizations focus more on maintaining external constituencies than achieving internal goals... and they do it by complying with processes that the external constituencies define as appropriate and 'good' (or best as in 'best practices'). Sometimes this leads to goals being achieved and people being happy... but often it does not. Either way, it is what we refer to as isomorphism... copying what others outside tell you to do to look good... even if it does not make you good.
We call it isomoprhism, which leads organizations to copy what outsiders say they should do... to look good and legitimate... even if the new processes don't make them perform better. It often leads to a gap between form and function. Here is a video on the topic, which argues that we need to think about context and a key contextual question is simply, 'what does getting things done mean anyway?'
Here is the powerpoint Download Mld1022014class 7
Here are the readings and blurb in my syllabus:
What does ‘getting things done’ mean anyway?
Overall: Classical and NPM approaches arguably assume that organizations always focus on achieving performance goals—this being the measure of ‘success’. Many observers argue that both bureaucratic and NPM reforms often seem to have limited results because this assumption is not correct—organizations, governments and the like have other conceptions of success and focus on multiple dimensions of success. This observation is an important one to unpack and make sense of, as it helps to direct thinking about what it means to ‘get things done’.
We will discuss the following themes:
To prepare for this class, please read the two case studies and the short reading. Come prepared to participate in a class discussion around the case, which will start with the question, “Which of the two revenue agencies—Nomburo or Zombeta—was successful…and why?”
Case to be prepared before class:
Effective Revenue Collection in Nomburo (or not). HKS case 1934.0 and
Collecting Revenue in Zombeta (case provided online)
Rainey, Hal. G. 2003. “Organizational Goals and Effectiveness” In Understanding and Managing Public Organizations. New York: Jossey Bass. 127-150. (23 pages on the class website)
Additional readings (I will draw on these in class):
Baker, K. and Branch, K. undated. ‘Concepts Underlying Organizational Effectiveness: Trends in the Organization and Management Science Literature’ http://www.au.af.mil/au/awc/awcgate/doe/benchmark/ch01.pdf
My students were asked to prescribe ideas for health sector reform in an imaginary country called Messaria. The country is described as being in real trouble, and I asked the students to do two memo's or videos or other advisory pieces. The two advisory notes were meant to garner:
One of the groups produced a memo with the following music video and song to advise on New Public Management solutions for the country. It's the first time I've seen a link between Taylor Swift and New Public Management....
Great work by my students and fun to listen to.
A team from my class produced this short skit as one of their exercises. The exercise asked them to think about the way performance information, contracting out and the like could be used to get things done in a dysfunctional health sector.
My class was given a task to think about using classical administrative mechanisms to address dysfuntion in a health sector. One of the teams put this video together, applying Weberian, Taylorist and other classical management ideas in a health sector needing help.