The International Consortium on Governmental Financial Management (ICGFM) maintains this public financial management blog. The focus is on PFM reform in emerging countries by addressing issues such as transparency, integrated financial management information systems, international donor funding, auditing, cash management, procurement, public private partnerships
ICGFM Promotes Knowledge Transfer Among Public Financial Management Experts
Working globally with governments, organizations, and individuals, the International Consortium on Governmental Financial Management is dedicated to improving financial management by providing opportunities for professional development and information exchange.
Jason Levergood, Senior Manager at Grant Thornton LLP, provided an overview of the ICGFM Worldwide Survey, Public Financial Management Responses to an Economically Challenging World on December 7th. at the ICGFM Winter Conference. Public financial managements from over 50 countries were surveyed in 2010.
The survey found that the financial crisis and stimulus packages have had significant impact on public financial managers. Yet, in this environment of doing more with less, governments have accelerated reforms including support for international standards and improvements in transparency.
Mr. Levergood described the survey results for stimulus programs, use of public private partnerships (PPPs), infrastructure investment and increasing transparency. 76% of respondents said that their countries have made or renewed a strong commitment to public fianncial management transparency. 80% of respondents said that their countries are adopting international standards. The survey found that the use of the eXtensible Business Reporting Language (XBRL) is gaining interest but has not been widely adopted in government.
The survey concludes with the observation that "public financial managers face some of the most challenging times in decades in meeting their responsibilities, but they have faced them no only with a variety of policy measures but with an unprecedented commitment to transparency".
In this section we review some recent publications which may be of interest to readers of the Journal. We would be pleased to receive reviews and suggestions of other resources which we should refer to in future issues.
This note summarizes the main similarities and differences in approach and coverage of fiscal ROSCs and PEFA assessments. These are two approaches used by international bodies to assess the quality public financial management in governments, especially those in the Global South. A fiscal ROSC differs from a PEFA assessment in focusing particularly on transparency and accountability aspects of PFM systems, grouped under four pillars:
clarity of roles and responsibilities for PFM within government;
open budget processes, covering all PFM-related processes of government;
public availability of information, specifying the kinds of PFM information that should be accessible to the public; and
finally, assurances of integrity, covering issues of data quality as well as the need for and quality of external scrutiny of PFM information.
A PEFA assessment focuses primarily on the extent to which PFM systems and procedures deliver efficient and effective outcomes in the six critical areas. It covers fiscal transparency issues insofar as they affect PFM effectiveness. The emphasis is on the budget process itself, particularly in respect of the main PEFA indicator set, although PEFA assessments also include some description of the legal framework for fiscal management, reforms being undertaken, and public access to key information. PEFA assessments have also focused predominantly on low- and middle-income countries, while fiscal ROSCs have also been carried out in a substantial number of high-income countries.
Rising public health care spending remains a problem in virtually all OECD and EU member countries. As a consequence, there is growing interest in policies that will ease this pressure through improved health system performance. This report examines selected policies that may help countries better achieve the goal of improved health system efficiency and thus better value for money. Drawing on multinational data sets and case studies, it examines a range policy instruments. These include: the role of competition in health markets; the scope for improving care coordination; better pharmaceutical pricing policies; greater quality control supported by stronger information and communication technology in health care; and increased cost sharing.
This national study from the UK Audit Commission builds on the work done for the World Class Financial Management, especially financial governance and leadership, financial planning, and finance for decision making. The study will review how councils develop and use strategic financial planning tools and will help them to improve strategic financial management and links to the planning of services and other interventions. It will examine the costs and benefits of strategic financial planning, determine which approaches, if any, offer most benefits and identify the key principles of effective strategic financial and risk management.
Public Private Partnerships (PPPs) have spread from the UK to many countries, but there is increasing evidence that they may not provide value for money and the alternatives are not adequately researched. UK Ministers do not have strong evidence to show that PPPs offer the best value for money, UK government auditors have warned. In evidence prepared for a parliamentary inquiry in November 2009, the National Audit Office warned: ‘Our view is that private finance can deliver benefits, but it is not suitable at any price or in every circumstance.’ The NAO paper noted that ‘assessing the pros and cons of alternative procurement routes is especially important in the recession’. Rising costs of private finance since the credit crunch had ‘implications for their value for money’. The paper added: ‘We have yet to come across truly robust and systematic evaluation of the use of private finance built into PPPs at either a project or programme level’ – evidence that committee chair Lord Vallance described as ‘quite unequivocal’. Systems to collect comparable data from projects using different procurement routes were ‘not in place’, the paper said. ‘Unless such systems are established, together with robust evaluation of the overall whole-life costs of alternative forms of procurement, government cannot satisfy itself that private finance represents the best VFM option.’ In Nigeria the government has also seen PPPs as an important way of acquiring public investment, but again recently suffered a set-back. Plans to concession airports to private investors in a public private partnership appear to have been abandoned due to opposition from the trade unions.
Greater Aid Transparency: crucial for aid effectiveness, ODI Project Briefings 35, London: ODI Samuel Moon and Tim Williamson (January 2010) www.odi.org.uk/resources/details.asp?id=4673
This paper sets out and explores the link between donor aid and recipient country budgets, and the role greater transparency about aid can play in improving budget transparency, the quality of budgetary decisions, and accountability systems. The paper goes on to explore how current initiatives to improve aid transparency can best support better budgets and accountability in aid dependent countries. These efforts provide an important opportunity to enhance the effectiveness of both the recipient governments’ own spending and the aid they receive from donors. It concludes that publishing better information on aid requires compatibility with recipients’ budgeting and planning systems. The research findings suggest that recipient budgets bear many similarities, but this is not reflected in current formats for reporting aid. Finally, it concludes that the poorest countries will lose out if donors do not publish aid information that is easy to link with recipient government budget systems.
Publish What You Pay (PWYP) is a global civil society coalition that helps citizens of resource-rich developing countries hold their governments accountable for the management of revenues from the oil, gas and mining industries. Natural resource revenues are an important source of income for governments of over 50 developing countries. When properly managed these revenues should serve as a basis for poverty reduction, economic growth and development rather than exacerbating corruption, conflict and social divisiveness. The PWYP coalition was founded in 2002 by a small, ad hoc group of London-based NGO representatives to tackle the ‘resource curse’ by campaigning for greater transparency and accountability in the management of revenues from the oil, gas and mining industries. Since then, the PWYP coalition has grown to become a global network comprised of community organisations, international NGOs and faith-based groups in more than 70 countries. The report discusses the origins and evolution of PWYP from 2002 to 2007. It also assesses the effectiveness of PWYP’s advocacy and policy endeavours and examines how the Coalition has operated internationally. In this sense, the report is not only a narrative of PWYP’s history and accomplishments, but a practical tool to shine a light on the strengths and challenges which face a global civil society coalition.
Carbon Trading: How it works and why it fails Oscar Reyes and Tamra Gilbertson (November 2009) Dag Hammarskjöld Foundation http://www.tni.org/carbon-trade-fails
Carbon trading lies at the centre of global climate policy and is projected to become one of the world’s largest commodities markets, yet it has a disastrous track record since its adoption as part of the Kyoto Protocol. This book outlines the limitations of an approach to tackling climate change which redefines the problem to fit the assumptions of neoliberal economics. It demonstrates that the EU Emissions Trading Scheme, the world’s largest carbon market, has consistently failed to cap emissions, while the UN’s Clean Development Mechanism (CDM) routinely favours environmentally ineffective and socially unjust projects. This is illustrated with case studies of CDM projects in Brazil, Indonesia, India and Thailand. The UN climate talks in Copenhagen discussed ways to expand the trading experiment, but the evidence suggests it should be abandoned. From subsidy shifting to regulation, there is a plethora of ways forward without carbon trading – but there are no short cuts around situated local knowledge and political organising if climate change is to be addressed in a just and fair manner. This accessible, well-researched book provides a devastating critique of both the theory and practice of carbon trading.
"There has been miserably slow progress in increasing domestic revenue in low-income countries since the 1990s. In order to find out why, this publication draws on an extensive analysis of disaggregated revenue data for low-income countries in sub-Saharan Africa, South and Southeast Asia, and Central Asia. Based on this analysis, it is contended that the reigning 'tax consensus' has placed an inordinate emphasis on boosting domestic indirect taxes, and the value added tax (VAT) in particular. These taxes cover domestic goods and services in the formal sector. At the same time, the 'consensus' has advocated eliminating import taxes (in order to liberalise trade) and lowering tax rates on corporate profits (in order to compete with other rate-cutting countries). Consequently, trade taxes have been particularly hard hit while increases in direct taxes, which cover mainly personal income and corporate profits, have generally been anaemic. Overall revenue has ended up stagnating because of the resultant reliance on boosting revenue from only one major component, i.e., taxes on domestic goods and services. The pre-eminent instrument for this purpose has been the VAT, which has replaced sales taxes (as well as import duties) in many countries.
ActionAid UK has published a report, Accounting for Poverty, to underpin its tax campaign. The report draws together a wide range of sources, some familiar and some new, to make the case for tax justice and development. One new contribution is ActionAid’s calculation that, if every developing country were able to achieve tax revenues equivalent to just 15% of national income (the OECD average is 37%, while Bangladesh raises just 8%) $198 billion per year of new money would be available to fight poverty in the poorest countries.
A Study on Gap Analysis of Indian Government Accounting with International Standards Government Accounting Standards Advisory Board (November 2008) http://www.gasab.gov.in/pdf/Gap_Analysis.pdf The Cash Basis International Public Sector Accounting Standard (IPSAS) may be the international standards for public sector accounting, but it cannot claim to represent best practice as it appears that not a single country has implemented this standard since it was first issued in 2003. The key problem appears to be the mandatory requirement to produce consolidated accounts which should include all controlled entities (including government companies, business enterprises and all parastatal organisations). Many countries have decided that this is not practically possible, is too onerous or would produce misleading information. This includes a number of governments who would otherwise like to have implemented the Cash IPSAS including India, Malaysia, Mongolia, Ghana, Uganda and Malta. This publication reviews the experience of the Government of India in comparing its approach to financial reporting to that outlined in the Cash Basis International Public Sector Accounting Standard. India is attempting to adopt this standard, but it does not accept some of the Standard’s key requirements, for example, the consolidation of government business enterprises and the disclosure of third party payments. On the first issue, the document actively argues against providing such a consolidation. “Though this is fundamental requirement of Cash IPSAS” it says, “it is likely to cause more distortion than bringing in clarity in the financial statements of government” (page 9). It is hope that the current review of the Cash Basis IPSAS will result in the development of a more practical standard which most governments which are not experimenting with the accrual basis will be able to use. However, what is really needed is some extensive research to identify current best practices in public sector accounting and to codify this. We need to develop international standards, from the bottom up, based on existing good practice not on pre-conceived ideas borrowed from the private sector.
Gender Budgeting: Practical Implementation Handbook Sheila Quinn (2009) http://blog-pfm.imf.org/files/gender-budgeting-practical-implementation-handbook.pdf The book’s focus is “to act as a guide to the practice of gender budgeting." It is, however, not really suited for those who have no prior knowledge of gender budgeting; there are many other publications which articulate the rationale for, the background of, and the history of gender budgeting, and a sample of these are listed toward the end of the handbook in the resources section. The handbook assumes an understanding of gender budgeting, of the objectives of a gender equality strategy, of the ways in which gender inequality manifests itself, of the need for structural change in order to tackle unintentional gender bias, and of the basics of gender mainstreaming as a strategy to address gender equality. Gender budgeting, as a tool of gender mainstreaming, cannot be implemented without a grasp of these fundamentals. Gender budget pilot initiatives have over the years brought about a new and deeper understanding of gender issues. Adopting a gender budgeting strategy requires prior experience in addressing gender equality. The chapter, "How to do Gender Budgeting" starts by discussing the type of experience and conditions that need to be in place in order to engage with gender budgeting. The temptation in using this handbook might be to skip these sub-sections and move ahead to the text dealing with specific tools and approaches. There is a considerable demand for specific tools, for the ABC of what to do, so to speak. However, the fundamentals cannot be by-passed or short-circuited. This is particularly the case if the practice of gender budgeting is to move beyond an analytic exercise to a mainstreaming strategy. The experience of many practitioners is that, since the tools need to be adapted, it is most important to focus on developing an approach based on local circumstances. The actual tools of analysis, of reformulation, and of mainstreaming will emerge when the goal has been identified.
What are the real risks of adopting accrual accounting? Many conference presentations, journal articles and books extol the virtues and benefits of the public sector adopting accrual accounting, but few provide any real evidence of the actual experience. Two audit reports from the Auditor General of the Cayman Islands provide a brutally frank and honest account of what can go wrong. In July 2008, the Auditor General, Dan Duguay, issued a special report, “describing a very grim assessment of the state of financial accountability reporting throughout the Cayman Islands Government”. Ten years after the Cayman Islands agreed to adopt accrual accounting, the first accrual accounts were 2.5 years late and the Auditor General found the “current situation deplorable” and he believed that “the legislative assembly has lost control of the public purse”. In the second report, issued in April 2010, the Auditor General concluded that, “the state of financial accountability reporting has gotten worse in the two years since I last reported on this matter”. Despite the Government spending an additional $1 million in the last fiscal year to address the problem, the Auditor General assessed these efforts as being, “too limited and therefore; insufficient to address the situation”. He concluded his second report by saying, “I believe this situation has become a national crisis that could lead to tremendous consequences for the Cayman Islands Government if not addressed immediately”. The Cayman Islands are not a poor country, the per capita income is one of the highest in the world and, as it is a tax haven and financial services centre, there are many qualified accountants available locally. If the introduction of accrual accounting can go so horribly wrong in the Cayman Islands, imagine what could happen in the many developing countries where accrual accounting is still actively being promoted for the public sector. The next time you hear a speaker listing the many benefits claimed for accrual accounting ask what the actual evidence is from the few countries which have adopted this approach. The objective and authoritative studies, from the UK for example, suggest that the costs are significant and that the actual benefits are minimal. Now we have reports from the Cayman Islands of the very real risks involved of adopting this approach to public sector accounting. The first report of the Auditor General on the State of Financial Accountability Reporting (July 2008) in the Cayman Islands Government is available from http://tinyurl.com/accrualcayman1 The second report of the Auditor General of the Cayman Islands, issued in April 2010, is available from http://tinyurl.com/accrualcayman2
Conference attendees were surveyed about PPPs. The results show that many PPP projects have not been successful. The lack of policy and guidelines is the most frequently sited reason for failures in PPPs.
Has your country used Public Private Partnerships to find sustainable funding for infrastructure investments:
Yes 43%
No 53%
Do not know, does not apply: 3%
If you answered yes to the previous question, have PPPs been successful?
Yes 39%
No 26%
Do not know, does not apply: 35%
If you answered no to the previous question, why were PPPs not successful?
Filip Drapak, Senior PPP Specialist at the World Bank discussed the impact of the financial crisis on Public Private Partnerships. He recognizes the affect of PPP on public accounts. The financial community has not provided effective guidance on how to account for PPP. Nevertheless, he remains an advocate for public private partnerships
The European Union has provided some guidance on how much risk must be passed to the private sector to not show PPP investments on the government balance sheets. There is always something that doesn't go well in long-term contracts, PPPs are no different, according to Mr. Drapak.
The financial crises impact on the PPP market is not over yet, however recovery and optimism is quite strong, according to Mr. Drapak.
Unexpected stress can increase risk on PPP financing and deliverables. Mr. Drapak pointed out that financial stress can originate in unexpected places like Greece. You must expect that financial markets will undergo stress of some sort. Governance of financial markets will increase according to Mr. Drapak. He sees governance as the most important aspect to PPPs.
The financial crisis affected PPPs in liquidity, capital allocation, and the "de-risking" of projects. Debt guarantees have become a new tool in use for PPPs according to Mr. Drapak. Before the financial crisis, there was considered that large projects had less risk. But, financing issues have resulted in many smaller projects. And, some of the risks that were exclusively with the private sector before the crisis is now shared with the public sector. Mr. Drapak asks how governments can show market disruption risks on financing on the books?
The financial crisis has put pressure on PPP governance. Mr. Drapak provided PPP case studies from the UK, South Africa and Russia. The UK is the largest PPP market, according to Mr. Drapak. India has emerged as the second largest world market. The UK created a special agency called "Partnership UK". There is a plan is to make an organization, within Treasury, called "Infrastructure UK." The Treasury of the Government of South Africa is creating a separate PPP organization in order to separate delivery from regulatory interests. The Government of Russia viewed that PPPs were unnecessary because of large budget surpluses. Now, the Government is developing PPPs. Russia is managing PPPs through its own development bank.
Mr. Drapak says that governments did consider the full lifecycle of PPP projects. However, there had not been any planning associated with potential financial crisis. PPP projects today suffers from the increased cost of equity. This requires higher levels of financing by governments which tends to reduce the value for money. In some projects, the government had to replace all private financing while the private sector has the equity risk.
Mr. Drapak discussed global PPP trends showing an increase in activity in BRIC countries. He showed a case study from Canada for Partnerships BC. The organization looked at the internal rate of return while looking at the public contribution to debt. Some people wonder whether government funding is a PPP. Mr. Drapak points out that banks have very little risk in PPPs, so government funding does not change the fundamentals of PPPs. This option is really only available to governments with stable revenue.
Mr. Drapak believes that the financial crisis is improving PPP governance. He also pointed out that the analysis of PPP projects tend to look at full lifecycles unlike traditional capital financing. This often results in better long-term planning for PPPs.
Developed countries tend to leverage PPPs to improve efficiency, according to Mr. Drapak. Developing countries tend to use PPPs for other reasons. The finance crisis means that developing country governments tend to have to take more financing risk than developed country governments.
Filip Drapak has over 14 years of experience in economics, public policy, and finance. Mr. Drapak has worked as assisting professor at Prague University of Economics, as a head of financial advisory services in Societe Generale Komercni banka and as assistant director in corporate finance of PricewaterhouseCoopers During the past six years, Filip was involved in the area of public-private partnerships (PPP) and was instrumental in the creation of PPP Centrum, under the Ministry of Finance to provide technical assistance and support to public entities engaged in public private partnerships. He introduced the Czech Republic's policy for public-private partnerships and was involved in training for the public sector as well as in the formulation of legislation for privatization and concessions.
Mr. Drapak served as the CEO and Chairman of the Board of Directors of the PPP Centrum, as a non executive Chairman of electric distribution company, oil transport company and on boards of airlines company and energy engineering company.
Rakesh Verma, the Principal Accountant General of India described the trend toward greater involvement and reliance on public auditors in public financial management. He pointed out that there are those who believe that India is over-regulated. He does not agree with this view. Mr. Verma described the impact of the financial crisis on countries around the world. This has resulted in monetary policy changes and other public management adjustments.
Mr. Verma described the impact of Public Private Partnerships on public finances. PPP's are high risk. Therefore, the role of the public auditor is critical according to Mr. Verma. PPP analysis is challenging to ensure that risk is properly distributed. He described the INTOSAI PPP guidelines for auditing for value for money.
Mr. Verma described problems with private auditors with many private sector companies. He warned that there are important lessons here for public auditors. Public auditors do not have a financial incentive to find unqualified audits And, constitutions around the world guarantee the independence of public auditors to ensure more reliable audit.
Audits are moving from compliance to performance in the public sector according to Mr. Verma. Compliance audit are still critical particularly because these address legal issues. He described the need to audit companies where the government owns more than 50%.
Mr. Verma described lessons learned from the financial crisis. Many interventions by public authorities have been based on the grounds of "too big to fail" rather than in the public interest. The public interest is better served by autonomous and independent organizations. He described how public audit can expand. Mr. Verma argued that government audit information should be published in newspapers to get scrutiny by the common man. He described the approach for risk-based audit in India.
Benefits of IFMIS enabling government reform improve efficiency and controls improve conficence through transparency reduce costs improve budgets, planning and decision-making
Implementation Practices and Project Management implementation practices lessons learned project management government ownership planning and benchmarks building the government team role of IT
Implementation Sequencing implementation success factors issues and reasons for sequencing implementation and roll-out phases post implementation changes diagnostic tools
Capacity Building coordinating training and implementation plans capacity development staffing and skills
Transparency and Accountability need for transparency budget transparency forms of accountability service transformation elements of good governance and transparency international benchmarks - lessons learned
Andy Wynne, the editor of the International Journal on Government Financial Management, is skeptical about PPPs. Mr. Wynne provided examples from the UK and Nigeria of why governments should be dilligent about using PPPs as a vehicle for infrastructure projects.
Andy Wynne, the editor of the International Journal on Governmental Financial Management, described why the public sector should not use public sector financing for public infrastructure. Mr. Wynne argues that private sector finance, public private partnerships or privatisation are never an efficient option for public sector infrastructure.
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.
PPPs appear to reduce the level of borrowing. Andy believes that PPP sounds more cuddly and friendly than privatization. Mr. Wynne provided evidence for why PPPs do not provide value for money:
•in UK private sector borrowing is 1-2% more expensive than state debt • December 2008: Lagos ₦50 billion bond at only 13% (inflation 15%) • 2002 – 57% of public sector accountants in UK did not think PPPs provided value for money
Mr. Wynne pointed out that risk is never fully transferred to the private sector. This means that the government assumes the liability. Allowing the private sector to charge for public services as part of PPPs is not sustainable. The poor cannot afford to pay.
If you wanted to design a system to maximize the opportunity for corruption, you would create something like PPPs, according to Mr. Wynne. "You have all the ingredients to maximize corruption."
Mr. Wynne believes that PPPs have never been an appropriate vehicle. The reduction in PPPs after the late 90's represents this experience.
Filip Drapak of the World Bank says that there have always been financial crisis. The current crisis is wider reaching than those in the past. Mr. Drapak spoke about the impact on infrastructure project public private partnerships with the financial crisis at the ICGFM Spring Conference.
Infrastructure programs provide significant investment opportunities even in the financial crisis. Mr. Drapak suggests that 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.
Before the financial crisis most experts did not make provisions for economic cycles. Equity bubbles are present every 13 years and last 2 1/2 years on average. Housing bubbles have larger impacts.
New debt calculations and risk management concerns can mean that many cost-benefit analysis do not show a positive value for money. Equity financing has increased as an overall percentage, creating high costs. Governments need to look at broader factors in order to better evaluate PPP projects.
The rule had been that larger projects were more attractive to the private sector. Risk and equity factors mean that projects need to be of a more modest size to gain financing.
The government of the United Kingdom has created a method to improve PPP projects called DFC (Direct Funding Competition). The French Institute for PPP is advocating flexible financing rates.
Mr. Drapak concludes that PPP economics are only temporarily jeopardized by the financial crises. He recommends that PPP is not solution in time of financial crises, and should not be leveraged to stimulate the economy.
Jason Levergood, Senior Manager at Grant Thornton LLP, provided an overview of the ICGFM Worldwide Survey, Public Financial Management Responses to an Economically Challenging World on December 7th. at the ICGFM Winter Conference. Public financial managements from over 50 countries were surveyed in 2010.
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