The analysis in this study was carried out under the Public Expenditure and Financial Accountability (PEFA) program, a partnership established in December 2001 involving the World Bank, IMF, European Commission, Strategic Partnership with Africa, and several bilateral donors (France, Norway, Switzerland, and the United Kingdom).

PEFAs mandate is to support integrated, harmonized approaches to the assessment and reform of public expenditure, procurement, and financial accountability, focusing on the use of diagnostic instruments. Many such instruments have been developed in recent years. In 2002 PEFA conducted a research project that mapped the technical scope and coverage of the instruments and identified areas of overlap as well as areas inadequately covered. The project also investigated the methods and procedures used by donor agencies in undertaking these diagnostic reviews, the extent to which the work was done in collaboration with other donors and recipient governments, and its likely impact on development. This work resulted in a PEFA report issued in the spring of 2003 that has been adapted into this book.

The authors are grateful to Serif Sayin and David Steedman for valuable contributions to initial work on the PEFA research project; to the PEFA Secretariat-particularly Mike Boniakowski, Odile Keller, and Nicola Smithers-for advice and technical input; to members of the PEFA Steering Committee-Armando Araujo, Ivor Beazley, Paul Bermingham, Pamela Bigart, Jim Brumby, Jack Diamond, Simon Gill, Cheryl Gray, Hen-

rik Harboe, Gilles Hervio, Jean-Louis Lacube, Sanjay Pradhan, Gradimir Radisic, and Helen Sutch-for support and encouragement; to Anand Rajaram (PERs), David Shand (CFAAs), Pamela Bigart (CPARs), Taryn Parry (Fiscal ROSCs), Bill Dorotinsky and Jim Brumby (HIPC AAPs), and Gradmir Radisic (EC audits) for advice on the specific instruments; and to many colleagues in the World Bank, IMF, European Commission, United Nations Development Programme, OECD Support for Improvement in Governance and Management (SIGMA) program, U.K. Department for International Development (DFID), and other organizations for insights and helpful comments at various stages in preparing this book. The study also benefited from comments on a draft presented to the financial management and accountability subgroup of the OECD Development Assistance Committees Task Force on Donor Practices and to a financial management working group of the Strategic Partnership with Africa.

Finally, the authors are indebted to the editorial and production team at the World Bank-Santiago Pombo-Bejarano, Stephenie DeKouadio, Paul Holtz (consultant), Nancy Lammers, and Mary Fisk-for enormous help in preparing the final manuscript for publication.

Executive Summary

This study is intended to help underpin a more coordinated, effective approach to assessing and reforming systems for public expenditure, procurement, and financial accountability in developing countries-especially countries that receive international aid for budget support. Such support, also known as adjustment lending, has become far more important in recent years. At the World Bank, for example, it increased from less than 10 percent of total assistance in the 1980s to about 50 percent in fiscal 2002. Many other development agencies are also increasing aid for budget support.

This support has been accompanied by-and reflects-widespread recognition that aid is fungible and that resources can be transferred, so that aid intended for one project can effectively be used to finance another. Thus, efforts to safeguard the integrity of donor resources mean little without safeguards on the use of government resources. Moreover, growing awareness of the destructive effects of corruption-emphatically underscored by the East Asian financial crisis of 1997-99-has given new urgency to donors need to ensure that aid is not diverted to private ends or misallocated to activities not conducive to fostering growth and reducing poverty. For all these reasons it is important, for donors and recipient governments alike, that the strengths and weaknesses of national budget systems be well understood and that governments implement reforms where needed, especially in high-risk areas.